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Leonardo da Vinci once said that “simplicity is the ultimate sophistication.” This quote still stands very true for everyone today and for everything, be it mind or heart, relationships, home, work or money. One of the best ways to achieve simplicity is to declutter. In this article, we will attempt to make a case for decluttering and how to do it.

Why declutter matters?

There are obvious benefits for decluttering are many. We live in a world of many. Today getting anything is very easy, just a click away. There are many distractions, updates, communications, events happening at virtually every second. The world today is smaller and we find a lot of things happening around us. Often we find our head spinning with so many choices around us. Here are the obvious benefits we will enjoy once we walk on the path to decluttering.

• Saves time: by removing time we spend on unnecessary things

• Make better choices: making by removing unnecessary things /details

• Helps prioritise: from among many things

• Bring focus: on things which are really needed

• Aids memory: by reducing the things we need to remember

• Being consistent: by simplifying things

• Get peace: by removing complexities

How to declutter and achieve simplicity?

Simplicity is something that many of us desire but many do not know how to do so. Here are the important steps to do so.

• Target: The first step is to decide what to declutter? Since almost everything around us may be decluttered, deciding where to start is an important step. Chose an area or subject which you feel requires urgent attention and has been draining you out mentally or physically. This could be your finances, relationships or even your kitchen or wardrobe.

• Learn: The second step is to learn how clutter and lack of simplicity are impacting your time, productivity, money, etc in your chosen area. Have a closer look at everything going in there. In case you are looking at your finances, just observe how many financial transactions, holdings, investments, accounts, advisors and such other complexities are there. Are they too many? Understand what and how you have been at a disadvantage due to this.

• Prioritise: The next step is to prioritise. What is the most important? What is the one thing you can and cannot live without? Organising into important and not important is an important step and you really would need to be strict here. Keep doing this till the time you feel you have a shortlist of the most important things that matter.

• Reduce: Once you have prioritised, the most critical action now is to remove the things you do not need or do not really carry any real value for you. In finances, one could do this by consolidating your investments, closing unused accounts, closing policies that do not serve the real purpose of protection, moving portfolio with only one advisor, reducing debt, and so on. One has to be very ruthless here to remove things that do not matter.

• Add: It would be rare that you would need anything to be added to your chosen target area of decluttering. However, it is possible and perhaps even a good time to add the most important things which you have been missing out since long. In finance, a comprehensive financial plan could be the one thing you are likely to be missing out.

In short, here is what we have done – subtract the obvious and add the meaningful. That is what declutter and simplicity is really about. Remember that you have succeeded in life when all you really want is only what you really need.

Simplicity in finance:

• Simple expectations: The major reason for mistakes, frequent churning and bad product choices is often exaggerated expectations. We need to have sound, grounded and long-term reasonable expectations and hold on to same at all times.

• Declutter portfolio: Most of us would likely have many insurance policies, bank FDs, small saving schemes and even mutual funds and equities. Time to have a strategy and remove the products that do not add real value.

• Prioritise your goals: One needs to prioritise one's goals. Often the random, small goals are given priority at the cost and compromise of long term big goals. This has to stop

• Have steady plans: Frequent changing of your plans has many costs attached to it. Have a comprehensive financial plan and stick to it.

• Have discipline: Disciplined savings over the long term is the ideal and easiest way to create wealth. Start a SIP, keep growing your SIP and forget about it.

• Reduce expenses: If you look around, there are many unnecessary expenses around you. This is impacting your financial well-being, one expense at a time.

• Do not run after ideas: Do not chase ideas or stock tips or get rich quick schemes. It does nothing but adds uncertainty and complexity to your finances

• Do not make too many mistakes: Not making too many mistakes or big mistakes in life is the surest way of letting your money grow and not protecting you from financial shocks.

Socrates once said, “the secret of happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.” If we all live to this principle in our lives, I am sure that our lives will be much happier, peaceful, rewarding and healthy. Let us commit ourselves to simplicity in all aspects of our lives and declutter thing which weighs us down, physically, mentally, emotionally and financially.

Over the last few years, the term “financial planning” has been very often used and heard by many of us. In this article, we explore as to what this term means and why it is important for us all.

What is financial planning:

Simply put, financial planning is the process of meeting your life goals through the proper management of your finances. The life (read financial) goals can include buying a home, saving for your child's education & marriage or planning for your retirement or protecting your family. It is a process whereby a qualified financial advisor will consider your entire financial situation and goals and provide you with appropriate action steps to fulfil your goals and better manage your finances. It is not a one-time process but is continuous in nature as your life situations and finances change over time. You also need to regularly review your financial plans & your investments to ensure that you are well on track to meeting your financial goals/objectives.

Why financial planning is needed?

Given the nature of today's life, with growing uncertainty, rising aspirations and increasing costs of living, doing thorough financial planning have become a must for each of us. It is also better to plan and be ready for any situation rather than be passive and wait for things to happen before doing anything about it. A special case to mention is of Retirement planning, which has become very critical since the average life expectancy has increased and appropriate planning is needed to ensure that your 20-30 years of your life after retirement is dignified, peaceful and self-reliant. 

In the absence of proper financial planning, the following are the risks faced by a client.

• Continued lack of understanding of your financial situation

• Delay and wastage of critical time for planning for goals

• Continued exposure to financial risks in life to you and family

The financial planning process:

The financial planning process is a logical, six-step procedure from the perspective of a client.

1. Establish and define the relationship: The first step is establishing a relationship with the financial advisor/expert. The client should inquire about the services offered and the process. The client should also inquire about the professional’s competencies and experience. The client should also enquire about any fees and how the advisor would be remunerated from the same. The client should make clear any expectations he/she has with the advisor/expert.

2. Sharing of information: The next step would be the identification of your personal and financial objectives, needs and priorities that are relevant to the scope of the engagement before making and/or implementing any recommendations. The financial expert would request sufficient quantitative and qualitative information and documents from you relevant to the scope of the engagement before making and/or implementing any recommendations.

3. Analysis and assessment of your financial status: The next step would now be to analyse your information, subject to the scope of the engagement, to gain an understanding of your financial situation. The step involves assessment of strengths and weaknesses of your current financial situation and compares them to your objectives, needs and priorities.

4. Development of financial plan recommendations and presentation: The next step involves the financial planning expert considering one or more strategies relevant to your current situation that could reasonably meet your objectives, needs and priorities. Then the financial planning recommendations based on the selected strategies will be developed and presented to you. You may seek to understand the supporting rationale in a way that allows you to make an informed decision.

5. Implementation of recommendations: Once you have understood and given your approval to the recommendations, the execution will happen. Note that the expert would expect your agreement on implementation responsibilities that are consistent with the scope of the engagement. Based on the scope of the engagement, the expert identifies and presents the appropriate product(s) and service(s) that are consistent with the recommendations accepted by you.

6. Review your financial situation: The expert and you would then mutually define and agree on terms for reviewing and reevaluating your situation, including goals, risk profile, lifestyle and other relevant changes. While conducting the period review, the expert along with you will review your situation to assess progress toward achievement of the objectives of the recommendations, determine if they are still appropriate, and confirm any revisions mutually considered necessary.

Advantages of financial planning:

To summarise, the following are the key reasons or benefits that you would get from financial planning.

• Proper understanding of your financial situation

• Finalisation of the financial goals and knowing what it would take to achieve the same

• Understanding your insurance needs and ensuring financial security

• Understanding how your financial decisions and choices will impact your financial well-being

• Having a path laid out for you and your family's long term financial well-being

Most of us do not have adequate information about financial planning and only in recent years has there been some growing awareness about it. Most of us though still believe that they are knowledgeable and smart enough to decide upon their finances on their own ignoring the fact that this is a very broad subject that requires professional expertise. We are ready to visit and pay an accountant, doctor, lawyer or any other professional but are shy when it comes to asking for a financial plan from financial experts. A better, secured financial life is a dream for all of us which, with proper financial planning, can become a reality. The need is to understand this crucial part of our life and give it the importance and priority it deserves.

No one can predict equity market. Right? But the other side of the coin is that no one can create wealth by ignoring equity market. Equity market becomes more predictable with the increase in investment horizon, and we have discussed and proved this on many occasions. The fact of the matter is that equity is best suited to help investor meet financial goals in life with the potential of generating inflation beating return, but another equally important fact is the inherent volatility of equity, specially in a short term of less than 5 years.

Financial goal based investing is at the core of any investment exercise., After all we all save and invest to achieve a specific goal or need in life, which can be to provide good education to our kids or to spend on their marriage or simply to have peaceful, worry free retirement. With the right advice of your financial advisor, you invest in the right asset class, generate return as expected or even exceed that, and reach the desired corpus required to meet a specific goal, but imagine a situation when equity market crashes just few months before you actually need that money, or a bank/company goes bankrupt in which you had put fixed deposit. Remember co-operative banks and many companies going bust in late 90s or recent crash of equity market in 2008.

Lets imagine Mr. Shah, who had been investing in diversified equity funds through SIP for last 10 years to save for his son's higher education, which was due in 2009 for which he required to pay fees in March/April 2009. He was a happy man in September 2007, as he had not only built the required corpus, but in fact had exceeded due to strong market rally and super performance of equity funds in which he had invested. His joy multiplied manifold in January 2008 with the increasing value of his portfolio. This strong rally of equity market tempted him to continue out of sheer greed to earn more. But come March 2009, his portfolio was down by more than 50% and he had to arrange for his son's fee from other sources.

Time Horizon and Risk Factor
These two are inversely proportionate to each other in case of equity investment. As investment horizon increases, risk reduces, and vice versa. Equity investment can prove highly risky with anything less than 3 years of investment period, but becomes more predictable with reasonable period of above 3 years. A common mistake that investors make is, they try to chase equity return in short term and lock long term money in fixed income product like PPF for 15 years. Ideally it should have been the reverse.

As can be seen from the below graph, if someone invests Rs. 50000 every year in both PPF and equity fund, over a period of 20 years, then equity fund clearly outperforms PPF. At the end of 20 years, an investor makes Rs. 24.71 lakhs in PPF while the same amount grows to Rs. 58.9 lakhs in equity fund.

Let us try to understand by putting numbers in the above example of Mr. Shah. Lets assume that he started SIP in 1999 and he wanted Rs. 7 lakhs for his son's education, when he reaches 17 years of age in 2009 (in approx 10 years time). His monthly SIP need was Rs. 2868 so he started with Rs. 3000 of SIP (assuming modest return of 13% per annum).

Eventually he got return of 20% during period of 1999 to 2008 and reached the figure of Rs. 7 lakh in the beginning of 2008. (when SENSEX was touching 20000 for the first time). Greed overtook rationality, and Mr. Shah wanted to cash in market rally and continued with his equity investment. We all know what happened to equity market between January 2008 and March 2009, when he actually wanted the money. SENSEX was down by around 50% and so was his portfolio.

Isn't this a very practical example? Many times we come across this kind of situation, when we find equity market at a low level, specially when we have need of the saving. What to do in this kind of a situation?

Conventional wisdom says that one should start shifting money from equity to debt as one reaches near his/her financial goal. Considering the inherent volatile nature of equity, it is always prudent to shift corpus from equity to debt, and ideally the entire amount should be in debt for at least 1 to 2 years prior to the actual need. This can ideally be done in two ways:

Opt for Systematic Transfer Plan (STP)
This is the facility available in mutual funds under which an investor can give standing instructions to transfer money from one fund to another. As one approaches the goal, STP instructions can be given to start switching funds from equity to short term/liquid funds to protect any potential downside from equity.

Shifting: As discussed, switching of invested money should ideally start around 1-1.5 year prior to the actual goal. As the objective here would be to protect any downside and not return optimization, short term/money manager funds can be an ideal option or one can also look at 1 year fixed maturity plans (FMP).

The idea here is to protect the funds created over the years. When you start investing, focus on equity, take maximum advantage of power of compounding and invest through SIP over the years. Switching to liquid/short term funds should start either as soon as investor reaches the desired amount or at least 1.5 to 2 years prior to the actual goal.

E.g. With our example of Mr. Shah, he could have started switching funds from equity to short term money market funds in the later part of 2007, as he reached his desired amount of Rs. 7 lakhs or could have simply put that money in 1 year FMP product. This would have not allowed him to participate in future rally but at least his money would have been secured and even during that 1 – 1.5 year period money would have generated inflation beating return.

Ideally, it is advisable to shift the amount required for a specific goal to liquid/short term funds at least one year or year and half ahead of actual requirement to protect any downside or it can be done as soon as required amount is reached, irrespective of the time horizon. Whatever path you take, prudent investment approach suggests to realign your portfolio in favour of debt to protect the amount you have built to meet your specific goal.

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As kids we would have read the famous story of Alice in wonderland. In the story, she once reaches a crossroads and was not sure which road to take. A passing cat asked her where she wanted to go to which Alice replied

"I don't know!". The cat then smilingly replied "Then it doesn't matter which road you take".

The classic moment in the story is true to each of us in our daily lives. In our lives too we are often at crossroads like Alice and unknowingly we choose our roads without knowing where we want to reach in our life. When it comes to investments, this is in fact the reality for most of us. Since we don't know what we want to achieve from our investments, any investment decision helps us achieve it.

The need for setting goals can never be undermined, be it business, personal life or your personal finance. Every wise investor would know the purpose or objective behind his/her investments and more often than not, the same would be geared towards achievement of some goal in life. The goal can be any personal or financial goal like retirement or a fixed amount at any time in future, with the condition that it can be monetised or spoken in terms of money.

Advantage of setting goals:
The following are some of the benefits of setting financial goals in your life...

• Goals make you think & prioritise: When you actually start planning for your goals, you are forced to evaluate the need, intensity and priority for each of your goal in life. This gives you a lot of clarity on which goals to pursue and in what priority. Often important goals which are not on the top of your mind, crop up and make you think.
• Goals make you take action: After identifying goals, one becomes more inclined to take actions for achieving the goals. We often neglect or delay the action because the goals are not very clear in our minds. Defining goals would help you realise the urgency for taking appropriate actions
• Goals tells you where you: Unless the goals are defined, we would not be able to comprehend our current situation with regards to the future. Defining goals also clarify their feasibility and practicality for achievement and accordingly, depending of our current situation, we may either change the maturity period or the returns expectations or the targets of the goals.
• Goals helps you to keep focus: Understanding your goals would help us keep focus on achieving them. This helps us on a daily basis and you may start making a choice between making small expenditures or saving for the goals. Also, we would be more discipled and regular in making our investments and at the same time, not withdrawing from the kitty saved towards the goal.
• Goals lead to success: With goals in mind, you will make optimum use of your financial resources when while planning for them. You would eliminate wastefull expenditure, invest in productive asset classes and tend to maintain discipline in your investments. All these factors ensure that you are much closer to your goals then they mature.

Risks of not setting goals:
Just like we discussed the benefits of goal-setting, there are similarly down-side risks to not setting and planning for goals.

• Compromise on goals: Not identifying or delaying planning for your goals for too long would ultimately lead to situations wherein you would need to either compromise on your goals, in terms of value or by pushing our goals into future. However, more often than not, goals like child marriage, education, retirement, cannot be postponed and it is best left unsaid as to how you would plan when they actually arise. You may even loose out on smaller goals & moments of happiness like say vacations, which would be very much possible if you are planning in advance for them.
• Failure to make optimum use of finances: Not setting goals and planning for same will lead to misdirected investments and spendings. Chances are that there would be unwarranted spending which would had been invested had planning been done. There is also high chances that you would save in asset classes or product which are not in line with your goals. For e.g., While planning for retirement after say 15-20 years, you will probably identify equity as ideal asset class for you to invest. However, in absence of same, you may avoid equity investing as a risky asset since your goal & time horizon is not clear.
• Compromising on Long-term financial well-being: In long term, better management of your resources would enable you to achieve same while also creating and protecting your wealth at the same time. Needless to say, you are more likely to be credit-free, while having appropriate wealth at disposal for a better life, especially post retirement. By avoiding goal setting & planning, you may well be inviting financial in-stability or insecurity in long-run since you may be forced to take credit or dilute your unplanned investments when your goals mature.

Setting financial goals is something that we are not completely unaware of. It is like basic common-sense. We all know its importance but rarely do we plan and act accordingly. We have discussed in detail the benefits and risks of not setting your goals and planning for them. Very clearly, they have potentially very far-reaching & defining consequences to your financial well-being in future. Those who are wise would understand its criticality and start taking appropriate actions towards it in immediate future. And for those who fail to do would leave matters increasingly to luck and chance for as long as they continue delaying same.