Financial planning works fine to achieve the financial goals when economic and market situations are normal and swing in normal cycles.
Financial planning is very important to achieve long-term financial goals. Without planning, you won’t be able to determine how much you need after how may years for goals like education of children, their marriage, buying your own house, maintaining standard of living after retirement etc.
It’s only after determining your financial goals, you would be able to determine how much to save for which goals for how long and to determine the best possible investment options to achieve the goals by taking minimum risks.
As part of financial planning, you should determine the life goals as early as possible and start investing early, so that you may get the benefit of compounding, which primarily depends on the length of investment.
Creating an emergency fund by keeping money equivalent to 6 months of your salary in liquid investment options is a crucial part of financial planning to deal with any unforeseen exigencies.
Taking adequate insurance cover is also very important, so that the journey to achieve financial goals doesn’t get jeopardised in case of any unfortunate adversities. As per financial planning, you should at least take adequate term insurance and health insurance covers and never mix insurance with investment by taking endowment insurance or ULIP.
As a part of the financial planning, you should classify your short-term, medium-term and long-term financial goals and invest accordingly in short-term debt fund, medium-term debt or balanced fund and equity fund respectively to achieve your goals.
However, financial planning works fine to achieve the financial goals when economic and market situations are normal and swing in normal cycles.
But, what will happen if you lose your job during 2008-like major and prolonged economic crisis?
In 2008 global economic crisis, lakhs of people lost their job globally especially in the US and Western countries, and hit by major liquidity crisis, banks were unable to advance loans even against assets, forget about emergency loans.
In such a situation, only the emergency fund would help you stay afloat, that too for around 6 months and not other parts of financial planning.
This is because major economic crises are triggered by debt failures that lead to collapse of stock markets. As a result values of your planned investments will become so low that withdrawals would not only jeopardise your financial planning, but you would suffer huge losses.
Moreover, term insurance cover will not be able to help you, as you can neither surrender a term insurance, nor take loan against it.
Although, financial planners advise people to avoid FDs and endowment insurance plans, but taking some of such so called ‘junks’ along with planned investment instruments, would help you survive during crisis of global nature, where planned investments would fail you.
During the liquidity crisis after job loss, you may break your bank fixed deposits (FDs) to avail funds and may also approach the insurance company either to surrender endowment policies or take loans against them to stay afloat during the crisis time.
While there is no doubt that you need to do financial planning and invest accordingly to achieve financial goals, but taking some out-of-plan instruments are also necessary to deal with crisis situations, during which financial planning fails temporarily.