fundamental of personal financial planning
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Personal financial planning is guidance by a licensed financial professional on the financial decisions faced by individuals.TRANSCRIPT
Personal Financial Planning
Why invest?Most of us in private job with no job
securityInflation rate doesn’t match the increment
rateTo have regular income after retirementTaking care of children’s needsInvestments must, hence, be foremost in
the order of priority barring any financial emergency
Understanding cash flowPreparing a Cash Flow statement of income
and expensesHelps to focus or curtail unwanted
expenses“The secret to getting rich is to pay
yourself first (i.e., invest for your future), before you pay others (utilities, shops, etc)” – Kiyosaki (author of Rich Dad Poor Dad)
Example of a cash flow statement
Total (savings) +Rs 10,000.00
Where to Invest?Different avenues of investment
Stocks, mutual funds, government bonds, post office schemes, bank fixed deposits, commodities, gold, real estate, art, etc.
Inflation Inflation is the rate at which the cost of goods and
services rises As inflation goes up, purchasing power decreases
Three years ago, you could have bought a three bedroom apartment in a premium suburb of Mumbai for Rs 75 lakh; today, the same amount will probably get you a one bedroom apartment in the same locality
Inflation reduces the value of money
Impact of Inflation on financial goalsOver the years, you have to spend more in
order to maintain your standard of livingA management course that costs Rs 15 lakh
today will cost around Rs 41 lakh (at 7 per cent inflation), 15 years hence when your child is ready for it!
Real returnTo fight inflation, invest in a product which
gives not just a higher rate of interest than inflation, but also leaves with a substantial amount that enables to meet the goals
Real return = stated return – InflationInvesting in an investment product provides 10%
return then actual return is 3% (10 – 7)If we consider 30% tax on return then the return
is almost nilConsider investing in equities, real estate and
commodities which are insulated from inflation
Accelerate earnings: The concept of reinvestment Are you investing the interest earned?
The simple act of reinvesting the interest earned means you earn interest on the interest and make more money
Suppose you invested a sum of Rs 2 lakh in the Post Office Monthly Income Scheme (MIS) @ 8 per cent per annum. Every month, a sum of Rs 1,333 will be deposited into your savings account, for a period of 6 years. “Where should i invest such a small amount?”, you may ask. Well, the Department of Posts has a Recurring Deposit (RD) scheme, where you can invest as little as Rs 10 each month @ 8 per cent per annum. Your MIS interest over 5 years would be Rs 80,000. Reinvesting would, hence, earn you an additional interest of 8 per cent on the Rs 80,000, without much effort.
Accelerate earnings: The concept of reinvestment The following table demonstrates the value of Rs 10,000
invested at 7 per cent over a period of 35 years, assuming that the interest is reinvested.
Compounding “Compounding the greatest mathematical discovery ever” –
Albert Einstein Reinvest your income from interest on investments, your
capital or principal that is invested goes up Another factor that influences compounding is the frequency
of compounding
Compounding is such a powerful financial tool that if you invest and reinvest your savings and profits regularly, your investment portfolio will steadily outgrow your salary!
Financial PlanningFinancial planning is the process of
developing a personal roadmap for your financial well being
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, real returns, and taxes
Process of systematically planning your finances towards achieving your short-term and long-term life goals
BenefitsHelps monitor cash flows and reduces unnecessary
expenditureEnables maintenance of an optimum balance between
income and expensesHelps boost savings and create wealthHelps reduce tax liabilityMaximizes returns from investmentsCreates wealth and ensures better wealth management to
achieve life goalsFinancially secures retirement lifeReviews insurance needs and therefore also ensures that
dependents are financially secure in the unfortunate event of death or disability
Lastly, it also ensures that a will is made
Financial Planning ProcessIdentify your current financial situationIdentify your goals Identify financial gapsPrepare your personal financial planImplement your financial plan Periodically review your plan
Tips for Financial Planning Start now. Even if you are in your mid thirties or forties,
it’s better to start now than dawdle for another five years. Every day counts
Be honest with yourself. Seek help when needed. Set sensible, measurable goals for yourself. Be realistic
in your expectations of the results of financial planning Review your plan and financial situation periodically and
adjust as needed Always review the performance of your investments; pull
out if needed and reinvest the money elsewhere. Be hands-on. It’s your money and no one else will do
your work for you
Types of InvestmentStocksMutual fundsGovernment bondsPost office schemesPublic Provident FundBank fixed depositsCompany fixed depositsCommoditiesGoldReal estateArt
Why Insurance is not categorized as Investment?
StocksRisk
HighReturns
HighTax impact
Capital gains tax will be calculated based on your gain
RequirementsDemat account to be opened
Mutual FundsRisk
High to Low based on the type of funds chosen
ReturnsMedium
Tax impactRequirements
KYC process to be followedInvestment type
Fixed amount more than Rs. 1000 or SIP
Government BondsRisk
LowReturns
LowTax impact
Tax free based on type of bondsRequirements
Demat account or buy in paper formInvestment type
Fixed amount more than Rs. 5000 as one time investment with specific period
Post Office Savings Scheme (POSS)Risk
NilReturns
LowTax impact
Interest is taxableRequirements
NoneInvestment type
National Savings Certificates (NSC), National Savings Scheme (NSS), Kisan Vikas Patra, Monthly Income Scheme and Recurring Deposit Scheme
Public Provident Fund (PPF)Risk
Nil but poor liquidityReturns
MediumTax impact
Tax freeRequirements
Should be opened on individual’s nameMaximum savings can’t exceed 70000 per yearCan remit in a single installment or in max of 12
installmentsCan avail loanCan liquidate only after 15 years
Bank FDsRisk
LowReturns
MediumTax impact
Interest is taxableInterest rate will vary based on RBI’s
monetary policy
Company FDsRisk
MediumReturns
MediumTax impact
Interest is taxableInterest rate is high when compared with
Banks but risk is highFixed term
InsuranceProvides financial protection to dependantsDoesn’t make sense if there are no dependantsFinalizing Life Cover
Life cover should be 10 times your annual incomeConsider other debts, pre-existing medical complication, etc.
Fund performanceIn case of ULIP, evaluate the performance of the company in
the past yearsTypes of Insurance Products
Term InsuranceEndowment Insurance Plans ULIPPension PlansMoney-Back Plan
Best Practices in investingDiversify your portfolioConstantly monitor your investment and try
to correct bad performing assetsUse online portfolio tools to have
consolidated view of your investmentsDon’t save what is left after spending but
spend what is left after savingAdd nominee in all your investmentsConstantly review your financial goals with
the investments you have made
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