Financial plan

A financial plan is a comprehensive statement of an individual's long-term objectives

for security and well-being and a detailed savings and investing strategy for achieving
those objectives. A financial plan may be created independently or with the help of a
certified financial planner.

Personal finance is about meeting personal financial goals, whether it’s having enough
for short-term financial needs, planning for retirement, or saving for your child's
college education. It all depends on your income, expenses, living requirements, and
individual goals and desires—and coming up with a plan to fulfill those needs within
your financial constraints.

Personal financial planning

The process by which individuals and families develop and implement a

comprehensive plan for achieving their financial goals.

The financial planning process is a logical, six-step procedure:

(1) Determining your current financial situation

(2) Developing financial goals

(3) Identifying alternative courses of action

(4) Evaluating alternatives

(5) Creating and implementing a financial action plan, and

(6) Reevaluating and revising the plan.

Step 1: Determine Your Current Financial Situation

In this first step of the financial planning process, you will determine your current
financial situation with regard to income, savings, living expenses, and debts.
Preparing a list of current asset and debt balances and amounts spent for various items
gives you a foundation for financial planning activities.

Step 2: Develop Financial Goals

You should periodically analyze your financial values and goals. This involves
identifying how you feel about money and why you feel that way. The purpose of this
analysis is to differentiate your needs from your wants.
Specific financial goals are vital to financial planning. Others can suggest financial
goals for you; however, you must decide which goals to pursue. Your financial goals
can range from spending all of your current income to developing an extensive
savings and investment program for your future financial security.

Step 3: Identify Alternative Courses of Action

Developing alternatives is crucial for making good decisions. Although many factors
will influence the available alternatives, possible courses of action usually fall into
these categories:

Continue the same course of action.

Expand the current situation.

Change the current situation.

Take a new course of action.

Not all of these categories will apply to every decision situation; however, they do
represent possible courses of action.

Creativity in decision making is vital to effective choices. Considering all of the

possible alternatives will help you make more effective and satisfying decisions.

Step 4: Evaluate Alternatives

You need to evaluate possible courses of action, taking into consideration your life
situation, personal values, and current economic conditions.

Consequences of Choices. Every decision closes off alternatives. For example, a

decision to invest in stock may mean you cannot take a vacation. A decision to go to
school full time may mean you cannot work full time. Opportunity cost is what you
give up by making a choice. This cost, commonly referred to as the trade-off of a
decision, cannot always be measured in dollars.

Decision making will be an ongoing part of your personal and financial situation.
Thus, you will need to consider the lost opportunities that will result from your
decisions.

Evaluating Risk

Uncertainty is a part of every decision. Selecting a college major and choosing a

career field involve risk. What if you don’t like working in this field or cannot obtain
employment in it?

Other decisions involve a very low degree of risk, such as putting money in a savings
account or purchasing items that cost only a few dollars. Your chances of losing
something of great value are low in these situations.
In many financial decisions, identifying and evaluating risk is difficult. The best way
to consider risk is to gather information based on your experience and the experiences
of others and to use financial planning information sources.

Financial Planning Information Sources

Relevant information is required at each stage of the decision-making process.

Changing personal, social, and economic conditions will require that you continually
supplement and update your knowledge.

Step 5: Create and Implement a Financial Action Plan

In this step of the financial planning process, you develop an action plan. This
requires choosing ways to achieve your goals. As you achieve your immediate or
short-term goals, the goals next in priority will come into focus.

To implement your financial action plan, you may need assistance from others. For
example, you may use the services of an insurance agent to purchase property
insurance or the services of an investment broker to purchase stocks, bonds, or mutual
funds.

Step 6: Reevaluate and Revise Your Plan

Financial planning is a dynamic process that does not end when you take a particular
action. You need to regularly assess your financial decisions. Changing personal,
social, and economic factors may require more frequent assessments.

When life events affect your financial needs, this financial planning process will
provide a vehicle for adapting to those changes. Regularly reviewing this decision-
making process will help you make priority adjustments that will bring your financial
goals and activities in line with your current life situation.

Importance of financial planning

When talking about money, planning should be concrete as there are several variables
which could affect your financial planning. Fulfilling the needs of your future and
improving your standard of living is dependent on the plans which you execute today.
Financial planning helps you in determining your short as well as long-term financial
goals and creates a balanced plan for meeting those goals. Here are 10 key reasons
why you need a personal financial planning for a better tomorrow.

1. Securing your family: Your family’s financial security is a crucial part of your
financial planning. Having a proper insurance coverage could provide peace of mind
both for you as well as your loved ones.
2. Cash Flow: Financial planning helps you to increase your cash flows by monitoring
the spending patterns and nature of expenses. Finance planning which includes careful
budgeting and prudent spending would help you in keeping more of the hard-earned
cash

3. Financial Understanding: Financial understanding could be achieved with financial

planning when the measurable financial goals are established, effects of financial
decisions understood, and their results reviewed. Financial planning provides you the
whole new perspective to your budget and improving control on your financial
lifestyle.

4. Helps you identify financial errors – Not just spending but overall financial
planning exposes financial mistakes which you could have been making and it also
provides easy fixes. For instance, proper financial planning let you analyze
opportunities to invest idle funds or consolidation of debts.

5. Enhances risk management: When you do proper financial planning, you could
determine the insurance coverage you require with better certainty. Hence, you don’t
have to overpay for any unnecessary insurance and also you don’t end up with lower
than required cover.

6. Improved ROI (return on investment) on your portfolio: Proper financial planning

takes into consideration several aspects such as investment planning, risk
management, liquidity management, liability management and goal planning. With
financial planning you would be able to design your integrated investment plan which
takes into consideration your goals, risk appetite and available liquidity hence helps to
improve the ROI on your portfolio.

7. Measuring and improving asset allocation: Asset allocation is a crucial money

management element. An individual needs to find a fine balance between managing
the risks and returns, and right mix of assets is required for the same. Financial
planning assists in choosing the right mix of asset depending on your risk appetite and
return preferences.
8. Future visibility: Financial planning assists you get the visibility of for next 10-20
years. With financial planning you would be able to get comfort with your retirement
and also help plan your finances at the time of emergency situations.

9. Emergencies: There may be unexpected and unavoidable times ahead that could
become obstacles before your finance goals. Proper financial planning allows you to
be ready for such unexpected and unavoidable situations without disturbing your
primary objectives.

10. Retirement Planning: While achieving your family goals is a general objective for
having a comfortable post-retirement life. In case you are planning an early
retirement, you must plan investing as early as possible because the magic of
compounding works better if it stays invested for a longer term. Proper financial
planning assists you in creating sufficient corpus for your retirement when the
expenses continue but the income dries out. It’s always advisable to consider early
investing for achieving your life’s goals.

MISCONCEPTIONS ABOUT FINANCIAL PLANNING

1. It is a One-time Exercise: Financial planning is thought of as onetime exercise

which is not true. Financial planning requires close monitoring regularly and readjust
or rebalance the asset portfolio so that the planned goals can be achieved within the
time frame work drawn.

2. It is Only about Tax Planning: Tax planning is only one aspect of financial
planning. Financial planning deals holistically and takes care of investment,
protection and estate planning in addition to tax planning.

3. It is to be Done When One Reaches Retirement Age: Another wrong notion is that
financial planning has to be thought of only when one is about to retire or nearing
retirement. If one asks what is the right time to start one’s financial planning, the
answer would be yesterday. That means it should be done at the earliest, as soon as
one starts earning money.

4. It is Meant Only for Very Rich or High Net Worth Individuals (HNI): Another
misconception is that financial planning is meant for only rich people. Financial
planning takes care of the goals of every individual whether rich or common man.
5. It is Only about Investments: As already seen, financial planning covers not only
the investment aspect but also other aspects like insurance, tax planning, retirement
planning and estate planning.

6. Financial Planning Does not Need a Professional’s Advice: Financial Planning is a

specialised job. It requires deep knowledge of the various investment options,
regulatory guidelines, legal aspects, etc. This can be done only by a professional
qualified financial planner.

7. Financial Planning Advice is Too Costly: It is true that one has to pay professional
fees to the financial advisor. One should not forget that the benefits which one derives
from this advice would be much more than the nominal fee one pays.

Family Background

Mr. Ramesh aggrawal

Mr. Ramesh aggrawal is 30 year old Software Quality Engineer at an IT services

company in Ahmedabad.

Ramesh’s Family

Ramesh stays with his wife Mrs Shraddha Aggrawal, in a rented apartment. Ramesh’s
parents stay in his hometown Ahmedabad, in the family owned house.

Name Relationship Age Details

Shraddha Wife 30 College professor

Aggrawal

Sunil Aggrawal Father 58 Retired

Smita Aggrawal Mother 55 Housewife (Needs medical

attention)

Income
 Ramesh Shraddha

Salary 70000 40000

Total income 70000 40000

Expenses
Household expenses 10000 10000
Loan EMI 10000
Insurance Premiums 3000
Personal expenses 5000 7000
Total expenses 28000 17000
Investible surplus 42000 23000

Financial Goals

Goal Year of goal Present value Years to goal

Child’s Education 2040 30 lac 20
Retirement 2048 5 lac per year 28
Emergency Fund Immediate 2.70 lac 0
Car 2022 10 lac 2

Net worth
Assets

Instrument Amount
Equity mutual fund (ELSS) 130000
Stocks (equities) 40000
Fixed deposit 150000
Cash in bank (saving account) 30000
Gold 300000
Total assets (A) 650000
Liabilities

Personal loan 300000

Total liabilities (B) 300000
Net worth (A-B) 350000

Financial Asset Allocation

Source Amount Allocation

FD 150000 23%
Equity 170000 26%
Cash 30000 5%
Gold 300000 46%
Goal planning

1. Emergency Fund
Emergency Fund is a kitty which is been kept aside to face any unforeseen
event in the future. It provides peace of mind and gives assurance that you are
well prepared in short term to face any immediate expenses.

Requirements
Component Amount
Total monthly expenses 45000
Emergency fund required* 270000
Current available fund
Cash in bank 30000
FD 150000
Total available fund 180000
Shortfall 90000

* Emergency Fund is considered for 6 months funds required to maintain your current
lifestyle and EMIs.
Action Plan
Accumulate additional Rs 90,000 towards Emergency Fund. Use shraddha’s
investible surplus to build an emergency fund. 1. Start a monthly recurring deposit
(RD) of Rs 7500 in her bank account for a year. On maturity convert the amount to an
FD.

Note
o Do not touch Emergency Fund for travel, hobbies or other “important”
expenses. This fund is for emergencies only.
o You can touch the emergency corpus only for your NEEDS but not for
WANTS.
o Never expect returns from emergency corpus.
o Safety, liquidity and simple tax rules are most important criteria of
your emergency fund.

2. Child’s Education
Ramesh and shraddha are planning a child next year. They want to accumulate a
corpus for their child’s college education. This fund should be available when
their child turns approximately 18 years. So the fund should be available
approximately 20 years from now. The present value of college education is
considered to be 30 lac.

Components Values
Time horizon 20 years
Present value of goal 30 Lac
Inflation rate assumed(education) 8%
Future value with inflation 1.40 crore
Current investments towards this goal -
Proposed equity: debt allocation 70:30
Expected return from equity 11%
Expected return from debt 7%
Avg. return 9.8%
Monthly investment required 19000

Action Plan
Accumulate approx. ₹ 1.40 Crore for child’s education within 20 years.

Suggesting following Equity Mutual funds & Debt funds to achieve this.
1. Start a monthly systematic investment plan (SIP) of Rs 8000 in SBI Index Fund
(Direct Plan). This is an equity fund.
2. Continue your existing ELSS (monthly SIP) of Rs 5300 in SBI magnumTax gain
scheme.
3. Start a monthly systematic plan (SIP) of Rs 5700 in SBI magnum Ultra Short
duration Fund (Direct Plan). This is a debt fund.

3. Retirement Planning
Retirement planning is the single most important financial goal common to
every individual. It is the only financial goal in which a corpus would get
spent over the course of decades! Retirement planning is non-negotiable.

Components Amount
Ramesh’s and Shraddha’s current age 30
Ramesh’s and Shraddha’s age at retirement 58
Life expectancy 85
Post retirement years 27
Current annual expenses 5.4 lac
Inflation rate assumed 6%
Expenses required for 1st year of retirement 27.60 lac
Rate of return on retirement corpus (1% + 7%
inflation)
Retirement corpus required 6.55 crore
Current equity investments contribution 19 lac
Shortfall 6.36 crore
Proposed allocation between equity: debt 80:20
Expected return from equity 11%
Expected return from debt 7%
Avg. return 10.2%
Monthly investment required 33500

Action Plan
Accumulate approx. ₹ 6.36 Crore for retirement within 28 years.

Suggesting following Equity Mutual funds & Debt funds to achieve this.
1. Start a monthly systematic investment plan (SIP) of Rs 9000 in Mirae asset
focused Fund (Direct Plan).
2. Start a monthly systematic investment plan (SIP) of Rs18000 in HDFC Focused
Large Cap Fund (Direct Plan).
3. Start a monthly systematic plan (SIP) of Rs 6500 in SBI magnum Ultra Short term
duration Fund (Direct Plan).

4. Purchasing a car

After we reviewed your current financial state and investment required for your long
term / short term goals, we recommend you to postpone your plan to purchase a car.
We foresee this possibility of creating a fund for purchasing new car after you have
completed creation of your emergency fund as discussed earlier.