Financial Planning is very relevant and important for all of us, who are in search of happiness. It helps us to achieve the desired goal.
India is a land of savings. Actually, the culture of savings, which is deep rooted in Indians, saved our country, during real economic crisis. This is one important reason, why India was not adversely affected by the global recession during 2007 to 2010.
It is rightly said that “Becoming wealthy is not a matter of how much you earn. It is a matter of managing your money properly”.
It may be possible that our parents and grandparents may be ignorant about various investment opportunities available. However we need to be aware of various investment opportunities.
With respect to achieving our financial goals, we should remember that Proper planning prevents poor performance. Hence there is a need for planning.
.We need to know the importance of Nomination [ with special reference to deposits],importance of writing will.
The three important aspects of Financial Management are (1) Wealth protection (2) Wealth creation and (3) Wealth distribution
Steps involved in financial planning:
1.Meeting the people: This refers to meeting people for the purpose of collecting data, Data analysis and drawing inferences. It facilitates better understanding. Collection of data regarding family members, dependents, the present status, current investments etc., analyzing the same and drawing inferences.
2.Planning and Goal setting. The financial goal has to be realistic and measurable. There is a need for time frame to achieve the goal. The plan may include buying of house, kids education etc.,. After the initial plan, there is a need for another plan, say after 12 months. On case to case basis, people may be need more than one plan. There is also a need for subsequent plans, this is on account of change in the market conditions, status change [eg. Change of marital status from single to married. Increase in number of dependents {kids}]. At this stage various products available to the person, for the purpose of investment, to achieve his goals may be suggested. On case to case basis, the person may decide/ choose the most relevant/ suitable products
3.Implementation: In fact, this is the toughest part of financial planning. Sometimes though the plan is very good, the concerned person may not be having commitment to implement the plan. The person need to possess the will to implement the plan to achieve the desired goal.
4.Review: This involves monitoring, follow up, answering the queries and problem solving. This step is extremely important to ensure that the person achieve desired goals.
We should understand the following Financial planning concepts:
1)Cash flow analysis [current financial status]
This refers to identifying sources and uses of cash/ funds, and arriving at net surplus(savings)
2)Current Asset allocation & net worth [current status]
Assets [gold, bank deposits, shares, NSC etc.,], Debt position, Calculating net worth. (Assets- Liabilities= Net worth)
3)Risk profiling: There is a need to assess the risk appetite of the person. From the point of risk, we should find out whether he is aggressive, moderate, conservative, risk averse.
Example: If Rs. One lakh funds are provided for the purpose of investment to different people, each of them will have different investment plans, depending upon their risk appetite. Each person is unique in this regard. Hence, this aspect need to be taken into account. Some people are of the view that taking high risk leads to high return. This need not be true always.
4)Emergency fund analysis: In order to take care of the unforeseen event, there is a need for emergency fund analysis. Certain events are to be treated as immediate and urgent. There is a need for emergency funds to meet the exigency. [Ex: A family member has to be admitted to the hospital and money is required to meet the medical expenses. Sudden leaking of the roof of house].If the funds are in liquid form, viz., cash, balance in SB a/c, bank deposits, short term mutual funds etc., then it is convenient.
5)Protection planning: An example for this is obtaining Life Insurance policy.
The quantum of life insurance required can be arrived from either through Income model or through Expenses model. (i.e., It can be arrived at either by collecting information about the income or expenditure as the case may be.)
There are different types of Insurance products viz., Term Insurance [ only risk coverage, high risk cover & low premium], Endowment policy, money back policy, ULIP, Pension plan etc. On case to case basis, depending on the requirement, the relevant products can be chosen.
Non life Insurance policy also should be obtained to cover the risk of property, motor, vehicles, electronic items etc.
6)Investment planning: Investment planning can be done based on Goals, Risk profile, time frame.[The goals can be purchase/ construction of house, sister’s marriage, retirement plan {ex. Save for 20 years & enjoy the benefits for 30 years} Depending upon the type of the plan, the person needs to take aggressive or conservative decisions, as the case may be.
The famous investment expert Mr. Warren Buffet said, “When others are greedy, you need to cautious and when others are cautions, you need to be greedy.” However, all eggs should not be put in one basket. Regarding investment in stocks, one should go for diversified investment portfolio to minimize risk.
7)Estate planning: Understanding the importance of nomination, will, trust etc., and then legally leaving wealth to legal heirs [leaving wealth after death] is also part of Financial Planning.
8)Tax planning: There is a saying in English, “Nothing is certain except death and tax”. Therefore, systematically planning and minimizing the Income Tax is very necessary.
Finally, there are certain mis-concepts about Financial Planning:
1.Financial planning is only meant for rich.
2.Tax planning is financial planning
3.Financial plan is not required for young people
4.Financial planning sometimes confused with investment planning.
Unless we remove these misconceptions from our mind, we will not understand the importance of Financial Planning. Let us remember that “Failure to plan is planning to fail”