As a Civil Engineer with a flair for architecture, Ashish has chosen the construction of residential properties as his vocation in life. Over the last four years, he has been the mind behind the construction of over 20 houses, each with a distinctive appearance and style. However, while he is exceptional in the construction side of the business, Ashish often finds himself struggling with financial planning and monetary well-being – though he has earned a substantial amount in the last four years of his career, the money has been languishing in bank accounts and fixed deposits, losing its sheen over time.

In this scenario, a childhood friend, who is well-versed in financial aspects, had a conversation with Ashish and elucidated financial planning in a way he could understand seamlessly. The friend showed Ashish how financial planning is quite similar to construction – just as a builder needs a blueprint to construct a sturdy house, a solid financial plan is a blueprint for achieving one’s various financial goals. Each element, from budgeting to investing, forms a crucial part of the structure, ensuring stability and security, which is the essence of financial planning.

Importance of financial planning

All individuals have goals in life, and these may range from purchasing a house or a vehicle, to travelling the world or passion projects like enhancing the lives of the needy. Whatever your goal may be in life, there are two things which are imperative to achieving the same – passion and money. Without money, no amount of passion can help you reach your milestone, and financial planning is the best route to building wealth in a sustainable manner.

A financial plan serves as a comprehensive roadmap outlining your current financial standing and your short- and long-term monetary aspirations. It encompasses strategies aimed at realising these objectives while also including essential components such as managing life's uncertainties, income and expenditure management, and debt reduction, thereby laying the groundwork for meeting an individual’s fundamental needs.

The process of financial planning entails a meticulous assessment of one's financial landscape, including income, expenditure, debt, and savings, alongside future expectations. Basis this understanding, one can craft a financial plan independently or in collaboration with a certified financial planner.

Asset allocation at the core

After realising the importance of charting a financial plan, Ashish started creating a roadmap for his monetary well-being. When he began considering possible investment options to enhance his financial standing, his friend explained to him the importance of asset allocation while investing. Asset allocation is the strategy investors use to distribute their investment portfolios across various asset classes like stocks, bonds, commodities, real estate and cash equivalents, with the aim of balancing risks and rewards according to their financial objectives, risk tolerance, and investment horizon.

Each asset class mentioned above carries its own risks and potential returns, leading to diverse behaviours over time and given that each investor is unique, there is no one-size-fits-all formula for determining the ideal asset allocation. Individual security selection within an asset class occurs after determining the allocation among various asset categories, and this has a significant influence on investment outcomes.

Choosing the right mix

Usually, investors tailor asset allocations to specific goals while also considering their age and earning potential to ensure optimal alignment. For instance, short-term goals, like buying a car soon, may warrant a conservative mix of cash and bonds, as you do not have the time to recoup losses if the market faces a sharp correction. In contrast, long-term goals, such as retirement planning, often involve a higher allocation to stocks to capitalise on their potential growth over time.

Since Ashish is only 28 years old and plans to have a long career ahead of him, he can take up greater risks in the quest for higher returns. Accordingly, he decided to allocate up to 65% of his corpus to equities, with the remaining 35% being divided across bonds, commodities and cash, basis his financial requirements.

Now that you know all about the importance of financial planning and asset allocation, when it comes to financial well-being, how far have you reached in your planning journey?

Disclaimer: This article is a paid publication and does not have journalistic/editorial involvement of Hindustan Times. Hindustan Times does not endorse/subscribe to the content(s) of the article/advertisement and/or view(s) expressed herein. Hindustan Times shall not in any manner, be responsible and/or liable in any manner whatsoever for all that is stated in the article and/or also with regard to the view(s), opinion(s), announcement(s), declaration(s), affirmation(s) etc., stated/featured in the same.