An understanding on Financial Planning

Executive Summary

Over the last few years, Individuals are taking care of their financial planning to achieve their financial needs and goals however the outbreak of Novel Coronavirus (Covid 19) pandemics puts more lights on the importance of financial planning in the individual & their family life. The biggest mistake that most people make when it comes to their financial goals is they do not Plan for it. The same is also noticed in the current coronavirus pandemic that most of the people are suffered due to poor financial planning or no financial plans for themselves. The financial planning brings the financial discipline in the individual life. All financial success comes from acting on a plan. The article talk about the understanding of the financial planning of an individual for the financial freedom and achievement of their financial goals. Read on to know more…

Financial Planning: Financial planning is the process of developing a personal roadmap for the financial wellbeing and fulfilment of current and future financial goals of an individual.

“Planning is bringing the future into present so that you can do something about it now” – Alan Lakein

A good financial plan is a road map that shows us exactly how the choices we make today will affect our future.” –Alexa Von Tobel

The Importance of the Financial Planning:

1. Financial Planning helps us to create the funds for the Emergency Situations.

2. Financial Planning also helps us to have a peace in Mind due to financial stability.

3. Financial Planning provides us the direction to fulfill our dreams and goals of our life.

4. Financial Plan make us discipline towards the savings.

5. Financial Planning helps us to tackle the various UPs and Downs in the Life of the Individual.

6. Financial Planning also helps us to avoid the unnecessary expenditures.

The major components of the financial planning are

1. Insurance Planning

2. Emergency Fund Planning

3. Financial Goals Planning

Insurance Planning: As we all know that the life is totally uncertain and no one can predicts the life.

Insurance = Peace of Mind
‘The grace of god is like insurance. It will help you in your time of need without any limit.’-Sri Sathya Sai Baba (Indian spiritual leader)

Sri Sathya Sai Baba’s statement is the best answer in the favour of Insurance that Insurance is akin to God’s grace for your dependents in the time of crisis.

Life Insurance: Life insurance is not for you, it’s for those who have to carry without you. We can take the Term Plan in the life insurance to fulfil the future needs of our dependents in our absence

In the Life Insurance major question is the amount of Term insurance which everyone shall take to fulfill the future needs of the dependent. The thumb rule for the amount of term plan is the 200 times of the monthly expenditure. Eg: If our monthly expenses is Rs.1.00lacs per month then the Term Plan should be 200lacs. The logic behind the same is that if we invest the sum in the Bank FDs/Low Risk Fund then average return on the same will be around 6% p.a. and it will fetch us the returns of Rs.1.00lacs per month to fulfill the monthly expenditure.

Health Insurance: Health Insurance helps to deal with the Health concerns and helps us to cover the rising medical costs. For an effective financial planning everyone must have the Health Insurance to meet the medical expenses.

We should not follow “Sochna Kya Jo Bhi Hoga Dekha Jayenga”(Why think, Whatever happen will be seen) for our Insurance Planning.

Emergency Fund Planning:

We as a financial planning missed the component of Emergency Fund Planning but the outbreak of Covid 19 realized us the importance of the Emergency funds in the Individual life. Everyone must have a corpus of Emergency funds for 3 to 6 months of their monthly expenses including the EMI in the liquid instruments like Saving Accounts, Bank FDs and liquid Mutual Funds etc. which will be available at any time of emergency needs.

Financial Goal Planning

1. Set up of Financial Goals Eg: Retirement Planning, Children Education, Buying a House, New Car etc.

2. Calculate the Current cost and future value of each Financial Goals.

3. The goals must be realistic and achievable.

 4. Plan to utilize the available resources in the each goals basis of their importance and time frame.

 5. A goal without planning is just a Wish.

 6. The financial goal isn’t the more money but the goal should be living the life on own terms.

“If you don’t take care of your money your money won’t take care of you.” ― Mac Duke The Strategist

Saving Formulae to complete the Financial Goals

We normally adopts the formulae of saving as under

Income – Expenditure = Saving

But the formulae for saving should be

Income – Savings = Expenditure

Don’t think of Saving Money as a punishment. Think of saving money as a lifestyle change and a means to freedom – Emily G. Stroud

By following the above formulae we will never miss our financial plans and also helps us to avoid the unnecessary expenditures in the life. But the savings must be balanced means that it also not impact our current life. We must also remember that “Kal ke Liye Aaj ko na Khona Aaj ye Phir kal na Aayenga” (Do not ruin the current for Future).

Various Instrument for Investments for achieving the Financial Goals:

1. Debt Instruments

2. Equity Instruments 

3. Investments in Real Estate

4. Investment in Gold/Silver

All the investment have their own Risk and Returns like some are having Lower Return but lower risk but some are higher returns with higher risks. One must consider their risk appetite before investing in any of the Instruments. Here Mr. Warren Buffet says “Don’t keep all your eggs in One Basket”. We should follow the balanced approached for saving in the different type of instruments.

Conclusion

When a financial planning prudently applied for fulfilment of the financial goals after evaluating the various options of investment and aligning it with the short term and long term financial goals of an individual, it can create the value for the individual and their family members. After all it gives the financial freedom to invest/deploy their savings where it is used efficiently, thereby with the rise in the returns on savings and prosper the life of the Individual and their family members. A good financial planning helps you to spend your precious time doing what you like rather than doing things just to earn money.