In my last article in September-2014 IMA Vadodara Monthly Bulletin, I had discussed about Life stages in the life of a doctor. While working with my doctor clients I have realized that doctors are highly organized people and they plan everything including their leisure trips but they are highly unorganized in their financial affairs and never plan their financial life properly. So this article is an effort to guide you on What is Financial Planning actually?
What is Financial Planning?
By definition “Financial planning is a process of meeting your life goals through available resources in the best possible manner”.
Let us first understand this in details.
A Systematic Process:
Financial planning is a six step process, this means that there is systematic series of action to organize and manage your financial affairs, Just like you have a systematic process to treat your patients. This process is defined by Financial Planning Standards Board of India.
Your Life Goals:
The entire focus of financial planning process is on meeting your Life Goals like Building Hospital, Retirement Planning, Higher Education Fund planning for your children, etc. As against this, traditional approach of investment never focuses on life goals. It only focuses on financial products. Life goals are like destinations where you have to reach. Doing investments without clear goals is like travelling in a train without knowing your destination. Life goals indicate the points in your life where there will be major cash outflows in your life.
Available Resources in the Best Possible Manner:
Financial planning focuses at optimization of your current resources and future resources to meet your life goals. Financial planning always aims at optimization and not maximization because maximization means maximum risk. Now you may not need to take that much risk and it may lead to losses in your investment. Let us take a simple example to understand this, suppose you are travelling from your clinic to home and distance is 10 kms and you have sufficient time say you have 1 hr to reach, now will you drive at higher speed in a crowded area? No. But say someone is suffering from heart attack and you have to reach hospital at the earliest, now you will try to drive at higher speed. Similarly, you have to check how much risk you should take to meet your life goals, if you are meeting your life goals easily with available financial resources why should you take higher risk when you can avoid it. All these aspects are thoroughly taken care in financial planning.
In short Financial Planning is a very systematic approach to manage your financial life. It covers three major aspects of your financial life which are as under.
- Wealth Protection : Financial Planning primarily aims at protecting your wealth from different type of risks involved in different asset classes and for that It has inbuilt risk management strategies. Financial Planning also protects your wealth by providing proper insurance for your life and your assets.
- Wealth Accumulation: Another important aspect that is covered in Financial Planning is providing for effective Wealth Accumulation strategies for your Goals. It provides for how smoothly you can achieve your financial goals.
- Wealth Distribution: Wealth Distribution is related to first providing for golden years (retired life) of life and then creating effective succession planning strategies to bequeath the wealth that you have accumulated during your life time to your legal heirs as per your wish considering Succession Laws applicable to you.
Why Doctors must adopt Financial Planning Approach:
Financial Planning is Broader Concept :
Financial Planning is a much broader concept as against simple investment planning. It covers many different areas like Goal Planning, Budgeting, Cash flow Management, Net Worth Analysis, Succession Planning, Investment Planning, Risk Management, Insurance Planning, Asset allocation strategies, Liability Management(managing loans) etc. Doctors need to focus on all these areas, which is taken care in Financial Planning approach.
Delayed Cash Inflows and Capital Intensive Nature of Medical Practice :
When I compare medical practice with other professions like Architects, Lawyers, Financial Planners etc. I find two major differences. First one is delayed cash inflows and second is very high investments in infrastructure and machinery. A doctor’s income starts very late almost at the age of 28 and then he needs to invest a lot in infrastructure and machinery, this has a significant impact on his financial life so doctors without wasting much years of working life should organize their financial life by adopting financial planning approach.
Time Constraint :
Doctors are always running short of time so they are not able to focus upon their financial matters properly and need an approach which can keep their financial life on track. Financial Planning is a perfect approach which helps them to keep their financial life healthy.
In my next article I will be writing on Six step process that is prescribed by Financial Planning Standard Board of India and every doctor should adopt this process for their financial planning.