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What is Financial Planning

What is Financial Planning

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Published by kirang gandhi
What is Financial Planning
What is Financial Planning

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Categories:Types, Research
Published by: kirang gandhi on Nov 22, 2011
Copyright:Attribution Non-commercial

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08/22/2012

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What is Financial Planning?
Financial planning is the roadmap to realise and achieve financial goals in life. Everyone hasfinancial goals in life. These goals may include:• Planning for children’s education• Planning for children’s marriage• Buying a house or buying a second larger house• Buying a car• Enjoying a vacation with family every year• Living a comfortable retirement life without any compromises• Leaving behind an estate for childrenThrough proper financial planning a person can accomplish all the above goals. Given this it isso scary to know how less people know about money. As they say “Being wealthy is not abouthow much you earn or what you do. It is just a matter of proper Financial Planning”. Financialplanning can help a person identify his / her goals, invest towards achieving those goals andregularly review the investments every year to make sure they are on track to meet the desiredgoals. In short financial planning is a journey and not a destination.
Financial Planning Stepping Stones
 The process of financial planning is divided into seven steps. Let us try to understand the processof financial planning with the help of an example.Amit is an MBA working for a MNC and is reasonably well placed. Amit is married, has a 7year old son Karan. Amit stays with his parents. Amit’s parents are retired and are dependent onAmit. Amit now wants to buy a new home and start saving money for his child’s education andmarriage and his own retirement. He would also like to go on a short vacation once every year.Let us see how financial planning can help Amit realize his goals with a high degree of certainty.The first step to financial planning is to assess the strengths and the risks involved.
Strengths:
 Amit is (30 years of age). That means a 30 year investment horizon till retirement.Amit has regular income @ 8 Lakhs per annumAmit is debt free and has no financial liabilities.
Risks Involved:
 Amit is sole bread earner of the family.Amit’s parents are old and hence more susceptible to health issues.Now keeping Amit’s example in mind let us see how the process of financial planning works.
 
www.kgandhi.anindia.com
1. Emergency / Reserve Fund
 This is the first step of financial planning. Amit should have a reserve fund equivalent to meethis 3 to 6 months expenses. A reverse fund is needed for the purpose of covering unforeseeableexpenses like medical emergencies or temporary job loss etc. With an adequate reserve fundAmit will not be required to dip into his investments in times of crisis.
2. Insurance
 Life is full of uncertainties and so it is imperative that one has adequate insurance cover to helpmitigate the risks that might arise due these uncertainties. A term insurance plan for Amit wouldensure that the family’s survival is not at stake in Amit’s absence. Amit’s insurance cover shouldbe equivalent to the present value of his future earnings till his retirement. Also Amit should buya good health insurance policy for the entire family to take care of any expenses that might arisedue to medical emergencies. Amit’s parents are dependent on Amit. If his parents gethospitalised due to some critical illness the huge hospital bill can burn a big hole in Amit’spocket.
3. Child Education Fund
 Amit wants his son Karan to become a doctor. Amit wants to start saving for his son’s educationfrom now onwards. If the cost of the course as on today is Rs. 10 lakhs then the same course willcost Rs. 41,77,248 (Rs. 42 lakhs approximately) 15 years down the line if the cost of educationincreases by 10% (inflation) every year. If Amit wants to reach this target of Rs. 42 lakhs 15years down the line then he will have to start investing Rs. 9300 per month (Rs. 1,12,000 perannum) if his investments earn him a return of 12% per annum.
4. Child Marriage Fund
 Amit wants to start saving for his son’s marriage from now onwards. The marriage is planned 18years from now. If the cost of an normal wedding as on today is Rs. 6,00,000 then the samemarriage will cost Rs. 33,36,000 (33.36 lakhs) 18 years down the line if marriage expensesincrease by 10% (inflation) every year. If Amit wants to reach this target of Rs. 33.36 lakhs 18years from now then he will have to start investing Rs. 5000 per month (Rs. 60,000 per annum)if his investments earn him a return of 12% per annum.
5. Buying a House
 Amit wants to buy a house worth 25 lakhs 3 years from now. For this he will have to make adown payment of Rs. 5 lakhs (20% margin money). He will have to start setting aside Rs. 13,000every month in a recurring deposit account.
6. Annual Vacation
 Amit wants to go for an annual vacation every year. This will cost him anywhere in the range of Rs. 25,000 to Rs. 40,000. Amit can make provision for this from his monthly cash flows. He can

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