Use FP Pyramid to prioritize goals for confused souls

Individuals & families have dreams, goals & aspirations and thats why we Financial Planners exist. The problem is they have too many goals but limited financial resources to fulfill them and some clients just fail to understand this equation, whom I call the “confused souls”. This is common and nothing unusual about this, even you and me can be one of them. Its our duty to interrogate, educate and help clients to set goals and prioritize them during the data gathering meeting.  
Financial Planning Pyramid is an approach used by many established FPs in the world (google the term to know more) to help clients understand their goals and needs so that the planner addresses them in their financial plan. Here is an article written by me and published in business standard, its my version of the approach based on my experiences. Go through it, I am sure it will help you in giving a proper direction to the many confused souls.
Start   
Many of you have a genuine interest in getting financially disciplined and some would even want to have a financial plan in place, but face difficulties in taking off, getting stuck with questions like “where to start?”, “what to include?”, “how to move ahead?” etc. In personal finance this happens because there are too many factors affecting which you don’t recognize and there is a lack of insight on understanding one’s own needs, goals & priorities.
Financial Planning Pyramid answers this confusion by showing where to begin, how to prioritize goals and how to move up when you are building a financial plan. It gives a clear picture of laying the foundations of a healthy financial life by addressing each of your goals step by step.

Healthy Financials

Income, Expenditure, Assets & Liabilities form the base of any individual’s or for that matter an institution’s finances. To start building a healthy financial life, one has to take stock of all these four elements in a holistic manner and establish proper ratios amongst them.
Only steady & higher income doesn’t mean all your financial goals will be addressed, one has to have a controlled expenditure and make it a habit to save a fixed percentage of income which ideally should be around 25-35% giving you a leeway for investing for future goals.
Your assets are formed overtime out of investments in stocks, mutual funds, fixed deposits, real estate etc and should be well diversified to counter asset related risks. The liabilities like home loan, car loan, and personal loan dig into your assets. It is best not to have a liability dancing over your head except for a home loan which is used to create a growth asset. Assets over liabilities give you the Networth which should be positive & commensurate with your age and income level.

Risk Management

Once you have put the pedal on healthy financials, you should move on to insure the uncertainties of life called “risks”. There are different kinds of risks one faces in life which have financial bearings like early death, health problems, accidents, job loss, house fire, theft etc.
All your calculations can go haywire if any of these events strike you. What will happen to the home loan EMIs and funding of children’s higher education if you meet with an accident leading to death? If you survive – great, but what about the hospital bill, savings will be wiped out. And what if you survive and are bedridden for a year or become handicapped. Insurance against all these perils is the second most aspect of any financial plan. It lays down a strong groundwork from where you can start building wealth which cannot be shaken easily.
One should also have a contingency fund in place amounting to around 6 months of monthly expenses & EMIs. This will come handy in case of a job loss / business loss or medical emergencies in the family. The money can be parked in flexi savings account or liquid funds.

Primary Goals

After healthy financials & adequate risk cover, you are all set to start saving and investing for your goals in life, start with primary goals which are your basic needs or for which you have very high emotional attachment. House Purchase, Independent Retirement & Children’s Education can be termed as the primary goals for most of us.
Buying or building a house is usually the first dream of every family! Well it’s worth pursuing the dream. The charm and pride of owning a house and making it into home where a happy family lives should be the primary objective of any individual. As parents, next on line would be children’s education which we would like to fund and burden them with an education loan. With education costs skyrocketing, an engineering degree and a post graduation in a reputed institute in India can cost up to Rs. 10 lakhs each. Independent Retirement should also figure high on your list, and if you are backing on your children or your employment’s pension benefits, think again.
Once you have figured out how much will these goals cost you today and in future, you can formalize an investment strategy. Many a time simply starting monthly SIPs in diversified equity mutual funds will make up the strategy if your goals are long term. Choosing the right investment product based on your time horizon and risk profile is important for successful wealth accumulation. Choosing a long term product for a short time horizon can be disastrous and vice versa. What if the money meant for your son’s college next year is invested in stock market and it plunges by 30%?

Secondary Goals

Sleek sedan, vacation with family to Europe, second home in a hill station, jewellery collection, second vehicle for family, hobbies… some are expensive and others not, but human desires are endless. While it is good to pursue them, it’s prudent to plan for them after having set into action a savings & investment plan for your primary goals.
Never get into a liability to chase these goals; they should be funded with investment assets and not with a loan or EMI. As far as the buying a vehicle goes, if it is helping you enhance your productivity or improve your business, you may take a loan else strictly delay it. Have a separate investment strategy for secondary goals based on time horizon, debt for short term & equity for long term.

Tax & Estate

Many a times tax saving happens effortlessly, but tax planning is what you should focus on which means utilizing tax saving instruments to address one of your goals above and not invest in them on an ad-hoc basis at tail-end of the year. And lastly look at estate planning; it is about passing on you assets to your heirs. An extremely popular way to do estate planning is do nothing and leave it to fate like Dhirubhai Ambani! Absence of a will can lead to conflict among family members; make a will before it’s too late.
Like they say “a good start is half the battle won”, a reference to Financial Planning Pyramid can be extremely beneficial when you get down to doing your financial plan either by yourself or through a professional financial planner. It gives you lot of clarity on what the plan should address and how to prioritize the various aspects of financial life.
End
Setting and prioritizing goals is a very critical step, client’s expectation from a financial planner depends on this step and helps you both to be on a common page. Usually clients talk about primary goals but when you expose them to this approach, they understand the bigger picture of financial planning and also differentiate you from other financial intermediaries.
What are the other ways and methods in which you make clients realize that FP is much more than investments and primary goals. Leave your comments below.