Financial planning is an imperfect science

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Often, when we sit with our friends for some relaxing time the topic of the day is financial planning. The discussion always starts from the age at which everyone is supposed to retire and then carries through series of conceptions and misconceptions, where eventually one thing everyone agrees to is the dependency on fate more than calculations. It is natural that after every meeting with our financial advisor we get the feeling that we are not doing enough savings. That occurs especially when the advisor draws exaggerated expenses saying your son will require Rs 50 lakh for his MBA, Rs 25 lakh for his marriage and somewhere around 1 crore for your retirement. Really? Looks like the advisor might have misjudged me with Elon Musk or has he?

In the early 70s, there was no concept called as 2BHKs, in fact, societies or apartments were a new phenomenon. In that period, a 1BHK flat in the Mumbai suburbs used to cost around Rs 25,000. Now if someone would come to you in that period said that in 40-50 years this property will fetch you around a crore of rupees, you would laugh and ask him to stop daydreaming. However, coming back to present life we do know that statement has become a fact. Going by that reference the financial advisor might not be kidding right? So what has changed in these 40-50 years? Income? Expenses? Population? Job opportunities? Or possibly everything. So if Rs 25,000 invested in the 1970s can become Rs 1 crore, how much can Rs 1 crore invested today become after 40 years from now? Probably Rs 100 crore or even more than that? Is it really that simple?

To understand why the investments are bubbling up year by year, one must know the concept known as inflation. In simple terms, the prices of each commodity are rising every day thereby raising the cost of necessities. Therefore, in order to survive, one must always match their income with that of the inflation rate. Hence a financial advisor’s or economist’s suggestion is the basis of history or past patterns of inflation, which results in the sum that shall be required to achieve your future needs.

So to summarise it, financial planning is a study of your future requirements, which are based on numerous assumptions and calculations, which may or may not be entirely correct. We might have figured how may now let us see why may not.

A forecast cannot be 100% accurate: There are 1,000s of factor which influence the inflation rate of any country, no one can predict it accurately.

Epidemics or acts of God: Two years ago, nobody predicted that the entire world will switch off and sit at home, and yet here we are two years later still sitting at home. Will this change the calculation? Yes, but was it predicted the answer would be No.

Death: Needless to say, that nobody can predict it, so imagine if you plan your retirement and you are not alive to enjoy it.

War or political scenario: This is another unpredictable area, which greatly hampers the development of any country.

Financial planning may seem like a myth, because of its imperfection or inability to predict the future, however, here are 3 reasons still why you should do it

A plan is always better than no plan: Just like you cannot predict the inflation rate, similarly you cannot predict your life span, however, one thing is certain and that is expenses for necessities. If you live, you will need money, however, your income may not outlast your life, therefore a plan to have money always is a must.

Being cautious is fine but being ignorant can be careless: You may think that financial planning is 20% science but 80% forecast, however, one must not forget that there is a strong chance this 80% forecast might come true. Ignoring the fact completely might leave you only yourself to blame at.

There is always the luxury of flexibility: If you plan and things work out the way you expect, it would be a dream come true, however, if do not plan, you miss out on flexibility and have to deal with only what remains, because till your retirement it would be too late.

Financial planning may be overly dependent upon the forecast, but isn’t every human life dependent upon fate? Nobody can predict their future, yet we all live in the hope of a better tomorrow because optimism is the fuel for energy. Waiting for perfection is not realistic or rather practical, however striving for it can at least help us achieve the nearest objective, if not both.

(The writer is founder, Money Mantra. Views expressed are personal)