Many of us has seen tremendous stock market rally all over the world in last 2 years. In last two decades there were only about 3 crore Demat accounts were active but within 2 years of pandemic it has increased to about 8 crores. Indian stock market has given superb returns than any other country. New other asset categories or concepts also become popular like Cryptocurrency, NFT and Metaverse. But these are based on Blockchain technology or unregulated markets, which a layman/common people cannot understand or aware of it.
The good thing is that youth has started investing in financial products like stock market through IPO, stocks, mutual funds etc. than non-financial products i.e. Gold & Real Estate. But apart from investing, many of us has not understood the importance of Financial Planning. Basically, Financial Planning is the step-by-step approach to achieve individual’s life goals. These goals include Wealth Creation, Children Education, Early Retirement, Starting a Business, Saving Taxes, Pay-off Debt like Home Loan.
Many individuals do not invest much time in the reviewing or managing their personal finance situation. Understanding the individual’s current financial situation is the most important step in financial planning.
Financial Planning includes 5 steps :-
1) Investment Planning
2) Insurance Planning
3) Retirement Planning
4) Tax Planning
5) Estate Planning
1) Investment Planning
It consists of investing in Stocks, Mutual Funds, Gold, Fixed Deposits, Provident Fund (PF), National Pension Scheme (NPS), Public Provident Fund (PPF), Real Estate etc. Investment planning can be start with Asset Allocation i.e., what percentage of each asset should be allocated in portfolio. For e.g., Ratio of 60:30:10 means investment of 60% in Stocks, 30% in Debt and 10% in Gold. The basic formula for investment is 50:30:20 i.e., 50% of your income should utilize in Household expenses, 30% should utilize in personal expenses like movies, outing, dinner, parties and remaining 20% should be compulsory invested. For better results the formula can also be changed to 50:20:30. Apart from this option the best option is in Self Investment.
2) Insurance Planning
Insurance is the most common risk management tool. When an individual chooses to purchase an insurance policy, he or she is transferring the risk of loss to insurance company. Insurance & Investment are different things. People often make mistake by purchasing Insurance-cum-investment products like Money-back, Endowment Plans which hardly provide enough coverage. Also, it’s premium is very high, and it grows at fixed percentage like 6.00-6.50%. The only solution for this is Term Insurance. It gives you 20-25X coverage on your income in affordable premium.
3) Retirement Planning
Today retirement can mean starting a new business, traveling the world, getting additional skills and education, expanding hobbies, donating time for charitable causes etc. Retirement planning step is to gain a clear understanding of what retirement look like to you. In younger age, retirement may seem distant thing to worry about. But it’s planning should be start as early as possible. After retirement, other expenses may reduce, but medical expenses are likely to rise. Inflation reduced retirement benefits and not having enough money in post-retirement can cause stress and worry. Retirement Planning can be achieved through setting aside funds and investing in retirement products like NPS, Insurance Pension Plans, Mutual Funds, PPF etc.
4) Tax Planning
It is an integral and most important part of Financial Planning. It is used in other 4 areas as well i.e., Investment, Insurance, Retirement & Estate Planning. Tax Planning refers to reducing one’s tax liabilities and utilizing tax exemptions, tax rebates & other benefits. It can be achieved through tax efficient products like Equity Linked Saving Scheme (ELSS) Mutual Funds, PPF, Life Insurance Premiums, Health Insurance Premiums, ULIPs National Saving Certificates, Home Loan Payments etc. Individuals & HUFs can get tax deduction up to Rs.1.5 Lacs under section 80C to 80U of the Income Tax Act, 1961 through above options. Also, individuals can claim a tax rebate of Rs.12,500 under section 87A if his/her total income doesn’t exceed Rs.5 Lakhs. It means if your total income is up to Rs.5 Lakhs, the tax liability will be Nil.
5) Estate Planning
All the assets a person own make up his or her state. It includes securities, real estate, business interests, cash, intellectual property, and any other items. Estate planning looks at how an individual wants to address the end of his or her life. Basically, it’s meaning to passing an asset to beneficiaries or legal heirs through Will or Will Substitutes after your death. It can also be done via Gifts, Intra-family Transfer and Trusts. The nominee is not always owner of the assets as he is only trustee of assets. A legal valid will helps in distribution of property, reduce legal hassles, prohibit family disputes etc.
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