Financial Planning Your Gateway To Financial Freedom

Indians traditionally consider parents as emergency fund and children as retirement corpus. For the changing times, DSIJ takes you through the financial planning process that will help you build your own corpus to create emergency and retirement fund.



It is a statistic that has been held consistently for a long period now, but it was exposed recently by a survey done by a fund house. Take 100 Indians—of these 68 expect their children to support them at some point in their retirement, whereas 58 think they will not be able to live comfortably in their golden age, and worse, 64 are worried about the rising cost of healthcare. Such worries do not come out of their lower earnings, but their inability to anticipate future financial needs. Only 33 per cent of working Indians are putting money aside for retirement and are saving only 71% of the required amount.

Managing finances can be stressful. This holds true even for finance professionals who are supposed to be adept with finance and understand its importance. The issue of personal finance becomes more challenging as individuals become responsible for their long term financial well-being. Therefore, financial planning becomes important, not just for people who have never thought about their finances, but also for everyone, and whatever the situation.

Financial planning should not worry you as it does not take much to get financially organised. You owe it to yourself to choose a financial lifestyle that helps you secure your future financially. Getting the advice of an expert with the right sign-posting may be the starting point that will relieve much of the weight off your shoulders. It has been observed that individuals who work with financial planners feel better prepared to achieve their financial goals. So what is financial planning all about?

What is financial planning?

Take a moment and ponder on what is financial planning? For some of you it might be saving for retirement, while for others it may be saving taxes, while for others, it might be paying for children’s college education. Broadly speaking, financial planning is an ongoing process to help you make sensible decisions about money that can help you achieve your financial goals in life.

Going deep and more technical, financial planning is all about the comprehensive evaluation of your current and future financial position by using currently known variables to predict future cash flows, asset values, financial goals, withdrawal plans, etc. In short, financial plan answers three most important questions: Where are you now? Where do you wish to go in future? How to get there?

Why is it important to have a financial plan?

Future is unpredictable and hence you should remain prepared for it financially, or otherwise. A good financial plan helps you to minimize the future financial shocks. It helps you to maintain focus and work towards achieving your financial goals and also leads you towards financial freedom and wealth management. It also helps you to identify your financial goals in terms of your needs and wants, covers risk in terms of life, health, etc. and helps you to be financially prepared for your rainy days. It helps you to understand your financial behavior and allows you to invest accordingly.



With financial planning, you are clear about the financial goals for which you are saving and investing. Investing for the financial goals becomes easier when you see your goals being achieved and you are being rewarded at the end. Also, it is important to note that there is no particular time for financial planning. No matter whether you have just got your first salary, you are married and have kids or no kids, nearing retirement or retired—every phase of life needs a financial plan. Financial planning helps you to identify the asset mix that suits you through asset allocation and helps you maintain it with the help of rebalancing. Financial planning helps you to adopt a disciplined approach, accumulate wealth and meet your life’s financial goals and much more.

What is included in financial plan?

A financial plan should be customized as one size does not fit all. The plan will depend upon an individual’s requirement and his current status. For someone happy to stay in a rented house, owning a house may not be a priority, but for some other person, buying a house may be a priority and he ,may be willing to take loan to buy it. Therefore, the financial plans of these two individuals will be different even if they have similar financial status currently. Nonetheless, there are some basic planning needs which most of us require, such as retirement, risk management, etc. In the following paragraphs we explain some of the basic planning, if done, will cover 90% of your requirement.

Emergency Planning

The first and the foremost component of financial planning is emergency planning. This is also known as planning for contingencies. You should not proceed further in a financial plan if you have not provisioned for your rainy days. The reason behind making such a provision is that in case of an emergency, your other financial goals do not get hampered and you would be able to meet the short term cash needs. For example, if you have not provided for an emergency fund and in if any emergency arises, you will have to withdraw from the funds that were meant for other goals, such as your child’s education, which will impact achievement of this goal.

Risk Management

This is the second step in financial planning. Risk management means planning for uncertainties. This includes life and non-life insurance planning. The reason for doing this is to protect you and your family during the time of uncertainties like death, hospitalisation, critical illnesses, disabilities, etc. Risk planning helps you to maintain the provisions you have made for your other financial goals.

Retirement Planning

This is something which many of us ignore most of the times. However, with rising life expectancy, it becomes crucial to plan for retirement. A longer life means you will need more retirement funds to continue to maintain your financial lifestyle. Planning for retirement often includes the amount you would require post-retirement to maintain or even upgrade your lifestyle and making provision for the same. Having a firm plan in place will make sure you do not become a financial burden on those you love the most.

Financial Goal Planning

Financial goal forms one of the important components of financial planning. Here you determine your different financial goals, how much amount you require to achieve these goals and what should you do to achieve them. These goals can be set for the short-term, mid-term and the long-term. For example, your short term goal may be upgrading your vehicle, medium term goal may be going for a vacation and long term goal could be retiring at a beach house.

Setting a goal is easier said than done. The better way to do so is to divide your financial goals between the needs and wants and then prioritize them accordingly. Therefore, to make the process of financial goal planning easier, you should answer the following questions. What are your goals in life in the shortterm, medium term and the long term? Can you prioritise them? And, finally, what is the likely cost of those goals and when do you need the money?

Estate and Succession Planning

This is one such component of financial planning which many of us are unaware of. We believe that filling up the nomination form is the equivalent of estate and succession planning. However, that is not the case. Estate planning and succession planning is one of the most complicated things to do as it involves not just money, but also relationships. So, it is very important to take this step well in advance. Usually, people do not know when to do estate planning. It is better to do at the earliest as life is full of uncertainties and you do not know your life-span. So, making a will at the current stage is important. Any changes and alterations can be made in future.

Should you hire a financial planner or should you do it yourself?

Now as you have understood the importance of financial plan and also the things to be included in a financial plan, the next logical question is: how to do it? You can do it by yourself or hire someone who will help you in doing this.

Tech-savvy people these days are adopting the ‘do-it-yourself’ (DIY) model, and to support this, there are a lot of roboadvisory services available for them. So, should you hire a financial planner and pay him fees or you should do it yourself? Without being biased (as we are ourselves a SEBI registered advisory firm) we can say hiring a financial planner would always be a better option. Even a doctor needs another doctor to treat himself. Even doctor cannot take self-treatment. The same holds true in financial planning as well. Beyond this analogy, there are some strong reasons why a financial planner is a better option:

1. Everyone carries behavior biases. Then may it be anchor bias, herd mentality, recency bias, etc. Our decisions as human beings are mostly driven by our emotions. Even in money matters, our emotions play a big role. You probably take decisions based on emotions and not facts. So, hiring a financial planner helps in keeping you away from these behavioral biases, which will help you to take better financial decisions.
2. Stress is also one of the reason why it is advisable to avoid DIY. If you have work stress or any other sort of stress, you would not be able to take the right decision in such a situation. However, hiring a financial planner would help you in taking care of your personal finance aspects and you focus on your work.
3. Financial planners put in all their time and efforts in managing your financial plan. When it comes to managing your finances individually, you may not devote the required time and efforts. So hiring a financial planner would be a good idea.
4. If you plan to do it yourself, you need to be in constant touch with everything in the field of personal finance. On the other hand, financial planners are required to remain abreast of the latest developments in their profession.



Whom to hire as your financial planner?

There are a lot many intermediaries today who call themselves as financial planners and, in such a situation, it becomes very difficult for a person to choose his financial planner. Following are the points to remember before hiring a financial planner:

1. Qualification is the very basic you should start with. Check his/her qualification. A CFP CM (Certified Financial Planner CM) can be a better choice as they are completely specialized in financial planning. This certification is awarded by FPSB (Financial Planning Standards Board) U.S. Though even SEBI RIA (Registered Investment Adviser) can be a good option.
2. Services offered are also one of the major factors to consider. There should be clarity from the financial planner as to the things that he/she can provide and things that he/ she cannot provide.
3. Remuneration set-up is one of the crucial things to consider. You need to check how he is earning. Whether he is earning commission or brokerage from the mutual fund companies or insurance companies or the like? Or his only source of remuneration is the fees that he is receiving from you? If he earns a commission or brokerage, then there is a possible conflict of interest. However, the same may not true in the case of a financial planner who is directly collecting fees from you.
4. Understand the difference between fee-based financial planners and fee-only financial planner. Fee-based financial planners take upfront fees for financial planning from you and they even charge a specific percentage on your AUM. This gives rise to their bias as they mostly concentrate on bringing more investment under their purview and earn a percentage on it. On the other hand, fee-only financial planners only take a flat fee. They do not charge anything on your assets. They usually practice financial planning in its true spirit.

You should always bear in the mind that ‘your parents are not your emergency fund and your children are not your retirement corpus and hence build your own corpus through financial plan. Now, as we have understood most of the things that are required for financial planning, let us get our hand dirty and do a financial plan for you. This will give you a clear idea of how a financial planning works.

Financial plan

Ravindra Mohite works in Pune and stays with his wife and one son. His wife is a homemaker and his son is aged 11. His monthly salary is Rs. 1.6 lakh and his total monthly expenses are Rs. 1.575 lakh. He has two loans, one is the home loan and the other is car loan. He is paying EMI of Rs. 28,000 for both loans. The cash flow surplus thus comes to Rs. 2,750 every month.

Ravindra has a financial goal of building an emergency corpus, accumulating for child’s education and his retirement.



Advice from a financial planner

First, Ravindra needs to make a provision for an emergency fund of Rs. 3.2 lakh, which is his expense for three months (excluding investments). This can be funded with the help of the cash (see second item in networth) of Rs. 3 lakh, which is already available with him. He needs to keep Rs. 1 lakh in savings bank account, another Rs. 1 lakh in liquid funds and finally Rs. 1 lakh in ultra-short duration fund. Further, he needs to raise this amount equal to six months of his monthly expenses, excluding investments. This comes to around Rs. 6.48 lakh and it needs to be apportioned in the same proportion as above.

The next goal of Ravindra is to accumulate corpus of Rs. 24 lakh for his son’s education which is 7 years away from now. This goal can be fulfilled by allocating a part of existing mutual fund investments and also by starting an SIP of Rs. 19,000 in aggressive hybrid fund for 7 years. Next goal is his son’s marriage, which is 9 years from now and requires Rs. 10 lakh, which can be achieved by aligning a part of existing mutual fund investments and, along with it, starting an SIP of Rs. 5,000 for 9 years in multi-cap fund. Finally, for retirement, which is 18 years away from now and requires Rs. 4.70 crore, stocks, mutual funds, NPS and EPF all are aligned and this would generate a corpus of Rs. 3 crore. For the shortfall, Ravindra needs to start an SIP of Rs. 23,000 in multi-cap fund.

In case of life insurance, Ravindra must surrender his traditional policy and use its surrender value of Rs. 3 lakh to partially pay the car loan. As he is falling short of life cover, he needs to buy a new term plan of Rs. 1.5 crore, for which he needs to pay the monthly premium of Rs. 2,500. He should continue the existing health insurance of Rs. 7.3 lakh. However, Ravindra needs to buy critical illness policy of Rs. 25 lakh and personal accident policy of Rs. 25 lakh for which he needs to pay monthly premium of Rs. 667.