Financial Planning is a comprehensive term in personal finance, which includes risk profiling of the investor to find out his investment preferences and economic strengths, and to design a detailed plan to achieve his financial goals. Financial Planning starts with defining the investor’s financial needs and goals, assessing his financial strengths, and willingness and ability to take risks, and then to design a plan to achieve those goals. Finally, the investments made as per the plan are to be reviewed periodically to check if they are producing the desired result.
Our financial goals may include, saving for children’s higher education and wedding, buying a house, buying a car, travelling to international destinations and retirement planning. It also includes saving for financial contingencies like job loss or an accident or illness. Finally, financial planning has to take into consideration, the extremely remote possibility of death before retirement, which leaves our family and dependents in emotional and financial distress.
The first step in financial planning is done thorough risk profiling of the investor to assess his financial health and his willingness and ability to take risks. Risk Profiling helps to decide in which asset classes the investor should invest, and how much to invest. It helps to balance his portfolio and sync it to achieve his financial goals.
The following steps indicate popular goals and needs:
1) Building a contingency fund to protect self and dependents against loss of job or income.
2) Health Insurance, to protect self and family against serious illnesses or accidents.
3) Life insurance cover to protect our family against financial distress in case of our untimely demise.
4) House.
5) Car.
6) Children’s higher education.
7) Children’s wedding.
8) Travelling and Holidays.
9) Retirement planning.
10) Estate planning.
A contingency fund is required to protect ourselves from a sudden loss of income. It is considered wise to save up to six months’ expenses in the fixed deposit of a bank. This money is used in the unfortunate event of loss of job or income or an emergency.
It is advisable to purchase a health insurance plan from a reliable health insurance provider. The health cover should be adequate to take care of hospitalisation expenses during illness. Separate policies should be purchased for parents or in laws, and elders in the family. Buying adequate health insurance helps us save money and stress during a medical emergency.
A life insurance policy should be purchased for the primary income earners in the family. Life Insurance protects our family from financial distress in unfortunate circumstances. It is recommended that you buy a term insurance plan and not any other type of insurance plan. Insurance policies like endowment plans, money back plans, whole-life policies and ULIPs, etc. Do not give sufficient returns. Such plans combine insurance with savings, and investors end up getting neither adequate insurance nor adequate returns on their investments.
It is better to consider Equity based Mutual Funds for your long term investment goals, and debt based Mutual Funds for the short term goals. Investors must follow a proper asset allocation model comprising equity, debt, gold and real estate.
It is advised that one should start saving from an early age as equity investments give better results over a prolonged period due to the power of compounding. It is essential to maintain strict investment discipline. Hence Systematic Investment plans (SIP) of Mutual Funds are a good choice. SIPs have several benefits which include, discipline, Rupee Cost Averaging and Power of compounding.
Financial Planning is essential for investors of all income groups as it helps them by allocating their resources in the most productive asset classes. It is also possible to take tactical calls, and dynamically allocate resources, to maximize returns.
Finally, a plan should be made for old age, and a Will must be prepared using legal advice.. Estate planning takes care of this. Estate Planning ensures a smooth path for transferring your assets to your loved ones.
