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 : 






Monthly expenses



Emergency fund for



Emergency funds required in savings account









Housing Loans are least expensive



Repaying all expensive loans like personal loans and car loans first followed by housing loans









a) Life Insurance



Annual Income (assumption)


Life cover



Life Insurance needed



Life insurance should include coverage for critical illness






b) Medical Insurance



Number of family members



Medical family coverage required for each member



Total medical insurance needed







4. Investment plan



Invest in :



Mutual funds






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



Section 80 TTA - Deductions from Gross Total Income for interest on savings account



Section 80 EE - Deduction on Home Loan Interest



Section 80 D- Premium paid for Medical insurance



Section 80 CCD ( 1B)- Additional Contribution to National Pension Scheme account






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.


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.


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