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Personal financial planning
Financial planning involves making funds available from current resources to meet future needs. It encompasses risk, estate, tax, investment, retirement, and savings (RETIReS). Financial planning aims to maximize returns while maintaining liquidity and safety of funds. It cannot prevent unforeseen circumstances but can provide financial support. Financial planning needs vary throughout one's lifecycle from being a learner, earner, partner, parent, provider, and retiree. At each stage, different financial priorities and needs exist. Life insurance can be an integrated part of financial planning by helping to create, protect, and accumulate assets at different life stages. The basic objective of financial planning is to allow a comfortable retirement without compromising lifestyle.
Personal financial planning
- 2. Introduction “Thodi si tulift karade Bangla motor car dila de Ek nahin do char dila de ”
- 3. What is financialplanning ? 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
- 4. 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
- 5. Contd…… FP isan 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
- 6. FACTORS DETERMINING FP Country’s economic environment ( tax changes) Change in job market Inflation Changes in pattern of savings instruments and savings habits.
- 7. 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.
- 8. UNDERSTANDING FP Lifeinsurance 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
- 9. 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. BUT WHAT HAPPENS WHEN3 Ds STRIKE ? HOW TO ENSURE PROTECTION & YET GET BENEFITS OF S-I-S ? MAY LEAD TO F FAILURE
- 11. FP & LIFEINSURANCE 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
- 12. 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.
- 13. 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
- 14. 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.
- 15. LIFE CYCLE OFINDIVIDUAL 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)
- 16. Learner - costsof 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
- 17. 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
- 18. Earner Generally inage 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.
- 19. Advantages of startingan 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
- 20. contd….. In caseof 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.
- 21. 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
- 22. Partner/Parent Age group31-40 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
- 23. Provider The middleyears. 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.
- 24. Provider The maturingyears - 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
- 25. Empty Nester Theretirement 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.
- 26. Empty nester Disposableincome 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)
- 27. Enjoyer The finalphase -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.
- 28. Contd….. Health expensesreplace 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.
- 29. RECAP Basic objectiveof 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
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