Financial Planning

1. Module 3: Developing
Financial Plan:
Introduction to Financial Plan, Meaning & Definition, Critical
analysis of Investment Opportunities, Risks in Financial Plan, Risk
Assessment of Individual and Companies in general. Steps in
Financial Plan, Factors considered for Financial Plan, Evaluation &
Revision of Financial Plan

2. What Is A Financial Plan?
 is that it is a document that guides you or an organisation
to achieve its financial objectives. An effective financial plan
aligns with your goals and helps you to make decisions that
assist you with your financial aspirations. It is a structured
document that includes information about your current
finances and financial goals. This document serves as a
blueprint that you may follow to make financially informed
decisions to ensure progress towards accomplishing your
respective financial goals.

3. Importance Of A Financial Plan
 Debt management
 Asset planning
 Investment strategies
 Emergency savings
funds
 Income and retirement
planning
• Getting married
• Raising a family
• Starting a business
• Funding education
• Risk management
• Tax liability reduction

4. Benefits Of Creating A Financial Plan
 Reduced uncertainty
 Short-term targets for long-term goals
 Improved results
 Staying motivated
 Setting expectations

5. Components Of A Financial Plan
 Net worth
 Current cash flow and operating costs
 Future cash flow and liabilities
 Financial targets
 Expenditures, savings and investments

6. How To Create A Financial Plan
 Set goals
 Assess finances
 List priorities
 Make a spending and savings plan
 Prepare for emergencies
 Seek professional guidance

7. 8 Keys to Good Financial Plans
 1. Setting financial goals
 2. Net worth statement
 3. Budget and cash flow planning
 4. Debt management plan
 5. Retirement plan
 6. Emergency funds
 7. Insurance coverage
 8. Estate plan

8. Critically Evaluating Investment Opportunities
 Understand Your Financial Goals and Risk Tolerance
 Research the Investment Opportunity
 Asset Class and Type
 Historical Performance
 Management Team
 Financial Metrics
 Market Conditions

9. Evaluate Risk and Return Potential
 Diversification
 Costs and Fees
 Understand the Investment Vehicle
 Seek Professional Advice

10. Risks in Financial Plan
 Financial Risks
 Financial risks are events or occurrences that have an undesirable
financial outcome or impact. These risks are faced by both individuals
and corporations alike. The main financial risk management strategies
include risk avoidance, risk reduction, risk transfer, and risk retention.
 No amount of planning is going to eliminate risk entirely. In fact, there
are many common risks in a financial plan that may cause issues down
the road. What we need to do is identify what types of risk a financial
plan may face and find ways to reduce risk or mitigate it where
possible.

11.  Investment Risk
 The problem with investing is that results are never guaranteed. There can easily be long periods with very low investment returns. Certain sectors and/or
countries can experience poor long-term results, sometimes taking decades to recover, if at all.
 With proper planning this type of risk can be reduced, but never completely eliminated. Having a diversified portfolio can help reduce investment risk.
Also, having the right asset allocation will help ensure your investment risk is in line with your personal risk profile.
 Systematic or Unsystematic
 Market Risk (Bull and Bear Market)
 Interest Rate Risk
 Purchasing Power Risk (Purchasing power risk is the probable loss in purchasing power of the returns to be received)
 Inflation Rate Risk
 Unsystematic Risk:
 Business risk Financial risk

12.  Longevity Risk
 Longevity risk is basically the risk of living a long and healthy life. This is something we all hope for but it means there is
a higher chance that we’ll outlive our money. It makes it more likely that we could run out of money in retirement… but
even before that point it can also create a lot of stress as investment assets are slowly depleted.
 Health Risk
 Having a health scare can have a big impact on your financial plan. This may cause a disruption to income. It could
cause increased spending on things you’d normally do on your own, like cleaning, cooking, and child care. It may also
lead to specialized treatment that isn’t covered by provincial and/or private health plans.
 Possible ways to mitigate health risk: Build flexibility into your financial plan, have the option to work longer, reduce
option to work longer, reduce savings rate, or draw on investment assets for a period of time, consider purchasing
critical illness insurance.

13.  Risk of Unexpected Death or Disability
 This type of income disruption can be in the form of an unexpected death or it could be in the form of a
disability. Although an unexpected death would be devastating, the risk is actually very small, especially at
younger ages, this is why term life insurance is so inexpensive in your 30’s and 40’s even if you feel you
need a large amount (which you may not!).
 Property Risk
 Probably the most common risk we all face is property risk. This is the risk of theft, damage, loss, liability that
comes from owning personal property. Property can be anything from a laptop, to a vehicle, to a house or
cottage, to jewelry etc. etc.

14. Financial Pyramid

15. Probability
PROBABILITY THAT SOMETHING WILL GO WRONG
A—Likely to occur immediately or in a short period of time,
expected to occur frequently.
B—Probably will occur in time.
C—May occur in time
D—Unlikely to occur.

16. Five Steps of Risk Analysis

17. Step 1—Identify Risks
Step 2— Assess event to determine levels of risk
Step 3—Identify Methods to Manage Risks
Step 4—Implement Methods
Step 5—Manage and Evaluate
2
Assess
Risks
1
Identify
Risks
5
Manage &
Evaluate
4
Implement
Methods
3
Identify
Methods to
Manage
Risks

19. Identify the hazards
• Natural disasters (flooding, tornadoes, hurricanes, earthquakes, fire, etc.)
• Biological hazards (pandemic diseases, foodborne illnesses, etc.)
• Workplace accidents (slips and trips, transportation accidents, structural failure, mechanical
breakdowns, etc.)
• Intentional acts (labor strikes, demonstrations, bomb threats, robbery, arson, etc.)
• Technological hazards (lost Internet connection, power outage, etc.)
• Chemical hazards (asbestos, cleaning fluids, etc.)
• Mental hazards (excess workload, bullying, etc.)
• Interruptions in the supply chain

20. Identify the hazards

21. 2. Determine who might be harmed and
how
 For every hazard that you identify in step one,
think about who will be harmed should the hazard
take place.

22. 3. Evaluate the risks and take
precautions
 Now that you have gathered a list of potential hazards, you need to
consider how likely it is that the hazard will occur and how severe the
consequences will be if that hazard occurs. This evaluation will help
you determine where you should reduce the level of risk and which
hazards you should prioritize first.

23. 4. Record your findings
 our plan should include the hazards you’ve found, the people they affect, and
how you plan to mitigate them. The record—or the risk assessment plan—
should show that you:
• Conducted a proper check of your workspace
• Determined who would be affected
• Controlled and dealt with obvious hazards
• Initiated precautions to keep risks low
• Kept your staff involved in the process

24. 5. Review your assessment and update if
necessary
 Your workplace is always changing, so the risks to your organization change as
well. As new equipment, processes, and people are introduced, each brings the
risk of a new hazard. Continually review and update your risk assessment
process to stay on top of these new hazards.

25. Risk Assessment chart

26.  A risk matrix is often used during a risk assessment to measure the level of
risk by considering the consequence/ severity and likelihood of injury to a
worker after being exposed to a hazard. The two measures can then help
determine the overall risk rating of the hazard. Two key questions to ask
when using a risk matrix should be:
1. Consequences: How bad would the most severe injury be if exposed to
the hazard?
2. Likelihood: How likely is the person to be injured if exposed to the hazard?

27. Risk Matrix

29. Steps in Financial Plan
1. Review your
current situation
•Step one in making
a financial plan is to
take a good look at
your current
situation. This
means giving
yourself an overview
of all your income
and expenses,
debts, investments,
and so on.
•Spend some time
reviewing how much
you spend on things
like groceries, days
out, debt
repayments, and
other variable
expenses.
2. Get clear on your
financial goals
•Creating a financial
plan without solid
goals leaves you
unfocused, and it
makes it all much
harder to stick to.
Financial planning
isn’t most people’s
idea of fun. So you
need to make it
worth your while or
you just won’t stick
to the plan.
•Spend some time
listing your top
financial goals, big
or small.
3. Find a budgeting
system that works for
you
•Methods like
the 50/30/20
rule are so popular
because they
account for
spending on things
you love.
•If that method
doesn’t work for
you, you can try out
one of the many
different systems
people recommend.
A few popular ones
to try out include
the envelope
method, the “pay
yourself first”
strategy, and zero-
based budgeting.
4. Create a debt
repayment strategy
5. Plan for
retirement
Pull out the interest
rates, monthly
repayment figures, and
final payment dates, so
you have a clear
overview. If you’re happy
with your debt
repayment strategy now,
you don’t have to
change it. But if you’re
looking for a way to
clear debts faster, try out
the snowball or
avalanche methods.
Retirement may be
a while away, but
the best time to plan
is right now. If you’re
not already taking
advantage of
employer retirement
benefits, make sure
you’re signed up
and not missing out.

30.  Cash stuffing/Envelope method-With the envelope system, you allocate your take-home pay
toward specific categories by placing cash in labeled envelopes.
 the “pay yourself first” strategy-he goal is to make sure that enough income is first saved or
invested before monthly expenses or discretionary purchases are made.
 Debt Avalanche-With the debt avalanche method, you pay off the high-interest debt first.
 Debt Snowballing-With the debt snowball method, you pay off the smallest debt first.
 Zero Based Budgeting- Zero-based budgeting aims to put the onus on managers to justify
expenses and aims to drive value for an organization by optimizing costs and not just revenue.

32. Evaluation & Revision of Financial Plan
 With constantly changing market conditions, economic scenarios, and
your investment motives, it becomes extremely important to review
your financial plan for its effectiveness and relevance regularly,
especially after a major change in your financial or personal life.

34. 1.
Review
The
Performance
Of
Your
Investments:
it is important to
keep an eye on
their
performance to
identify if they
are generating
the required
returns or not.
Along with the
amount of
returns, it is
equally important
to identify if
those returns will
help you achieve
your goal at your
respective time
or not.
2.
Review
Your
Goals,
Income,
Expenses,
And
Insurance
Plans:
In a year, your
income can
increase, a new
member can be
added to your
family, a goal can
be achieved, or
even a new goal
can be set, with
the constantly
changing time, the
possibilities of
changes in a year
are endless.
Therefore, it is
essential to review
and update your
financial and
insurance plan as
per your current
priorities. 3.
Revise
Your
Tax
Plan:
Your tax liability
is directly
related to your
income, and
along with the
increase in your
income, your tax
liability will also
increase.
Reviewing your
tax planning will
help you identify
the amount of
additional tax
which you may
be required to
pay because of
the increase in
your income
4.
Rebalancing
Rebalancing is
reshuffling your
current asset
classes to match
your ideal asset
allocation in case
any of your assets
underperform or
your decided asset
allocation changes.
It also enables you
to keep your
financial plan on
track during all
market conditions
and continue to
match your risk
appetite and
goals.

35. Types of Rebalancing
1. Strategic Rebalancing:
Strategic rebalancing depends on
your goals, investment tenure, and
expected goal-achieving date. For
example, long-term goals like
retirement planning require more
equity allocation, and when the
goal-achieving date is closer, the
investments are rebalanced by
shifting from equity to debt, in
order to safeguard the returns as
the debt investments are
comparatively less risky.
2. Tactical Rebalancing:
Tactical rebalancing is all about
anticipating the movement of
the market and utilising it to
redirect investments and earn
some extra returns. In order to
execute this tactical move, you
need in-depth market
knowledge, market movement,
tax implications, exit expenses,
and, most importantly, keep an
eye on the market movements.
3. Trigger-Based Rebalancing:
In trigger-based rebalancing, you are
required to fix a particular percentage of
price movement which, whether positive
or negative, you can easily accommodate
in your risk appetite. And when the price
movement goes beyond your decided
percentage, you can consider rebalancing
your investment to maximise the return
or minimise the loss. Eg. If your asset
allocation is 60% equity, 40% debt, and
your risk tolerance is +/- 10%, so,
whenever in the future, if your asset
allocation changes to 70% equity and 30%
debt, the trigger-based rebalancing will
make you reduce the additional 10%
equity exposure and bring it back to the
original 60%.