Financial planning: A case study

The Eisenhower matrix for decision making directs to schedule time, to do task that is IMPORTANT but not urgent. But, the urgency is not there even at the scheduled time and hence the fate of this quadrant is often procrastination. The primary reason for procrastination in financial planning is starting problem. Perhaps a DIY kit could help with that. But is there a DIY kit/instruction booklet for financial planning? The chances are pretty high! However, more important questions are- do I have time & resources to do it myself? And will an Excel spreadsheet or an online calculator personally understand me and my needs? Such programs are yet to reach that level. Here I endeavor to lay a sample case construct that will help you get started.

Client Profile

A tech entrepreneur in early 40’s with nearly 18 years’ experience, married to a finance professional turned entrepreneur nearing 40’s. They had two daughters.

Current Financial Position
Major Financial Goals
  1. Maintain current lifestyle after retirement at age 55: Cost of living increases every year due to inflation. So the client will want Rs. 7.8L per year adjusted for inflation post retirement. 
  2. To provide for education and wedding expenses of daughters. Education is a necessity and must be prioritized. Education expenses were modeled over today’s fees for school of client’s choice and higher education cost overseas. Wedding on the other hand, will be towards end of client’s earning period and is a discretionary expense. It may be difficult to put a number on such goal. After some consultation client decided to aim for Rs. 15 L of today’s value for each daughter’s wedding.
Unstated Financial Goals

At the time of our discussion there were no other goals such as new car or holiday abroad as these were either not required or were being comfortably managed from discretionary expense mentioned in table above. But many people do have such aspirational goals.  

Major Concerns

While looking through a telescope, a millimeter movement in the tube towards your eye results in focus shifting by a few kilometers in your frame. Similarly, even though one is earning comfortably today, like our client, everyone is concerned about shortfall risk- that is whether the goals will be sufficiently funded at the time they become due.

This is because both inflation and returns compound over longer term and result in telescope-like effect. If the investment portfolio doesn’t generate returns in excess of inflation (real returns) over longer term then the value of goal will be higher than the provision.

Behavioral Analysis

The ultimate objective of financial planning is to comfortably meet financial goals and have mental peace in the journey. Generating returns is means to achieve these goals and not an objective. Behavioral analysis aids to address the later part of the objective.

Behavioral analysis reveals following biases-

Familiarity – Investments in real estate were mainly due to the comfort in asset class.

Status Quo– Reluctance to divest from real estate despite being convinced that there are better options.

Lack of self-control– Expenses funded by credit card and personal loan despite high income level. A part of it was unawareness of 36% annual interest on credit card loans.

However, client was open to let go of investment control and assume oversight responsibility. He was rational and responsive to revelations of risk-return dynamics of various asset classes.  The factors discussed here, along with many other forms a client’s case and aid in decisions regarding asset allocation and selection of investment instruments.

This, along with risk profiling helps to decide whether client can tolerate risk. The purpose here is to get you started with understanding yourself and collect data. I am deliberately not putting any analysis and solution because, in my experience this leads to reverse-engineering: people try to frame the case keeping in mind the solution they desire. The objective is to find a key that opens the lock not the other way round!