Financial Planning

Introduction to Financial Planning

Financial planning is an important part of financial management. It is the process of determining the objectives; policies, procedures, programmes and budgets to deal with the financial activities of an enterprise. 

Let us understand financial planning with an example : 

 

ANSHUL’S FINANCIAL PLAN
1.Savings
Monthly expenses	179500
Emergency fund for	6	Months
Emergency funds required in savings account	1077000
2.Loans
Housing Loans are least expensive
Repaying all expensive loans like personal loans and car loans first followed by housing loans
3.Insurance
a) Life Insurance
Annual Income (assumption)	1200000
Life cover	20	times
Life Insurance needed	24000000
Life insurance should include coverage for critical illness
b) Medical Insurance
Number of family members	4
Medical family coverage required for each member	200000
Total medical insurance needed	800000

 

4. Investment plan
Invest in :
Mutual funds
Equity
Sovereign Gold Bonds
RBI floating interest rate bonds
No need to invest in real estate because house is already available
5. Tax plan
Avail Tax benefits
Save tax under Section 80 C by investing in Life Insurance and Public Provident Fund	150000
Section 80 TTA - Deductions from Gross Total Income for interest on savings account	10000
Section 80 EE - Deduction on Home Loan Interest	200000
Section 80 D- Premium paid for Medical insurance	25000
Section 80 CCD ( 1B)- Additional Contribution to National Pension Scheme account	50000
6. Retirement Plan
As per the retirement plan prepared, it is estimated that I will have to build a corpus of	Rs 25.4 crores

 

                                                                                     

                                                                                   

     

   Insights from the above  Financial Plan

A good financial plan as mentioned above should cover all the six heads: Savings, Loans, Insurance, Investments, Tax Planning and Retirement Planning.

 

Savings according to me a person needs to create an emergency fund in a savings account which can be used to meet all the designated expenses even if the income for a particular month is nil. As a thumb rule an amount equivalent to six times the monthly expenses should be set aside as emergency funds. In my case as calculated the monthly expenses are of Rs.179500, so an emergency fund of approx. Rs.10.77 lacs needs to be created to cover all contingencies.

                                                                           

               

 

A good Financial Plan is one where expensive loans (which bear high interest rate) like personal loans and car loans are avoided. Home Loans are the cheapest loans. I case of repayment the focus should be to return the expensive loans as early as possible.

                                                                                        

 

If we talk about insurance, I have analyzed that Life cover should be equal to 20 times the annual earnings of an individual. The medical insurance should be available for all the family members. It is better to have a family cover. I have opted for a Rs 200000 medical cover for each family member. A medical family cover means that medical expenses to the extent of the family cover are taken care of instead of the smaller medical insurances.

                                                                                

 

The investment portfolio should be a balance of high risk high return instruments such as equity and mutual funds, moderate risk moderate return instruments such as Sovereign Gold Bonds and RBI floating interest bonds and low risk, low return instruments such as Fixed Deposits and Preference Shares, depending upon the risk taking capacity of individuals. I chose a combination of high, risk high return instruments and moderate risk, moderate return instruments according to my risk taking capacity.

                                                                   

 

For tax planning, one should try to save as much tax as possible by investing in tax saving instruments provided by the Government. This will not only help in saving tax today but also help in the creation of future Corpus.

 

Finally, in the Retirement Planning section, the monthly expenses need to be determined for the calculation of corpus needed post retirement. Accordingly the financial planning should be done. One should opt for retirement planning as early in life as possible because considering the ever increasing inflation rate, the monthly expenses will keep increasing resulting in an exorbitant increase in the corpus required post retirement if we begin at a later date.

Conclusion

Financial Planning is best if it is simple. A good financial plan should cover all the six heads : Savings, Loans , Insurance , Investments , Tax Planning and Retirement Planning. The goal should be to maximize returns so that a corpus is created in the shortest duration of time for the retirement and a person is able to comfortably meet the expenses.