Building wealth doesn’t happen by accident. You need to plan the things meticulously and implement those systematically. Financial Freedom is available to those who learn about it and work for it.
Financial Planning aims at ensuring that a household has adequate income or resources to meet current and future expenses and needs. The regular income for a household may come from sources such as profession, salary or business. The normal activities of a household and the routine expenses are woven around the regular income. However, there are other charges that may also have to be met out of the available income. The current income of the household must also provide for a time when there will be no or low income being generated such as retirement period. There may be unsuspected expenses which are not budgeted such as a large medical expense, education of children , their marriage expenses or buying a home all of these require an adequate fund to be made available at the right time. A portion of the current income is therefore saved and applied to creating assets will meet these requirements.
Financial Planning refers to the process of streamlining the income, expenses, assets and liabilities of the household to take care of both current and future need for funds.
Understand this concept in detail with the following Example:
Rajiv is 40 years old and earns Rs. 2 lakhs a month. He is able to save about Rs 40000 a month after meeting all the routine expenses of his family, paying the loans for his house, car and other needs. His investments include those for tax savings, bank deposits, bonds and some mutual funds. He pays premiums on life insurance for himself and his wife. Rajiv is a sole earning member of his family, and he believes he takes care of his finances adequately to take care of his current and future needs. How would financial planning help him?
Following are the set of indicative issues that financial planning will help Rajiv resolve
- Does he have adequate insurance cover which will take care of his family’s requirements in the event of his untimely demise?
- Given his current income and expenses is he saving enough to create the corpus required?
- What are his specific future expenses and how will he fund them?
- If Rajiv has to create a corpus to fund large expenses in the future, what is the size of the investment corpus he should build?
- Will he have to cut back on his current expense or can he increase his current income so that his expenses in the present and the savings for the future are met?
- What is the wealth Rajiv has so far build from his savings and how can he best use it to meet his needs?
- How should his savings be deployed? What kind of investment are suitable for Rajiv to build the required corpus?
- How much of risk is Rajiv willing and able to take with his investment? How would those risks be managed?
- How should Rajiv ensure that his savings and investments are aligned to change in his income, expenditure and future needs?
A formal treatment of the issues Rajiv faces will require a financial planning process to asses the current situation, identify the current and future needs, determine the savings required to meet those need, and put the savings to work so that the required funds are available to meet each need as planned.
Financial Planning is thus a process that enables better management of the personal financial situation of a household. It works primarily through the identification of key goals and putting in place an action plan to realign the finances to meet those goals. It is a holistic approach that considers the existing financial positions, evaluates the future needs, puts a process to fund the needs and reviews the process.
