What is financial planning?

Financial planning is the process of developing a personal roadmap for your financial well being. The inputs to the financial planning process are:

a. your finances, i.e., your income, assets, and liabilities,

b. your goals, i.e., your current and future financial needs, Retirement

c. your appetite for risk.

The output of the financial planning process is a personal financial plan that tells you how to use your money to achieve your goals, keeping in mind inflation, Investment returns, and taxes.

In short, financial planning is the process of systematically planning your finances towards achieving your short-term and long-term life goals.

Importance of financial planning.

Can you manage without financial planning? Many people do, but they may find—often when it’s too late—that they don’t have the means to achieve their life goals.

For example, people today realize the importance of living life to the fullest. Consequently, many opt for early retirement from full time jobs, as compared to a few decades ago, when most people worked until the maximum retirement age of 58-60 years.

The average person can, today, expect to live a healthy life well into his or her seventies or eighties, which means that retirement life is almost as long as working life. Financially, it implies that savings (after taking into account inflation) should be enough, not just to maintain the same lifestyle for almost 25-30 years, with no new income, but also to take care of medical expenses, which are usually high the older a person gets. Planning for all this is a challenge for anyone. That’s why it’s critical for everyone to plan their finances from an early age.

Components of financial planning:

· Purchase a Term Insurance -Reviews insurance needs & Purchase a Term Insurance of 20 to 60 Lacs till the Age of 65 or 70 Years (when Risk is more) and it will ensures that dependents (wife,children) are financially secure in the unfortunate event of death or disability.

An Insurance coverage of Rs.20 to 60 Lacs till 60 to 70 Years of Age depends on your Income and Family requirement (Cost around Rs.3000 to Rs.14, 000 per year.

· Health/Medical Insurance-It helps to monitor Healthcare expenses and reduces unnecessary expenditure and burden. If Provided by Office then no need to purchase again.

Health Insurance Coverage of Rs. 200,000 to 400,000/- per year cost around Rs.5000 to 6000/- per Year depends on your Income level (If company provided then not required.)

· Cash in Bank -Maintenance of sufficient balance in Bank Account equal to 6 months of Salary to manage Requirements like; Annual School Fees of children, Travel Expenses, Family Event and occasion Expenses.

· Mutual Fund-Invest in Mutual Fund to create wealth Maximizes returns @12,13 or 14% as well as TAX Saving to reduce tax liability for Long Term like;10,15,20 Years to meet Children Higher Education, Children Marriage Etc.

· Retirement Corpus- Financially secures retirement life after retirement on 55 or 60 years of Age with continuous Monthly money requirements till the age of 70 or 75 Years for House Hold expenses , Medical Expenses etc you need a Corpus of 40 to 50 Lacs.(Life expectancy in India for females is 70.2 years and 67.4 years for males as per National Health Profile 2019 released in India )

(***Through Mutual Fund Investment you can achieve your Retirement Goal through SWP)

· Invest in Land/Flat as a Property Investment.

What is the 50/30/20 Financial Planning Rule ?

Spending 50% on needs and 30% on wants while allocating 20% to savings.

The 50-30-20 Rule

Confused about how much to save and spend each month? Here's how to get started. It's the 50-20-30 Rule, i.e., 50 per cent of your income should go towards living expenses, i.e., household expenses, including groceries; 20 per cent towards savings for your short, medium, long-term goals; and 30 per cent towards spending, including outing, food and travel. The idea is to create outflow buckets for better control. Individuals may tweak the percentage according to their age, circumstances, etc.

Needs (50%)

Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent EMI payments, car payments, groceries, insurance, Child education, health care and monthly Bills like, Telephone, Electricity. The "needs" category does not include items that are extras, such as HBO, Netflix, Starbucks and dining out.

Wants (30%)

Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronics gadget and ultra-high-speed Internet. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.

Savings (20%)

Allocate 20% of your income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making Investment to a mutual fund account.

How much to save for retirement?

Most financial planners suggest a retirement corpus target which is about 20 times of one's annual income. Some feel that 30 times can be a better figure as it will take care of inflation. It gives you a reason to work backwards and estimate how much you need to save from today till you retire.

Still, this rule may leave you disappointed as it takes income and not expenses into account. Also, it may work for those whose retirement is years away than those who are retiring soon.