What does it take to do your own financial planning?

Published: April 15, 2014 at 11:30 am

Last Updated on December 18, 2021 at 10:42 pm

Here is a list of ‘qualifications’ necessary to do your own financial planning. This is not a ‘find a financial planner, if you cannot find the time to do it yourself, post!

I am writing this for two reasons: out of irritation and fear.

I am irritated that time and again financial planners and mutual fund agents tell me that, ‘not all can find the time like you to do their own financial planning’! Obviously, they are confusing managing my finances with making calculators and writing a blog!

The more I interact with investors, the more I am afraid. Many seem to think that they can handle their own finances while the abject truth is, at least at that point in time they do not have what it takes to DIY (do it yourself).

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So what does it take to do your financial planning? 

I. Confidence

to DIY. Doing it yourself, means doing it yourself. Not seeking free advice in forums! You will need to evaluate your life needs and decide on suitable products. You will need to review and monitor the performance of the products regularly. Do you have the confidence that you can pull it off on your own?

Financial planning = 1% plan creation + 99% review.

Unfortunately, financial planners focus too much attention on plan creation and getting ones financial life in order and not on the importance of the review.

This gives many people the impression that anyone can plan their own finances.

Well, anyone can create their own financial plan, but only those with confidence in their decision-making abilities can review it efficiently and calmly without worrying about the performance of other investment vehicles in the same or different categories.

 II. Inclination

to take control. Initial tasks like, reviewing cash inflow and outflow, setting up an emergency fund, buy life and health insurance, listing goals, determining investment amounts etc. All these are part of the plan creation(1%)!

These are one-time tasks. Once completed satisfactorily, additional effort in sustaining most of the above is minimal.

This is the easy part and is obviously a prerequisite! Most of these actions can be done by anyone who understands simple commonsense. Anyone who wants to do their own financial planning is likely to agree on the need for adequate emergency fund, pure term life insurance, individual health insurance, and equity investments for long-term goals.

Setting the house in order will take some time, yes. Fortunately, anyone with an inclination to change his or her financial life will find the time to do so. And they should! No question about it. Whose money is it anyway!

Do your own financial planning
Charles-Guillaume Étienne (5 January 1778 – 13 March 1845) was a French dramatist and miscellaneous writer. This (french) quote is widely translated as, “If you want something done right, do it yourself.”

III. Clarity

while investing.  Once you have enough emergency fund, life insurance, health insurance, list your goals, know how much to invest for each, what next? Well, invest of course! Not in a hurry though.

Invest, as per the risk profile of the goal and not as per the risk appetite of the investor. Invest with the right priorities. Invest with clarity.

  • Capital protection and low tax outgo for short term goals
  • Capital preservation (aka beating inflation) for long term goals.
  • Recognize the importance of liquidity in an investment

Unfortunately, most investors cannot think beyond returns and tax. The DIY investor must recognise the importance of investing with priorities, something I would like to call contented investing 

IV. Understanding

Knowing how much to invest for a goal, how much to invest in an asset class (equity/debt) are important but not difficult to decide (use this tool).

  • Understanding the way volatile assets like equity ‘compound’, requires time and patience.
  • Understanding how risk and return is quantified (see here for a simple explanation)
  • Understanding the need for diversification across volatile asset classes ( market capitalization, geography). This is important because it involves counter-intuitive concepts like, ‘including high risk but uncorrelated instruments in the folio, lowers overall risk’   

Remember, diversification is the single most important investment action one should take care of.  If a portfolio is well diversified to being with, understanding how to manage it can wait! 

V Recognition

Taking control of your finances and investing right is just the beginning. Portfolio management of long term financials goal is the most important task of financial planning. You may draw up a financial plan for yourself using available web resources. You may understand the basics of intelligent investing.

Those are necessary, but not sufficient steps to achieve your financial goal.

Long term financial goals typically require the use of volatile instruments like equity. While volatility in returns is necessary to beat the enemy – inflation (also volatile in nature!), it not your friend. Volatility is the enemy of your enemy! Not necessarily your friend!

So while accumulating wealth, keeping volatility in check is an ongoing and never-ending process. Unless someone recognizes this, they should not do their own financial planning.

So once the basic steps are in place and investing begins, financial planning is all about portfolio management: rebalancing, adjusting the quantum of investment in accordance with market conditions, regular review of the portfolio growth, diversification, weeding out non-performers, chalking out an exit strategy etc.

Although this sounds like a lot of work, once we know how to do it, the time involved is insignificant.

Does this mean we need to read books on portfolio management? 

No. All we need to learn the basics and make a beginning are some simple DIY resources.

To be successful we will need to recognize the basic concepts involved within a couple of years. We need not understand everything before we start. However, sustained interest is necessary.

An interest in elementary mathematics will speed things up.

Once we understand the rules of the game, it is best stop reading blogs, financial news etc.

Ignore the latest NFO, LIC policy, tax free bonds and double indexation FMP. We have invested as per the requirements of each goal. We do not need these offers.

Optimizing our technique will however always involve learning and reading. So while we must search for more and more advanced DIY texts, we must learn to ignore blogs and new articles written for dummies.

The idea is to streamline our financial life as soon as possible and focus on good health and happiness.

Yes one would need to track market movements and review the portfolio once a week. This will only take a few minutes of our time.  

I spend my spare time making calculators and blogging. I do not spend all of it reviewing my finances as many financial planners and distributors assume.

I will of course admit that blogging and familiarity with quantitative mathematics does help in managing my finances. I typically tend to work on aspects that I am yet to understand. Aspects that will help me fine tune my portfolio.

However, I can assure that DIY financial planning requires only basic familiarity with compounding mathematics.

Will DIY planning take a lot of time and effort?

People with no inclination always focus on the effort involved. As mentioned above, it is our money and therefore our duty to develop an inclination.

As for the time involved, don’t ask me how, but people with an inclination always seem to find it!

Let us never forget that inclination = interest + action.

If you can find one hour per week, you can make a difference to your financial life.

I read some people making statements like, ‘I am looking for inspiration to improve my financial life’.  Such people ought to be kicked in their derriere until they see sense!

That is how I found my inclination. In the my case the kicks were sudden recurring expenses and debt

You can read my story here: The Financial Arrow of Time.

This post is not intended to scare you away from DIY financial planning. Instead it is intended to make you aware of the tasks involved.

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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