What is personal Financial Planning : What is personal Financial Planning 1 Personal Financial Planning is the process of formulating , implementing and monitoring multifunctional decisions that enables an individual or family to achieve financial goals.
Financial goal can include buying a home , saving for a child’s education , or planning for retirement.
Personal Financial Planning covers Risk Management , Retirement Planning , Investment Planning , Tax Planning , Education Planning , Estate Planning & much more.
Financial Planning puts you in control of your financial life.
Need for Financial Planning : Need for Financial Planning 2 Adequate risk cover for life & assets
Matching investments with Financial Goals
Growing Complexity of products
Preparing for Contingencies
Dis-integration of joint families in India.
Meet Retirement Goals –Life expectancy is on the rise.
Proper asset allocation/ Investing intelligently
Reduce the amount of taxes
Estate Planning
Avoiding emotional financial decisions
Benefits of Financial planning : Benefits of Financial planning 3 Achieve your financial goals in a disciplined manner.
Improve net worth growth
Maintain standard of living after retirement
Plan for education expenses
Provide financial security for your family in case of an unexpected event.
Improve Investment performance.
Minimize your taxes and maximize the after-tax return.
Reduction or avoidance of problems with creditors.
Spending money wisely
Avoiding financial stress/peace of mind
Personal Financial Planning Process : Personal Financial Planning Process 4 Determine current financial situation – What you’re worth ?
Define measurable goals - How much you need to save ?
Identify alternative courses of action
Evaluate alternatives
Formulate an action plan to meet goals
Review and monitor the plan periodically
Financial Planning is an ongoing process that changes as your financial situation and position in life change. No one is exempt from the need to develop a personal financial plan
Power of Compounding : Power of Compounding 5 Compound Interest is the effect of earning interest on interest , resulting from the reinvestment of interest paid on investment’s principal.
E.g. If we invested ,Rs.25,000/- today after 40 years
@ 6% rate it will become Rs.2,57,125/-
@ 12% rate it will be Rs.23,36,225/- (Almost 10 times !)
@ 18% rate it will be Rs.1,87,59,458/-
The rate of return we realize and the length of time we keep our principal and earnings invested are very important.
Concept of Investment Planning : Concept of Investment Planning 6 Investment vehicles depends upon :
Risk : Safe , Low , Medium , High
Return : High , Average , Adequate
Time Horizon : Short Term , Medium Term , Long term
Life Cycle : Accumulation , Acceleration , Preservation
Diversification : Liquidity , Fixed Income , Growth
Tax Planning : Taxable returns , Tax-free Returns , Tax-deferred returns
Traps and Obstacles : Traps and Obstacles 7 Not linking investments to a specified goal
Market Timing
Investing in anything you don’t understand
Thinking of risk of losing money and overlooking the risk that your money will not be worth much when you need it
Chasing last year’s highest-performing mutual funds
Reacting to volatility in stock market
Overinvesting in one basket
Constantly changing investment product
Losing sight of the real after-tax rate of return on investment
Investing in anything that seems too good to be true
Helpers : Helpers 8 Time horizon
Asset allocation
Compounding
Rupee-cost averaging
Tax-deferred plans
Mutual funds
Lower tax rate on long-term capital gains
Reinvestment of dividend
Rebalancing
Retirement Planning : Retirement Planning 9 Reasons for retirement planning :
1.People are living longer
2.Inflation which reduces purchasing power of money
3.Dis-integration of Joint family system
Obstacles to retirement planning :
a. We start too late
b. We put away too little
c. We invest too conservatively
Wealth Creation : Wealth Creation 10 Income :Current stream of cash flow
Wealth : Income invested for growth in investment vehicles. It is the total value of all items owned by an individual
Investment vehicles : Real estate , Bullion , Shares, Small saving schemes, Pension funds, Mutual funds , life insurance
Wealth erosion : More consumption, eroding purchasing power of money , taxation, fall in interest rates, Not planning for emergencies, Government legislation.
Risks that can erode significant life savings:
1. Longevity “Risk”, 2. Inflation risk, 3. Asset allocation risk,4. Excess withdrawal risk,5. Health care expenses risk.
“Research has shown people with written goals are more likely to success than others”
Getting Your Financial Act Together : Getting Your Financial Act Together 11 Start keeping good financial records
Take adequate insurance cover
Put together a realistic budget you can live with
Save for specific goal by paying yourself first
Set up an emergency fund
Optimal Asset Allocation
Begin saving seriously for retirement
Lifestyle Creep : Lifestyle Creep 12 Lifestyle creep occurs when increase in income cause a similar increase in the things you acquire.
Every rupee that comes in to your possession will be spent –by you, your heirs, or the government
“Spend it in ways you find personally fulfilling .”
You need to examine your current lifestyle and plan for your retirement lifestyle by carefully defining goals and making financial choices.