WHEN BEHAVIORAL BIASES TURN AWAY FROM THE SIMPLE TRUTH; WHAT DO YOU THINK HAPPENS TO FINANCIAL DECISION MAKING?
Long-term financial planning is extremely important for lifetime financial security, but it is also exceptionally difficult for most investors. By improving decision making among clients, financial advisors can improve lifetime financial security. The average investor is less knowledgeable than professionals about the problem and has limited time and attention to devote to it. Understandably, investors may resort to rules-of-thumb, display biases, or behave “irrationally” in other ways. Not only does this make optimal long-term financial planning difficult for the average investor, but it presents challenges for advisors as well. –
BENEFITS OF FINANCIAL PLANNING
Financial Planning helps in improving risk management, improve portfolio ROI, uses metrics to manage money, among other benefits.
1.Improves risk management:
2.Improvement in portfolio return on investment
3.Identify good and not so good areas
4.Use the metrics approach to manage your money
5.Reduce your cost of personal finance
6.Discipline in managing money
7. Measure and improve asset allocation
8. Future visibility
FINANCIAL HEALTH CHECK WITH PERSONAL FINANCIAL RATIOS
While we continuously postpone the task of making investments or following financial discipline to another day, there are some simple tools in personal finance that can serve as benchmarks to help us gauge our financial situation. Just as we evaluate a company’s balance sheet with Financial Ratios, our Personal Finances also can be assessed with the help of a few simple ratios. The task, though, is much simpler compared to analyzing Balance sheet of a company.
All it requires is your basic financial details like bank balance, loan amounts and knowledge about the values of your assets.
Let us take a look at some important Personal Financial Ratios –
To tide over times of uncertainty such as a job loss, change of location or a sudden illness, it is critical to have money placed in liquid assets that are easy to encash. Basic Liquidity Ratio indicates expenses worth how many months are provided in the form of Liquid assets, to sustain such uncertain times.
Basic Liquidity Ratio is calculated by dividing Liquid Assets like SB A/cs, FDs, RDs by monthly expenses.
Basic Liquidity Ratio = Liquid Assets / Monthly Expence