LOVELY PROFESSIONAL UNIVERSITY

Term paper
Personal Financial planning

ALOK KUMAR

ROLL NO.- RS1901B33

S
ECTION- S1901
13/11/2
010

SUBMITTED TO:

MS. NITIKA SEHGAL

Personal Financial Planning

Financial planning is a process through which an individual can chart a roadmap to meet
expected and unforeseen needs in life. Simply put, the intention is to take necessary steps to
ensure that the individual is equipped to accomplish what he has set out to achieve and is
prepared to deal with contingencies as well.

And yes, the importance of financial planning (especially in the present scenario) cannot be
overstated. Among others, two factors are responsible for the same i.e. inflation and changing
lifestyles.

Inflation is a situation where too much money chases a limited number of goods. This leads to a
fall in the value of money. It is also expressed as a rise in the general price level. For example, a
product that costs Rs 100 at present would cost Rs 105 a year from today, assuming that prices
rise at 5 per cent. This is the impact of rising prices over one year; over a 30-Yr period, assuming
that inflation continues to rise at 5 per cent, the same product will be available at Rs 432!

Financial planning can ensure that one is equipped to deal with the impact of inflation, especially
in phases like retirement when expenses continue but income streams dry up.

The second factor is changing lifestyles. With higher disposable incomes, it is common for
individuals to upgrade their standard of living. For example, objects like cars that were
considered luxuries not too long ago, have become necessities today. Financial planning has a
role to play in helping individuals both upgrade and maintain their lifestyle as well.

Finally, there are contingencies like medical emergencies or unplanned expenditures that an
individual might have to cope with. Sound financial planning can enable him to easily mitigate
such situations, without straining his finances.

Principles of financial planning

At its core, financial planning is not a very difficult task. All it takes is discipline and religious
adherence to the principles of financial planning.
Discipline has a part to play at every stage, from setting objectives to actually executing the
plans that are meant to achieve those objectives. In fact, an adhoc approach while dealing with
finances is one of the major reasons for the financial distress that individuals find themselves in.
Setting objectives, investing in line with one's risk appetite and asset allocation are some of the
fundamental principles of financial planning.

This is the plan of achieving my short, medium and long-term goals. We must develop our
financial plan with clearly defined goals and action plan to achieve them. Through this pie-chart
I have tried to show my asset allocation in my future and the cash flow that I need to maintain in
the future.
 

 
This was the snapshot of my desired financial plan but before going further we should analyse our
current financial situation.

My Current financial Situation

Personal Data:

Name: Alok Kumar

Date of Birth: 18-07-1986

Marital Status: Single

Qualification : MBA (2nd yr)

Father’s Occupation : Railway Loco Pilot

Mother : Home maker

Brother : Software Engineer at EA Sports, Hydrabad

The source of income in my family is through the earnings of my father and my brother. We are
currently consist of only 4 members ie my parents & the two brothers including me.The consumption of
the income is only by four of us. The list of the earnings and expenditure is shown below along with the
assets we are having so that the picture of my financial position is best shown.

1. List of Personal Financial Information:

Net worth:

Income Data: in Rs

Father Brother

Salary 5,40,000 3,24,000

Assets Data:

Asset Ownership Current Fair Value

Saving Account 1 Father 1,50,000

Saving Account 2 Myself 30,00,000

Saving Account 3 Brother 1,00,000

Vehicles (Bike) Myself 55,000

Bike Brother 55,000

Plot Mother 6,00,000

Mobile 1 Myself 6,000

Mobile 2 Myself 6,000

Mobile 3 Brother 12,000

Mobile 4 Father 1,500

Mobile 5 Mother 1,500

Jewelry & Mother 3,00,000

Collections

Other Personal Father 1,00,000

Assets

Fixed Deposits Myself & Brother 12000

At P.O.(annually)
 Laptop Myself 44,000

Laptop Brother 55,000

My three short-term goals

Since I am not earning anything so, my three short term goals will be fulfilled by my family
income and saving.

Description Amount Needed Months to Action to be Priority

achieve taken

Bike Insurance 2000 2 Use money from High

salary

Insurance 1,500 8 Use money from High

Premium saving A/C

4th installment of 81,300 1 Use money from High

the tution fee of saving A/C.
MBA

My three intermediate term goals

My three intermediate term goals are

1. To arrange funds for specialized job training.

2. To arrange funds for fooding and lodging during job search.
3. To take my parents on a tour on my expenses. For this I need to get a job first.

My long term goal

Description Amount Needed Months to Action to be Priority
achieve taken

To construct a 25,00,000 5 By taking home High

newly furnished loan
house

Investment Planning
For money to grow and protect it from the rising inflation, the best way out is to invest. The rate
of investment should exceed the rate of inflation in order to benefit. Investment must be done
early, at regular intervals and both for the long and short terms.

Investing is a lifetime activity, where persistence, patience and time are the keys to success. As
one build assets over time, it is imperative one monitor them to maximise returns. Here are five
strategies and thoughts that can help me in this objective.

Average Your Cost

 
Cost averaging is the central principle behind systematic investment plans of equity funds. You
invest a fixed amount every month. So, when the market rises, your investment will buy you
fewer units. And when it falls, it will buy you more. Through market cycles, it reduces the
average cost of your holding, while relieving you of the onerous task of trying to time the
market. In the short run and in a bull market, cost averaging may trail a lumpsum strategy in
returns, but over a longer term and through market cycles, this strategy has proven to be a
winner
 
Take some risk
 
Risk and returns go hand in hand. An approach to minimise risk may result in mediocre
returns. The contrast becomes stark over the long term. Let’s assume an investment of Rs 1
lakh earns three rates of returns: 8 per cent (pure debt), 11 per cent (balanced) and 13 per cent
(pure equity). The difference in returns gets steeper with time: from 25 per cent in five years, it
expands to 57 per cent in 10 years, 97 per cent in 15 years and 147 per cent in 20 years.
 

Keep Rebalancing
 

Review your investment portfolio periodically to assess whether it is in line with your desired asset
allocation. Say, you have a portfolio of Rs 1 lakh with a 60:40 equity-debt split. Further, assume a
bull run in the stock market earns you 30 per cent on your equity portion after a year (Rs 18,000),
while the debt portion earns 8 per cent (Rs 3,200). Your portfolio is now worth Rs 1,21,200, and
the split stands at 64:36.

If equity returns continue to outpace debt returns, this ratio may get skewed towards equity. If your
financial goal is still far away and you don’t mind the risk, you can choose to let the profit run and
not bring your portfolio back to your original 60:40 split. However, if you don’t want more risk,
book part of equity profits and reinvest in debt. In another scenario, if equity returns less than debt,
sell some debt and reinvest in equities. By doing so, you are also booking profits in rising markets
and increase holding in falling markets.

Sell the duds

Review your portfolio dispassionately. Hold on to investments that are performing well. At the
same time, exit underperforming investments. By holding on to laggards, you lose out on the power
of compounding, as well as the chance to earn a better return elsewhere. Imagine, if you got a
bonus of Rs 50,000, you will invest it in the best avenue possible. But if it is lying in an
underperforming investment, you won’t follow the same thought process.

Retirement Planning
 
It’s a different situation in India. With 58 per cent of our population below 25, retirement
planning is not a topic of discussion here. Moreover, traditionally, after retirement, the elderly
have been supported by their children. Their lifestyle has been simple and expenses modest. But
there are shifts happening that might throw up the same issues in retirement as the Baby
Boomers in the US face today.

The current working generation is enjoying the fruits of a vibrant economy. Incomes have
spiralled, but so have expenses and lifestyle spending, as it happened with the post-war
generation in the US. Our needs in retirement will be different from that of our parents. Also,
social structures and values are changing fast, with nuclear families being a norm. By the time
the current working population retires, chances are, they will support themselves through their
retired life. Life expectancy will keep improving with medical advances, even as healthcare and
medical insurance costs rise.
Retirement planning may not be the most pressing need for young India, but by being proactive,
we can be better prepared for it than the Baby Boomers. Retirement planning is a process to
estimate how much money you need to save each month in order to have a comfortable
retirement. You will need an income to support yourself, pay for your medical insurance,
maintain a place to live and service the other financial goals you might have.

How to plan
 
The starting point of any such exercise is to estimate how much income would you like in your
retirement, in today’s value. Take your current annual expenses, factor in those that will go down
(like housing and fuel), and those that will go up (medical insurance and travel) to arrive at a
figure. Most experts say you will need 70-80 per cent of your current annual expenses in
retirement.
 
Once you know what you would like your income to be, estimate your current savings towards
retirement. Your employer may be providing you PF and superannuation schemes. Your payroll
department can help you get your account balances under these schemes. Add any other
investment that you have earmarked for retirement.

The difference between your need and savings is the gap you need to fill through further savings
and investments. The following are a few aspects that play an important role in your retirement
planning equation:

• How much return will your savings earn before and during retirement? Generally, you should
use more aggressive investments like equity or equity-based mutual funds before retirement to
help your money grow faster; subsequently, approaching and in retirement, you should switch to
safer investments like bonds, debt-based mutual funds or annuities from insurers.

• What inflation rate will affect your purchasing power and salary? By the time you retire,
inflation will increase cost of living. It will also increase your income during the accumulation
phase. So, if you have many years to go and you can’t fill the gap right way, you can make a start
now and keep increasing your savings as your salary increases over time.

• When do you want to retire? You can retire early if you can save more to fill the gap.

How much you need

If I’ll be at 35 and wants to retire at 60. I estimated I will need Rs 4 lakh a year (in today’s value)
during my retirement years. Assuming an average rate of inflation at 4 per cent, my expenses on
turning 60 will be around Rs 10.7 lakh a year. At a rate of return of 10 per cent per annum post-
retirement, I need a corpus of about Rs 1.8 crore to fetch me sufficient returns to meet my annual
expenses. Since I have not started saving towards my retirement, I need to save Rs 5,412 a month
for the next 25 years, assuming an annual rate of return of 15 per cent during accumulation.
Given your projected annual expenses in retirement and years to retirement, you can work out
how much you need to save in the remaining years.

Retirement can seem daunting if you don’t have a plan. By taking out the time now, you can
knock down those big numbers into smaller, monthly actions and cruise home.
Insurance planning
Step 1: work out your expenses
 
Living expenses. These include day-to-day expenses such as food and utilities, and non-
recurring expenses your family may have. Your current annual expenses, exclude your own, can
be a good indicator. If you have young children, chances are, their expenses will increase with
age. Work out their expenses till they become financially independent that period should
determine the tenure of your cover.
 
Current liabilities. This is the principal amount outstanding in your various loans (for example,
house, car, personal loans or credit card outstanding).
 
Future expenses. The major expenses expected in the future like higher education of children
and their wedding expenses. Consider the time horizon and the impact of inflation on these
expenses.
 
Step 2: determine your assets

Salary. If your spouse is earning, some of the day-to-day expenses can be supported from that
salary.

Current assets. Value of investments like mutual funds, shares, real estate, bonds, and post
office savings. Don’t include the house you live in, as your family will still need to live in it.

Other payouts. Your pension and insurance plans. This includes pension or superannuation
plans offered by your employer, employee provident fund and life cover from your existing
insurance plans. Many employers provide life cover to their employees through a group
insurance plan. Typically, the cover is a multiplier of the base salary. Check whether you are
covered by such a plan, and add it to the existing cover.
 
Step 3: Calculate your life cover

First, we determine the capital required to earn a return that can support the annual expenses of
my family.If our annual expense is Rs 3 lakh and I earn Rs 1.2 lakh a year.

That leaves a shortfall of Rs 1.8 lakh. Now, because of inflation, this amount will increase every
year. Assuming the cost of living increases by 4 per cent a year and their corpus earns 10 per
cent a year (post-tax), the effective rate of return is 6 per cent. In order to earn Rs 1.8 lakh at that
rate, I will need a capital of Rs 30 lakh.
 
To this, we add our current liabilities and future expenses. That’s what I need to cover for.
Next, we work out how much of this I can meet by what I have, namely my current assets and
existing life cover. The balance is the additional life cover I need to get.
Once you have calculated the life cover, get a life insurance product that suits your need. Term
plans are the cheapest and most effective. However, they don’t provide any returns, which is not
a bad thing. It is advisable not to mix insurance and investment, as such products are not the
most efficient. The one exception to this rule is a children’s plan in which the insurer pays the
sum assured in case of the insured parents’ death, as well as continues to pay the future premium
to ensure the fund accumulation for children’s education continues as planned by the parent.
Lastly, assess your insurance need every three years or when there is a change in your family
situation for example, marriage, birth of a child, spouse discontinuing career.

Tax Planning
Under section 80C of the Income tax Act, 1956 ('Act'), one can choose from a wide range of
schemes to get a deduction up to Rs 1 lakh from your taxable income. We can use this
opportunity to plan for your medium- and long-term financial goals. A bit of thought, planning
and discipline is all it takes.

How much to invest?

The first step in such planning is to work out how much targeted investments you need to make.
The maximum savings you can avail off by investing in Section 80C will depend on your annual
income.

If your annual taxable income is below Rs 1 lakh, you don't have to pay any tax and hence, you
don't need any deduction.
 
For annual taxable income of up to Rs 2 lakh, you can bring down your tax liability to zero by
investing Rs 1 lakh in saving schemes allowed under the section. Of course, you need to see
whether you can afford to save that much in the first place without falling short on your running
expenses.

Where

The universe of eligible instruments under Section 80C can be broken into two: expenses
(repayment of housing loan principal, tuition fees of your children) and investments (PF, NSC,
ELSS, life insurance premiums). While planning your Section 80C investments, there is a
hierarchy you need to keep in mind and you would do well to follow.

To start with, account for the housing loan principal and tuition fees. Since you can't avoid these
spends, make the best of them by claiming the tax breaks available. Then, account for 'forced'
investments. These are investments that are unavoidable, like your contribution to the
Employees' Provident Fund (EPF) scheme that goes from your paycheck, and premiums towards
life insurance policies and pension plans. The balance to Rs 1 lakh is what you need to save,
assuming of course your cash flows are taken care off.

Based on your financial goals, time horizon and risk profile, there are a range of investments to
choose from. On the one end are the zero risk, fixed income schemes like Public Provident Fund
(PPF) and National Savings Certificate (NSC). Both these schemes earn an interest rate of 8 per
cent. The PPF has a lock-in period of 15 years (though, you can start making withdrawals after
seven years) and the interest is taxfree. The NSC has a maturity period of six years and the
interest is subject to tax.

The 80C basket

 
There are options aplenty on how to maximise your tax savings under Section 80C. Expenses
and investments. Risk-free and risk-laden investments. Low-return and high-return potential
investments. The overall investment limit is Rs 1 lakh. The limit for each individual avenue is
also Rs 1 lakh, barring the PPF, where it is Rs 70,000.
 
Expenses
• Tuition fee
• Principal repayment of home loan
 
Risk-free investments
• EPF
• PPF
• NSC
 
Low-risk investments
• Life insurance premiums
• Pension plan of insurers
• Pension plan of mutual funds
• Ulips of UTI MF and LIC MF
• Infrastructure bonds
• Tax-saving bank FDs
 
High-risk investments
• ELSS
• IPOs of specified infrastructure projects

So, the above all are the tax saving schemes available for me. Now its depend on my earning
capacity in the future to decide and select any schemes to get optimal benefit through tax
deduction.
Estate Planning
Estate planning refers to the process by which an individual or his/her family arranges the
transfer of assets to the legal heirs in the event of death or disability of the individual. It includes
the distribution of the real and personal property of an individual to his/her heirs.

One of the goals of an individual will be to protect the needs of the loved ones during lifetime
and after his death. This can be achieved by way of estate planning by distributing assets among
his beneficiaries. An estate plan aims to preserve the maximum amount of wealth possible for
beneficiaries and flexibility for the individual prior to his death.

Steps in the estate planning process:

We should perform the following steps in estate planning -

 Relationship establishment

 Information gathering

 Determining the client's financial status

 Draw out a plan of transfer

 Implementing the plan

 Regular reviewing of the plan

Tools of estate planning:

There are various tools that a financial planner can adopt for getting an estate plan in place.
Some tools are effective during the lifetime of an individual while some after his/her death.

The following figure shows the tools used for estate planning by transferring the assets to the
beneficiary, with or without restrictions, during the lifetime of an individual –
The following figure shows the tools used for estate planning where the transfer of assets to the
beneficiary becomes effective after the death of an individual –

Risks and drawbacks involved in estate planning:

 An individual's goals or wishes on how his assets are to be distributed may not be
fulfilled

 Huge costs of transfer and taxes

 An individual's family may be in financial distress if the process id not properly planned

 There may be insufficient liquidity to meet client's debts an taxes

 Time consuming legal procedures

Conclusion :

Personal financial planning is one of the most important aspects of personal finance. The
personal finance planning helps us to understand whether our financial decisions have any
impact on other financial decisions. If they are affecting any short term or long-term life goal
then we can revise our decisions. Depending upon my short term, intermediate term and long
term goal I need to analyse my Investing planning, tax planning, insurance planning, cash
management and retirement planning at regular interval.

Investment Planning: For money to grow and protect it from the rising inflation, the best way
out is to invest. The rate of investment should exceed the rate of inflation in order to
benefit. Investment must be done early, at regular intervals and both for the long and short
terms. 

Retirement Planning: This process determines the amount of money that will be required at the
time of retirement.

Insurance: Death of any earning member in the family gives a severe financial jolt to the family
as a whole. Such risks can be hedged by opting for a life insurance policy. Not only is the life of
humans subject to accidents but commodities like cars, houses as well, they can also be insured
to avoid any risk of their accidental destruction. This is another way of managing personal
finances.

Tax: It is very important to plan taxes at the beginning of the current year rather than be
burdened by the investment load. By investing in mutual funds one can save taxes.

Estate planning: Investing in real estate can also be very much beneficial.

The guide to personal finance also informs us about the host of financial services provided by banks and
other financial institutions.