Financial Planning For Beginners

By viewing each financial decision as part of a financial plan, it might help you to consider the long-term and short-term effects on your life goals. This will help you feel more secure and more adaptable to life changes

Financial planning is the process of meeting your life goals through the proper management of your finances. An individual has various short-term as well as long-term goals such as buying a house, car, television, refrigerator, washing machine, etc. and saving for children’s education, marriage, retire-ment, etc. A financial plan acts as a guide as you go through life’s journey. It is very essential to have an adequate financial plan in order to fulfil your life goals without any stress. A financial plan helps you give direction and meaning to your financial decisions. It allows you to understand how each financial decision affects other areas of finance.

By viewing each financial decision as part of a financial plan, it might help you to consider the long-term and short-term effects on your life goals. This will help you feel more secure and more adaptable to life changes once you can measure that you are moving closer to the realisation of your goals. A financial plan predominantly consists of four categories such as insurance planning, investment planning, retirement planning, and tax and estate planning. Your financial plan should have adequate insurance in order to insure yourself and family against any unfortunate event occurring in the future.

An investment plan will help you to fulfil your long-term as well as short-term life goals and will help you in saving at regular intervals. A retirement plan will aid your sunset years to be stress-free. A tax plan helps an investor in earning tax-effi-cient income while estate planning is the process by which an individual or family arranges the transfer of assets in anticipa-tion of death or incapacitation. Let’s look at each of them in detail.

Insurance Plan

We live in risky world. Forces that threaten our financial wellbeing constantly surround us and are largely outside our direct control. Some people experience the premature death of their near and dear ones or loss and destruction of their property from both manmade and natural disasters. So, it’s very much necessary to protect our financial wellbeing by insuring against any occurrence of an unfortunate event. Insurance is transferring the risk from an individual to a company and reducing the uncertainty of risk via pooling.

One should be adequately insured against any contingency which might occur in the future in order to avoid financial stress on yourself or your family. As life changes, the insurance needs also change such as marriage, birth of one or more children, occurrence of any disability or illness, etc. Thus, insurance planning isn’t a one-time process; it needs regular monitoring and assessing in order to adequately cover all your risks against any uncertainty. Following are the factors you need to consider as you begin your insurance planning:

• Your age, whether young, middle-aged or retiree
• Your family status such as single, married, divorce, having children, not having children
• Your health and consequently your family’s health
• Your assets such as car, house or any other property
• Your professional status i.e. whether student, employed, unemployed or self-employed.

All of these factors should be considered so that you have sufficient insurance. One must have adequate insurance since under-insurance as well as over-insurance can be risky. Under-insurance can lead to great financial stress in case of unfortunate events. On the contrary, over-insurance can lead to higher monthly premiums, which may hamper your current finances. One should possess the following basic insurances:

✓Life Insurance: This will protect the insured’s family against any financial crisis in case of unexpected death of the insured.
✓Health Insurance: One should possess adequate health insurance for one’s own self as well as family members in case of any health issues arising in the future.
✓Personal Accident Insurance: Personal accident insurance will protect the insured financially against any unfortunate crisis arising due to an accident. This type of insurance covers an individual against death or partial or permanent disability arising due to an accident.
✓Property Insurance: An individual may possess various kinds of property which might face uncertainty and cause loss. So, in order to secure one’s own self against any financial crisis, one should possess adequate property insurance.

Investment Plan

Smart investment is very essential in order to make our financial life better. It will help in providing us enough funds to make our dreams come true. Traditionally, Indian investors have always preferred fixed income instruments as they provide safe and assured returns. Investment should be able to create higher returns on your investment portfolio which can help you come closer to your financial goals. A proper investment plan is required in order to build higher capital with higher returns for better stability over a longer period of time. Following are some fundamental rules of investments:

•Start early
• Invest regularly
• Ensure higher returns on your investment.

Investment planning is the process of identifying financial goals and converting them through building a plan. The core aspect of financial planning is investment planning.

Following are the basic steps while formulating an invest-ment plan:

The objectives of investment planning are:

• Safety in terms of finance
• Generating income over a period of time
• Creation of wealth
• Liquidity in case of emergencies
• Investor can invest in tax efficient investment vehicles in order save on taxes
• Investor can create inflation-beating returns over a period of time.

Retirement Planning

Retirement planning is extremely important because the quality of life for a large part of the later years depends on the kind of retirement planning undertaken. This is one of the areas of planning that deserves a closer look, and hence everyone should be looking at the effective ways to plan well in order to enjoy life after the hard work put in during the best years of one’s life. Retirement planning is the process of undertaking financial planning to provide for the period after one retires from work. This means the process of saving and building up a corpus that is invested in various asset classes that will result in income and earnings for the individual over a period of time.

For example, a person who receives Rs 40,000 per month at the time of his employment will cease to receive these funds when he retires. Thus, during retirement income ceases but expenses do not stop and so in order to finance them there should be some receipts to replace the earlier income. This calls for proper retirement planning. Retirement planning should be done right from the age you start working and earning which will help you create a huge corpus and help you in retiring happy and stress-free. Young people ignore retirement planning but it’s most important which should be considered.

Key features in terms of actual steps in retirement planning:

Tax and Estate Planning

Tax planning is the process of analysing a financial plan or a situation from the tax perspective. The main purpose of tax planning is to make sure that there is tax efficiency. You can create wealth efficiently by investing in investment vehicles which offer tax benefits. Tax planning involves applying various advantageous provisions which are legal and entitles the assessee to avail the benefit of deductions, credits, concessions, rebates and exemptions. A plan that minimises how much you pay in taxes is referred to as being tax-efficient. Tax planning should be an essential part of an individual investor’s financial plan.

Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death or incapacitation. An estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death. Wills and trusts are common ways through which individuals dispose of their wealth. Other tools are power of attorney, gifts, partition, succession when the will is not made, etc. Many people are of the opinion that estate planning is an unpleasant subject. They put it off because they think they don’t own enough assets to plan for or because they don’t like to think about death. There is no doubt that estate planning can raise some difficult emotional issues. Unfortunately, ignoring these issues now may cost your family thousands or even millions of rupees later, as well as lead to considerable anguish. Proper estate planning can give one tremendous peace of mind.

The objectives of estate planning include:

•Transfer of assets to beneficiaries
• Beneficiaries will have to pay least amount of taxes
• Planning for incapacity
• Orderly business succession

The risks associated with failing to plan for estate transfers include:

•Property transfer wishes go unfulfilled
• Transfer taxes are excessive
• Transfer costs are excessive
•Family is not provided for financially in a proper manner
• Insufficient liquidity to cover client’s debts, taxes and costs at death
• Time-consuming and expensive probate which is the legal process through which property is transferred after a property owner’s death.

Conclusion

It’s rightly said that “if you fail to plan, you are planning to fail”. You may have various financial goals you wish to fulfil but they are only achievable at the right point of time if you have a proper financial plan right from young age. Formulating a financial plan can be a tedious task for the common man and most people take the help professionals who can prepare and monitor your financial plan. They can be the right professionals to also help you in selecting the right type of investment option.