• Sameer Shashank

Difference Between Investments & Financial Planning

Most people think that financial planning is synonymous with Investments and Insurances.


This is the stereotype that has been existing among our families, colleagues, friends, and the general populace.


"I invested in insurances and mutual funds. What do I plan more?"


This is one of the most common financial planning myths.


In the blog, we explore various aspects of investments and financial planning that will debunk this myth and set the record straight.


Let's get to it straight away!


#1: What are Investments? What is Financial Planning?


Why do I need a financial plan even after investing in several financial products?


What exactly is the difference between investments and financial planning, anyway?


What's investment planning and how is that any different from financial planning?



The answer however is pretty straightforward.


Investments and Financial Planning are obviously not one and the same.

Investments and Financial planning are not exclusive of each other either.


It's not 'Plan = Invest'. You don't 'Plan or Invest' either.


The right way is to 'Plan and then Invest'.


Financial planning is an intelligent and comprehensive methodology that involves cash-flow modeling, debt management, goal prioritization, portfolio optimization, progress tracking, and so much more apart from investment management.


There are several types of investments, few of the most popular ones are:

  • Stock, Bonds, Options

  • Mutual Funds, Exchange-traded Funds

  • Property, Gold

Your financial goals should ideally be mapped with a portion of your financial resources as per your investment objectives before you jump into any investment.


That is the process of investment planning which is an integral part of a goal-based financial planning process.


#2: How are financial planning and investments related?

An investment is financial planning in action

You don't take a plunge into the ocean without learning any diving signals.


Investments constitute an actionable part of the process of financial planning, not the entire process as such.


Yet most of us start and end our entire financial planning journey with just investments without a plan while abandoning a comprehensively planned financial life.


Investments are a subset of Financial Planning

The process begins with setting clear and measurable goals.


That's when the most suitable investment can be efficiently recommended for each specific goal and for all your goals put together.


The point here is that it all about your goals.


Hence the need for financial planning.


A fulfilling financial life is achieved based on how all your goals put together pan out in the grand scheme of things.


It's not about one goal or another. It's about how you can optimize all your goals congruently.


#3: What Financial Planning does?


The accomplishment of any goal, say buying a home or vehicle, your retirement, or child's education, don't merely rely on the ROI of our investments.


What you need first is a planning expert before you can choose to invest in deposits, schemes, bonds, or mutual funds.


There is an interplay of several other resources and factors such as savings, cash flows, debt, bank or PO deposits, etc apart from just the returns on your investments.


Here's what you can do with financial planning in addition to managing your investments.

1. Debt Management

Did you ever gauge the role of debt in your financial life?


What if you wanted to buy your dream home but debt could take up 50% of your monthly income?


That's when financial planning comes to your rescue.


You need an efficient financial planning methodology to plan and manage your debt.


2. Cash-flow Modeling


Often associated only with business, cash flows do play a key role in personal finances.


Cash flow means the movement of money in and out of your bank balance.


It's important to maintain a positive cash flow to stay on top of your finances. If you fail to keep tabs on your cash flows, it has a potential threat of derailing your finances.

Tracking your monthly cashflows is like monitoring your pulse - an incredibly crucial financial health check.


To have cash-flow modeling seamlessly and elegantly integrated with your financial goals, try this.

3. Help interpret goals realistically


Financial planning helps you understand your goals which in turn makes you a better investor.


Inflation, market volatility, and several other factors are to be accounted for while planning your life goals.


Your goals today may mean something else entirely tomorrow. There are various macro-economic factors that come into play.


What is the value of 1 crore 10 years from now?


What is the total amount you will need for kid's education?


How much risk is suitable for your portfolio?

These are questions an effective, strategic, and comprehensive financial plan answers.


3. Overview of your financial life

Financial planning gives you a panoramic view of your financial life.

Be it buying a home or vehicle, your retirement or child's education, to clear debts or save tax, a major event, or dream vacation.


Before you get into the nitty-gritty of investment execution, it pays off to get a broader perspective on your goals.

This is perhaps the biggest advantage of financial planning.



#4. What Investments can't do?



Investments, albeit being a key part of your financial growth, don't offer few things.


Here's what they miss out on.


1. Address short-term, immediate needs?


No, they don't!


Investments (other than Liquid funds or the likes) for big long-term goals in your life can't answer questions like:


Can I upgrade my furniture this year, while I'm still paying my home loan EMI?


2. Care about your overall financial growth?


Well, not really!


Let's face it. Most investment and insurance agents care about increasing their income, not yours.


The investment products industry is dominated by agents, brokers, and other platforms whose goal is to sell their products and earn a commission.


That could lead to a lot of misspellings thereby impeding your financial growth.



Conclusion


Investments are a subset of financial planning. Investment planning is an integral part of financial planning.


Financial planning gives a panoramic view of your finances while investments are the actionable step of financial planning.



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