One word that describes the essence of financial planning

45 year old Sandeep Sathe describes the benefit of financial planning in his family’s lives in just one word. A senior professional at a leading US based tech company which is at the forefront of artificial intelligence based automotive applications, Sandeep lives in Pune with his wife Rajasri and daughter Indrani. Despite investing reasonably successfully for 10 years, he was blown when he was introduced to financial planning in 2015 by Priya and Shyam Sundar of PeakAlpha. Its now 3 years since his family embraced financial planning – the benefit of which Sandeep summarizes in one word: confidence.

Ad-hoc approach to investing

My first experience with investing was in 2005, shortly after I got married. Prior to marriage, I never really looked at investing. Soon after my marriage, my wife introduced me to a mutual fund distributor and that is when I started investing. I just started investing – no goals, no plans – just on the basis of some fund recommendations. Now when I look back, I am amazed at what I did – just jumped in with no knowledge, no plan – just moving from one ad-hoc investment to another. We invested in lumpsum as well as SIPs. How did we figure out how much of an SIP? Well, the distributor said, “start a Rs.10,000 SIP in xyz fund”, and we just did it.

Then in 2007, my bank RM got in touch with me and recommended a ULIP which would give me an equity exposure as well as a Rs.25 lakh insurance cover. So we invested in that ULIP too. The bank then started giving mutual fund recommendations, and we invested on the basis of those recommendations. There was no discussion on goals, on creating a plan – just one ad-hoc investment after another. My RM would call me and inform me of some new NFO and advise me to invest, and I went along with these recommendations. Some of them were 5 year lock-ins, but they told me that I can expect good returns, so I went along and invested. In 2013, I opened an account with a stock broker and started trading in stocks. Why? Because everyone else was doing it!

Never realized what we were missing

This continued till 2015, until my wife and I came across an article written by Priya Sundar on why people like us should embrace financial planning. We were amazed with what we read – we realized that though we had been investing for a decade, we were not doing anything that the article suggested. We got in touch with them and expressed our keenness to engage them.

If I look back to that day in 2015 when we were first introduced to the concept of financial planning by that article, I must confess that until then, I had never felt as if something was critically missing in the way our investments were being managed. I have always been a disciplined investor – even though my investments were all ad-hoc and without a plan, I was disciplined in sticking with my SIPs through all the market ups and downs and also with my investment portfolio through the 2008 meltdown and the recovery thereafter.

One of the reasons for my discipline with investments was the early introduction to the world of equity that our company gave us through ESOPs and ESPPs (Employee Stock Purchase Plans). Right from the time I joined my company in 2004, I jumped onto ESPPs after studying it and understanding its potential to create long term wealth. Every month, we can set aside between 1% to 10% of our salary for the ESPP program and at the end of every 6 months, the accumulated money is used to buy the company stock (ours is a US based company) at 15% discount. The discount acts as an incentive to buy, but the real benefits come through when you hold on to your shares for the long term if your company is doing well, which of course our company has done – splendidly. I have been investing since 2004 the maximum allowed – which is 10% of salary, and that investment has demonstrated to me very vividly the real benefits of long term investing in good quality equity.

Coming back to 2015 when we first began our discussions with Shyam and Priya Sundar, I was initially a bit apprehensive on execution, though interested in the concept. We are in Pune, they are in Bangalore – that was my first concern. Then there was the initial discomfort with revealing every detail of our financial position to them – which is somewhat against the culture I suppose of most Indians. How many properties do we own? Where? What is their value? What are the details of all your investments and insurance policies? When you see someone wanting to look deep into your finances, there is an initial reluctance – especially since we contacted them based on an article, and not from any known reference.

Two questions changed everything

Despite all these apprehensions in our mind, in the very first meeting, we were fully convinced about the financial planning proposition and our advisors who were offering this to us. Two questions in specific that they asked set me thinking and helped me get fully convinced that this is what we need.

The first question was, “How much wealth would you like to leave behind for your next generation?” This was a philosophical question that we had never thought about. What this question told us is that these planners have really thought through the entire life cycle of a person and have a strategy in place to help us achieve what we articulate as life goals.

The second question that really stuck in my head was when they observed my share trading with the stock broker. They asked me why I was doing it and offered three options: (1) To grow wealth (2) To learn a new skill through direct equity trading, and (3) Because I enjoy it. I reflected on this question before giving an answer. No, I was not doing this primarily for wealth creation. Yes, some amount of learning was happening, which is welcome. But the most important realization was that I was doing this because I enjoyed the process – placing orders, deciding on limit orders, tracking execution, tracking price movements – the works.

What these questions did for me was to make me introspect, for the first time in my life, what I was doing with my money, why was I doing whatever I was doing, where am I going with what I am doing, where do I want to go – questions that I never asked myself over a decade of investing my savings in an unplanned, ad-hoc manner.

Operation clean up

When my planners made a list of all the investments that I had accumulated over the years, they showed it to me: 45 different mutual funds. We agreed on an objective of reducing this to 7 – which we then went about systematically executing. We looked at all the insurance policies that we had and figured out how much we really needed and what could be terminated. We had a detailed discussion around property investments. Like with my stock trading, they asked me to reflect and answer what these property investments meant to me. Beyond the first house, why had I invested in the second and the third? Were these merely financial decisions? Was there a status symbol attached to owning property which was important to us? Were the houses giving us joy? Since there were no such emotions for us, we looked at the merits of the houses as just investment decisions. Our planners walked us through all the pros and cons of property investments including the liquidity aspect, the ongoing maintenance costs. We decided on balance that it made sense to liquidate the extra houses and convert into financial assets.

Then they looked at my monthly income, expenses and savings and got us to articulate specific goals including education for our daughter, her marriage, retirement and so on. They have a good software which allows us to carry out various scenario analyses to come to well informed decisions on planning for each goal. Our planner made an observation that has stayed with us: when you build your home, you plan every room in detail first and then get to execution. You never build one room and then figure out what the next should be and where. Financial planning does the same thing with your money. The importance of planning holistically and then executing the plan made so much more sense than the random approach I had taken for a decade. In our business, we understand the critical importance of project planning for successful execution of IT projects. That one can and should do this with one’s money as well was a revelation to me.

One big benefit: clarity

One big benefit of financial planning for us is clarity. We were made aware of the concept of asset allocation, which made a lot of sense. So, if I sold some of my ESOPs or ESPPs, that money goes straight into Indian equity, since it is part of the overall equity allocation. We now have a well-defined portfolio of financial assets rather than an unwieldy accumulation of random investments. We have quarterly discussions with our planners and receive a report which tell us all that we need to know about our finances. We have a detailed budget which lists out all our monthly, quarterly and annual expenses down to the last detail – which tells us exactly how much we spend on what and how much we save. Based on this, we decide on the amount of SIPs for our goals.

Biggest benefit for me: confidence

Their software enables us to play around with scenarios – what if we cut some expense and saved a little more – how would that impact achievement of a goal? More importantly, the scenario analysis allows us to see what impact some indulgences will have on our finances. So, if we want to take two vacations in a year rather than one, we can look at what would happen to our goal achievement if we reduced some savings as a consequence. When you see that you can afford that indulgence, you go ahead and enjoy! That to me is the biggest benefit of financial planning – in one word – it is confidence. Confidence in our ability to meet our financial goals, confidence in enjoying life today, knowing fully that one is not being reckless. Our previous generations have taught us to always be frugal, to save today for a rainy day, save today for a better tomorrow. What financial planning does for my family is to put a structure to this saving habit and yet give us the confidence to live life fully today.