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Personal financial planning


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Personal financial planning

  1. 1. Introduction “Thodi si tu lift karade Bangla motor car dila de Ek nahin do char dila de ”
  2. 2. What is financial planning ?  Making funds available from one’s current resources to meet future needs  Entire gamut of FP explained by RETIReS  R……. Risk  E……. Estate  T……..Tax  I………Investment  Re……Retirement  S………Savings
  3. 3. Core of FP  “If you want to know what God thinks of money, just look at the people he gave it to ” Dorothy Parker  No sane man would like loose out his money  People like to derive maximum utility from use of money  When it comes to savings & investment, we want our money to give us best returns
  4. 4. Contd……  FP is an attempt to maximise returns keeping in view liquidity and safety of funds.  Good financial planning will not protect one against crises arising out of unforeseen circumstances.  It cannot avert the circumstances, but can provide necessary financial support  FP can be of short/long duration Plan for shorter duration ensures proximity to reality
  5. 5. FACTORS DETERMINING FP  Country’s economic environment ( tax changes)  Change in job market  Inflation  Changes in pattern of savings instruments and savings habits.
  6. 6. Need for awareness  Living beyond one’s means spells doom  Financial problems come uninvited without notice  Financial problems create tension  Requires foresight, time & patience to prepare plan  No one in family can be ignored as each needs money  FP provides a direction, builds motivation , support.
  7. 7. UNDERSTANDING FP  Life insurance alone is the instrument available to take care of all aspects of FP.  Saving , investing & spending are 3 important terms of FP  Saving = Asset accumulation A short & long - term perspective  Investing = Asset creation Making money out of money, focus on capital growth, a long-term perspective , creation of physical/ financial assets, investing depends on level of risk tolerance
  8. 8. Contd…….  Spending = Asset protection Spending is protecting our LIFESTYLES , lives & assets.  We may spend more & save less , taking care of all expenses ( most cases) – financial failure  Save more, spend less, not considering unexpected expenses. Not feasible when huge expenses occur & savings are depleted – financial dependency  Save, invest, spend – savings ( unexpected expenses) & investments (long-term goals accompany each other) - financial independence
  10. 10. FP & LIFE INSURANCE  Important to understand person’s objective in a long-term financial instrument like LI  Value -creation main objective Spiritual value – peace of mind Emotional value - love for family Financial value - tax saving, capital creation  LI instrument – takes care of s-i-s , leads to asset accumulation, creation & protection  LI offers a complete financial solution
  11. 11. Contd……  Asset creation - opportunity to earn in ULIPS  Asset protection – cover against 3Ds  Asset accumulation – account grows with scope to reinvest further by recycling accumulated account. HENCE LI IS AN INTEGRATED FINANCIAL PLAN THAT WORKS IF SOMETHING HAPPENS & ALSO IF NOTHING HAPPENS. GUARANTEES LIFETIME INCOME TO FAMILY IF ONE DIES & LIFETIME INCOME TO ONE IF HE LIVES.
  12. 12. APPROACHES TO FP  Depends on individual - may be conservative (safety), enterprising ( take some risks), speculative ( take high risks for high returns ).  Approaches vary due to given factors – Age/family – affects ability to take risks Responsibilities Financial strength Tax savings Temperament Specialised knowledge Insurance status
  13. 13. BASIS OF FP - LIFE CYCLE NEEDS  Need for FP persists throughout life  Most people have at least one unsatisfied need at any time.  Most people will have both financial protection and investment needs simultaneously throughout life  Priorities of financial needs change with age.  To appreciate how these changes come about financial planners use the Life Cycle Needs Guide.
  14. 14. LIFE CYCLE OF INDIVIDUAL  Childhood stage - Learner  Young Unmarried stage – Earner  Young Married stage - Partner  Young Married with Children stage - Parent  Married with older Children stage - Provider  Post –family/ Pre-retirement stage – Empty Nester  Retirement stage – Enjoyer 3 phases of one’s life - birth & education (22 ) Earning years(38) & retirement (20-30)
  15. 15. Learner - costs of education  High cost of private education plus inflation  To achieve success, parents use life insurance as a FP tool.  In case of demise of a parent, LI looks after education
  16. 16. Earner stage  Young , healthy, carefree, easy access to money, single young adults.  Many may possess extensive funds but no specific savings/FP plan for emergency.  Need for protecting new-found status & earning capacity  Priorities list need to be topped by disability insurance to protect loss of income.  May have o/s loans, high credit card balances
  17. 17. Earner  Generally in age group 25-30  Youth is chewing gum ….it never ends  Why forget the future while enjoying today , is the mantra.  Could go for policies which mature at 55-60  If no dependants, need not have LI, only risk cover/accident cover.
  18. 18. Advantages of starting an early security program  Provision for a guaranteed, immediate financial security ensured. Lower premiums charged at young age.  Qualify for lifelong protection while insurable , regardless of later hazards that may be ventured through chosen life-style vocation or occupation.  Start building cash reserves for emergencies.  Final rewards are high due to compound interest schemes prevalent in LI plans  Option to change policy-type with flexibility
  19. 19. contd…..  In case of early death, funds available can pay off debts & honour any bequests as per will.  If policy commences at early age, higher pension values obtained  Get satisfaction & peace of mind  Life insurance needs low- should accumulate growth assets( home/stocks/mutual funds) aggressively due to high risk-taking ability now.
  20. 20. Partner / Parent  Nuclear family –breakdown of joint family.  When children arrive & there is single earning spouse, require emergency fund for survivors through LI.  In case of dual income, families buy less LI. View second income as insurance against first. Complacency rules.  Need LI for both partners to maintain standard.  Have young children.Has taken home loan.Starts investing in earnest. Should have adequate LI, asset protection & continue asset creation.Current needs minus existing assets – difference is LI
  21. 21. Partner/Parent  Age group 31-40 years  Needs are many – rent, school fees, vacations….  Now there are dependants  If non-working spouse, buy term plans till 60 years -for protection, not investment  If businessman, then your risk & growth comes from investing in own business.  In asset-building, home buying is top priority  Invest in children’s insurance plans
  22. 22. Provider  The middle years. People constantly making commitments, acquiring assets, incurring additional debts to fulfill dreams  Higher education goal of children approaching, home loan nearly repaid, income peaking, investible surpluses high, financial protection for family, sufficient income against disability, emergency fund to meet exigencies.  LI needs low as asset base builds up.Take term plans to cover shortfall in existing assets.
  23. 23. Provider  The maturing years - 41 to 50 years  Persons could switch over from being employee to entrepreneur  At this age risk cover important ( protection )  You begin to get real about the possibility of being where your father is today ….70 plus enjoying golf & gardening  LI needs to continue as long as dependents exist.  If entrepreneur, your assets are your business - can sell assets in future if required after working
  24. 24. Empty Nester  The retirement countdown begins – 51 to 60 years  Needs are to ensure healthcare, ensure additional income during retirement  Children are independent, home loan repaid, no other debt, investible surpluses peak.  Divert new surpluses to build retirement corpus, reduce portfolio risk.  Maintain life cover as long as earning, increase health cover since premia increase with age  Save as much as possible during these years.
  25. 25. Empty nester  Disposable income is high, rebalance investment portfolio and tone down aggressive investment  Invest in pension plans if not done earlier  JUST BEFORE RETIREMENT - Top up health insurance Clear off all debts prior to retirement Try to live in a smaller city/town Do not be covered by life insurance after 60 . Develop skills for engagement/income ( if reqd)
  26. 26. Enjoyer  The final phase -60 plus.  Security & comfort top priority for all.  Different people perceive retirement differently.  Some look forward, some dread.  Obstacles that prevent people from planning for their retirement are – Lack self-discipline to save sufficiently during earning years Investment & reinvestment a formidable challenge to most Few people posses expertise to provide constant liquidity that lasts till one lasts.
  27. 27. Contd…..  Health expenses replace work-related expenses.  Creating cash flows & beating inflation top priority.  Create adequate cash flows from safe investments & invest surpluses in instruments that comfortably beat inflation to prevent erosion of retirement capital.  No life cover needed. Retirement corpus should fund needs.
  28. 28. RECAP  Basic objective of FP is to allow you to lead the life you want during old age comfortably without compromising on basic values  Goal should be financial security to take care of all financial needs post-retirement  How much money one needs for these goals that could be 2 /20/40 years away can be arrived at by FP so as to maintain same standard of living.  LI is excellent instrument in case of RP
  29. 29. THANK YOU !