A Financial health check-up is the starting point, to determine the state of your finances. In this conversation with Sumeet Vaid, Founder and MD, Freedom Financial Planners, I talked about the list of questions that would help you get a better picture of your investments, your state of debt, and the condition of your financial goals. The questionnaire has been designed by financial planners to get a better sense of their client’s financial health.
The following is an excerpt of our conversation.
Sumeet, I have a list of questions here. Lets get started.
The first question on the list is ‘Have you prepared a budget for your household expenses?’ Why is that important to know?
Sumeet: The starting point is to try and understand the old saying in financial planning – “Failing to plan is planning to fail.” It is important to know if the family has a budget and if yes, then are they following the budget or not
What is your monthly household expenditure?
Sumeet: Before I dive into this question, I specifically ask my client – what is your understanding of savings? Savings is Income (minus) Expenses. So what we are trying to ascertain when we are getting into your budgeting questions is (a) do we prepare a budget for you, and (b) if you prepare the budget, do you know what your expenses are? Because that will help us determine whether you have any savings potential. We understand all this by understanding what is your household expenditure
Do you have ready cash in case you lose your job?
Sumeet: It talks about the discipline of the family. It talks about how do you go about planning your monthly expenses, maintaining the discipline within family saving, expenses etc
Have you taken a life insurance cover?
Sumeet: Life insurance cover in India is a very misunderstood concept. People use the term ‘invest in life insurance.’ You don’t invest in life insurance, you buy life insurance.
Have you taken up health insurance for your family?
Sumeet: Usually the focus in this question is on the family because when we do financial planning, the focus is on the entire family rather than just an individual. So the question is whether the whole family is covered. Most of the time, the answer is in the affirmative from Corporate employees because most companies provide this as a perk. Even then, most of the times it’s not for the family, it’s only for the individual employed. And many a time, people end up buying family floaters or some kind of a medical insurance. We ask this question to get into ‘how much is that’?
Is your home or business insured against disasters? Tell us about this…
Sumeet: Property valuations make up to 50% or more of an individual’s net worth. Most of the times when we write financial plans, we find that people don’t have their property insured. By not getting it insured, you’re opening yourself up for disasters.
Have you identified your financial goals with dates and amounts? What does that mean?
Sumeet: Try to ascertain whether you are saving or investing. The difference is that saving means ‘Income (minus) expense.’ When you save for a defined goal, defined time period, defined amount, defined risk – it is an investment. We want to ascertain if people are aligning their goals to their investments which are in date and objective. It is very important for any kind of financial plan to be prepared.
Are your investments diversified across all classes? What does that help you understand about your client?
Sumeet: That basically means ‘are people going overboard in a typical asset class like real estate’… especially in India. If you go with families, real estate is one asset class which most of them understand. Most of their money goes into real estate because it has definitely given them a good return. It doesn’t give a diversified portfolio and so your risk is not getting covered by going into one asset class. So we deliberately ask that question so that we can analyze for the financial plan – are they diversified, are the risk diversified, are their assets diversified – so that’s the objective.
Also we want to tell people that there is some amount of risk attached with every kind of investment. You cannot plan your portfolio without understanding risk. No risk-free return.
What are the current investments you hold – share, equity, mutual funds, debt mutual funds, bank deposits, government savings, real estate…do you leave the balance on your credit card rather than pay off the full amount?
What we see in most families is that they have surpluses yet they don’t pay their credit card bills on time. They just carry on without understanding what kind of cost they are paying. No payment of credit card leads to debt trap.
(To be continued…)
