How Long-Term Financial Planning Can Help You Sail Through Another Pandemic – Forbes

The unprecedented coronavirus pandemic was a timely reminder that even black swan eventsextremely rare, unexpected events with severe consequencescan come to pass. The pandemic has demonstrated unequivocally that such unforeseen and unplanned-for events can wreak havoc on economies around the world, creating a ripple effect that impacts each one of us.

One of the lessons of this crisis is the realization that we must all prepare for any such eventuality in the future. You must start by ensuring that you are, at the very least, financially protected against a similar event. The only way to achieve this goal is by creating a financial safety net through long-term planning.

You can start with diligent saving under a carefully-designed financial plan that is monitored regularly. A long-term financial plan has many benefits that extend beyond providing security in times of crisis. However, before you understand the need for long-term planning, you must ensure stable cash flow through savings.

As half of Indias population is under the age of 27 years, any similar crisis in the future has the potential to severely cripple the income streams of this large demographic. The resultant employment losses and financial insecurity can become immediate threats. To combat this, personal savings can prove to be a critical factor in cushioning any fallouts. There is, hence, an urgent need to promote long-term financial planning and retirement savings strategies in all age groups.

Create A Savings Plan: A savings plan is not just about letting your money accumulate in a bank deposit; it has many other benefits. The smart option is to always let this money work for you. A smart investment plan will include an option to facilitate regular cash flow, where you may be able to see partial returns on your investment after a certain period of time. This will allow you to further build your capital and enhance your financial portfolio.

Plan Financial Goals: With sufficient savings, you can plan for your life goals, such as retiring early or investment in long-term assets such as real estate. You can also put aside funds for short-term goals, like buying a car or planning a holiday, without worrying about crippling your long-term portfolio. A suitable nest egg is essential for your financial stability and independence. In a crisis situation like a pandemic, it can help you tide over a sudden job loss or pay cut, and give you greater freedom to scout for new opportunities.

Discipline Yourself: Financial planning helps build fiscal responsibility and self-discipline where you learn to budget, keep track of your liabilities, pay your taxes on time, and eventually increase your savings. Over time you will learn the trick of maintaining a consistent flow of cash, while ensuring a healthy and diverse portfolio.

A long-term financial plan may seem like a daunting prospect, especially if your savings are generally low and spending is high. It may even seem unnecessary if you are still in your 20s. However, the sooner you start, the more you can gain from an investment plan. You can allow more time for your investments to mature, opt for high-risk-high-return investments without worrying about a looming retirement.

Similarly, it is just as important for those in their 40s or 50s. While age may limit the liabilities you can take on, there are plenty of safer options where you can park your money and allow it to grow. In fact, with age a financial plan becomes critical as your retirement comes closer.

Over time you will develop an understanding of the markets and the factors that influence their working.

Diversification here means distributing your investments between different assets that react differently to the same financial event, market, or timeline. For instance, a diversified portfolio will typically include stocks, bonds, mutual funds, money market instruments, commodities, and real estate. When planning a long-term investment plan, diversification is critical.

Asset allocation is the distribution of different asset classes in a portfolio. An ideal asset allocation should balance the risks and rewards in a portfolio. Assets are broadly divided into stocks and bonds.

Your portfolio should contain both to strike a balance between risk and surety. However, the proportion can change according to various factors. The general rule of thumb when calculating asset allocation is to subtract your age from 100, the result being the amount you should invest in stock. So, a 25-year-old can keep the asset allocation at 75% stock and 25% bonds. On the other hand, a 40-year-old could keep the ratio at 60:40.

However, this is just a rough guide. Today we have plenty of other options to choose from, such as:

The question here is how to distribute these asset classes in a portfolio. Asset allocation depends on your goals, risk appetite, and age. Since the goal here is long-term investment, lets look at the other two factors:

Risk appetite: An important part of any portfolio is risk management. Stocks and bonds should be allocated according to the amount of risk you are willing to take while pursuing your investment goals. This is risk appetite and there are multiple factors that influence it. If you have high liability or low income, your risk appetite is likely to be lower even if you are in your 20s. On the other hand, someone in their 30s with no unusual liabilities, will have a higher risk appetite and can hold the majority of their portfolio in stocks.

Age: As you grow older and nearer to your retirement age, you are less likely to risk your life savings. The proportion of bonds in a portfolio, hence, increases with age. The younger you are, the longer the potential lifespan of your investments. You can invest in stocks that may seem high risk in the near future, but are likely to show higher returns later. You can hold your stocks and allow them to appreciate.

The two main factors of asset allocationrisk appetite and agekeep changing with time. As your earnings increase, your risk appetite will also go up. On the other hand, a sudden loss or cut in earnings will lower your risk appetite. In addition, your liabilities may change with time. For instance, starting a family or buying a house entails regular expenses that will impact your savings, and hence, your investments. Your age will also play a role; as you grow older, your willingness to take risks is likely to lessen. These changes in circumstances mean that your portfolio must be rebalanced periodically.

A long-term investment plan is necessary for a secure future. Whether it is about creating a retirement plan or ensuring comfortable savings, it ensures that your money is secure and growing at a healthy rate. At a time when we have been confronted with unimaginable and uncontrollable events, it becomes even more critical for your personal freedom and in ensuring economic security against another pandemic.

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How Long-Term Financial Planning Can Help You Sail Through Another Pandemic - Forbes