Chapter 1

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Financial Planning Handbook

Introduction to Financial Planning

he Indian youth never had it so good. On the consumption side, the choice of goods and services available is unprecedented. And, as far as income is concerned, given the booming economy and its ever improving prospects, opportunities have never been better! So the youth are earning a lot and spending a lot as well. It is definitely a happy situation to be in. In times like these, when everything seems to be going right for so many people, there is a tendency to ignore that one great habit saving money. The rationale is simple-since the future looks great from here, why set aside money for the future needs and contingencies. But in our view, this is an ideal time to save money as surplus monies are high. Rather than spending this money on a product that you dont really need, you would do well to invest in the future for some later date critical need. In this book of financial planning, we discuss this and a lot more, including investment avenues available. We also discuss the concept of spending wisely and creating wealth in a systematic way. Happy Investing! Financial decisions are critical decisions, which decide how comfortably we end up monetarily in life. Poorly planned financial decisions can cause, at best, great anxiety and at worst lead to bankruptcy, whereas well thought-out decisions can lead to a prosperous lifestyle. The complexities of our financial circumstances are many and we need to take a careful well thought-out solution to such problems. The concerns could be many. Some of them are: How can I grow and protect my financial wealth? How can I pay and manage my debt? How much should I save to be able to pay for my childrens education? How can I maximize the tax benefits which can be availed of? How can I save enough to be able to retire comfortably and maintain the current lifestyle? How can I maximize what my heirs will inherit? Definition: Financial Planning is the process of identifying a persons financial goals, evaluating existing resources and designing the financial strategies that help the person to achieve those goals. The key basic steps toward reaching this end as a financial advisor are: Organizing your clients financial data. Assisting your client in goal setting. Financial Analysis for the client. Developing appropriate strategies. Evaluating and choosing the best option amongst the various strategies. Coordinating and implementation of the planned decisions.

Financial Planning Handbook

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What is Financial Planning?

Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, savings for your childs education, planning for your retirement or estate planning. This process consists of six basic steps. Using these broad six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goal. The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy for a plan on how you can meet with your goals, and map the gap. The Benefits of Financial Planning Financial Planning helps you give direction and meaning to your clients financial decisions. It allows him to understand how each financial decision affects other areas of finance. For example, buying a particular investment product may help your client to pay off his mortgage faster or may delay his retirement significantly. By viewing each financial decision as a part of a whole, you may help your client consider the long term and the short term effects on his life goals. You will help them feel more secure and more adaptable to life changes, once they can measure that they are moving closer to the realization of their goals. Best Practices When Approaching Financial Planning Set measurable goals. Understand the effect your financial decisions have on other financial issues. Revaluate your financial plan periodically. Start now. Do not assume that financial planning is for when you are older. Start with what you have got. Do not assume that financial planning is for the wealthy. Take charge. You are in control of the financial planning process. Look at the bigger picture. Financial planning is more than retirement planning or tax planning. Do not confuse financial planning with investing. Do not expect unrealistic returns on the investments. Do not wait for a money crisis to begin financial planning. How Do You Make Financial Planning Work For Your Clients. To achieve your goals of making a complete financial plan for your client, you have to be completely in sync with his financial needs and his responsibilities. This can be best achieved by following the processes: Set measurable goals. Set specific targets of what your client wants to achieve with a specific time line. For example, instead of saying that he wants to be comfortable when he retires, or that he wants to send his children to good schools, he should be able to quantify what comfortable and good means. He will have to as specific as I need Rs.100000pm income post retirement for 25 years from the age of 60, considering the anticipated inflation rate at 5%. These plans may have to be changed keeping in view the market scenario or a changed need. Understand the effect of each financial decision. Make the client realize that each financial decision that he takes will affect several other areas of his life. For example, an investment decision may have tax consequences that are harmful to his estate plans or a decision on the retirement plans may affect his retirement goals. If he has invested in real estate and

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Financial Planning Handbook

would like this investment to provide for his retirement income that he has to realize that real estate investment would invite long term capital gains tax which can reduce the post tax returns and keep margins for this deduction. Re-evaluate the financial situation periodically. Financial planning is a dynamic process. These goals may change over the years due to changes in lifestyle or circumstances such as an inheritance, marriage, birth, house purchase or change in job status. Revisiting these goals periodically is very important to keep track of how much our client is on course, both from a long term perspective and a short term perspective. Start planning soon. Explain to the client consequences of waiting and how any delay in financial planning affects the whole big picture that he has in mind for himself and his family. Developing good habits like saving, budgeting, investing and regularly reviewing ones finances early in life, makes one better prepared to meet changes and handle emergencies. If one starts investing Rs. 500, one can expect to have Rs.58 Lakhs at age 60. Remember that every Rs.500 that you can save from the age of 21 can get you Rs. 58 Lakhs towards your retirement, but if you start at age 41, you will get only Rs.5 Lakh. Be realistic in terms of expectations. Financial planning is a commonsensical approach to managing ones finances to reach ones life goals. It is a life long process. There are certain extraneous factors like inflation, changes in macro economic policies or interest rates that may affect ones financial results.

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Chapter Review

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Financial Planning Handbook

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