Personal financial planning for beginners: An Ultimate Guide

Personal finance involves managing your money efficiently through saving, protecting, and investing. It also includes strategies to increase your income and minimize spending for optimal results. You can optimize these aspects using various financial tools, all of which fall under personal finance.
Understanding the basics of personal finance is crucial. Key personal finance topics include:

1. Financial Planning and Analysis
2. Cash Flow Management and Budgeting
3. Insurance Planning
4. Debt Management
5. Investment Planning and Asset Allocation
6. Tax Planning
7. Retirement Planning
8. Estate Planning

We will explore these concepts one by one in upcoming articles. This article will focus on the basics of Financial Planning and Analysis.

Financial planning helps ensure you have enough income or resources to meet both current and future expenses and needs. Without it, managing expenses can be difficult. Below are the 4 Pillars of Financial Planning:

1. Identify Your Existing Financial Position: Identify your regular income from salary, business, part-time jobs, hobbies, or investments which is your present financial position.
2. Evaluate future Needs: You need to prepare for times when there is little or no income, like after retirement, and for unexpected expenses, such as high medical bills or significant future costs like children’s education or buying a home.
3. Set up a process for Funding the needs: Saving and investing a portion of your current income to create assets for future needs is an essential part of financial planning.
4. Regular Review of Progress: Financial planning involves organizing your income, expenses, assets, and liabilities to meet both current and future financial needs. It’s important to regularly check how your plan is working and make changes if needed to stay on track.

By mastering these aspects of financial planning, you can secure your financial future and achieve your financial goals.

To Understand the Need for Financial Planning we will take the Example of Mr. A:
Mr. A’s Financial Situation:
– Age: 40 years old
– Monthly Income: Rs. 2 lakhs
– Monthly Savings: Rs. 40,000 after covering regular expenses, including loans for his house, car, and other needs
– Investments: Tax-saving schemes like PPF and NPS, bank deposits, bonds, and some mutual funds
– Insurance: Pays premiums on life and health insurance for himself and his wife
– Earning Status: Sole earner of the family

With the above criteria, Mr. A believes he manages his finances well to meet current and future needs. But Is it sufficient for him? What do you think?

How Financial Planning Can Help Mr. A ?

1. Emergency Fund: Does he have an emergency fund to cover expenses if his income is interrupted?
2. Life Insurance Coverage: Does he have enough life insurance to take care of his family if he passes away unexpectedly?
3. Health Insurance Coverage: Does the family have sufficient health insurance to avoid using up all savings in a medical emergency?
4. Future Expenses: What are his specific future expenses, and how will he fund them?
5. Investment Corpus: How large should his investment corpus be to fund future large expenses?
6. Savings Rate: Is he saving enough based on his current income and expenses to build the required corpus?
7. Income vs. Expenses: Does he need to cut current expenses or increase his income to meet both present expenses and future savings?
8. Wealth Accumulation: How much wealth has he built from his savings, and how can he best use it to meet his needs?
9. Investment Strategy: How should his savings be invested? What kinds of investments are suitable for him to build the required corpus?
10. Risk Management: How much risk is he willing and able to take with his investments? How can those risks be managed?
11. Adaptability: How can he ensure that his savings and investments adapt to changes in his income, expenses, and future needs?

The perfect solution for Mr. A would be a Proper Financial Planning. Do you agree?

Proper financial planning can solve Mr. A’s problems by:

• Assessing his Current Situation: Evaluate income, expenses, savings, investments, and insurance.
• Identifying Needs: Determine current and future financial needs.
• Calculating Savings: Identify the amount of savings required to meet those needs.
• Investment Strategy: Develop an investment plan to ensure funds are available when needed.
• Regular Review: Monitor progress and adjust the plan as needed.

Financial planning helps manage personal finances better by setting key goals and creating a plan to adjust finances to meet those goals. This approach looks at the current financial situation, evaluates future needs, sets up a plan to fund those needs, and reviews progress regularly.

Today, many financial products and services are available for investors, and they need to be matched to your specific needs and situations. Not every product suits everyone’s needs. You need to know how to choose and use the right products and services from those available in the market.

Good financial planning helps you choose the best products for your specific needs. It empowers you to understand how these products work and how they fit your situation. By engaging in effective financial planning, you can make informed decisions, optimize your investments, and ensure that your financial goals are met.

Understanding that everyone has different needs and requirements, is crucial for effective financial planning. Just as everyone has their own life story, your financial journey should be unique. Don’t just copy what others do. Instead, understand your situation and, if needed, seek help from a professional financial planner. Even if you consult a financial planner, knowing the basics of financial planning is essential. Here are some steps for good financial planning.

1. Recognize Your Needs and Goals: Identify the exact needs and goals of your household or family and make efforts to ensure these can be achieved.
2. Understand Income and Expenses: Personal financial planning requires time and attention to understand income and expense patterns, estimate future goals, manage assets and liabilities, and review your finances.
3. Seek Professional Help if Needed: If you don’t have time for detailed financial activities, seek help from a financial planner.
4. Set Financial Goals: Setting financial goals isn’t always easy and requires knowledge of different products and skills. If you lack this knowledge and are confused, get help from a financial planner.
5. Choose Suitable Products: Every financial goal needs a suitable product and proper asset allocation to different asset classes to achieve it.
6. Research and Evaluate Options: Select the right investment products, service providers, managers, and insurance products. Evaluate borrowing options and other financial decisions with thorough research. Spend time on yourself to make informed decisions.
7. Manage Asset Allocation: Asset allocation is crucial in financial planning. Manage money by evaluating asset classes and products based on their risk and return features. Align these assets with your financial goals, monitor their performance, and adjust their weights periodically. If you lack time or knowledge, seek help from a professional advisor.
8. Stay Dynamic and Flexible: Financial planning is dynamic and requires continuous attention to changing markets and product performances. Ensure your investment goals align with market dynamics by regularly monitoring and adjusting your plan.

Nowadays, numerous financial advisory services are available. Understanding the specific services they offer and what they can do for you is crucial. Always be aware of the services you are using and the provider. Here are some points to improve your awareness:

1. Holistic Approach vs. Specific Needs:
   • Financial Planning: Addresses your overall needs and goals through a comprehensive process. It considers your entire financial situatio
   • Financial Advisory Services: Typically focus on specific needs, such as advising on stocks, debt, or insurance, without considering your entire financial picture.
2. Goal Setting:
   • Financial Planning: Central to the process, with all efforts directed towards meeting your goals.
   • Financial Advisory Services: Overall goals might not receive as much emphasis. As an individual, you should know your goal and ensure it aligns with the advisory services.
3. Personalized Solutions:
   • Financial Planning: Select what is right for each person, considering both returns and risk. It balances the need for growth with the need for safety.
   • Financial Advisory Services: Might focus solely on earning higher returns and ignore risk. Ensure that their advice aligns with your overall financial plan.

When choosing between a financial planner and random financial advice, understanding the differences can significantly impact your financial goals. Here’s what you should know:

Financial Planning vs. Random Financial Advice: Financial planning integrates all financial facets cohesively, ensuring they align with your goals and risk tolerance. In contrast, random advice may overlook these factors, potentially conflicting with your broader financial strategy.

Example: For instance, a well-structured financial plan ensures that asset allocation for an older individual considers their risk tolerance, balancing equity exposure across asset classes. Random advice, like suggesting investments in specific equity mutual funds, might not account for overall portfolio risk.

Monitoring and Action: Financial planning involves regularly keeping track of your finances and making changes as needed to stay on track with your goals. This ongoing process sets it apart from occasional or unorganized advice you might get from random sources.

Opting for financial planning gives you a structured method to protect your financial future. It ensures that every decision you make about your money is carefully planned to match your long-term goals and manage risks effectively.

When selecting a financial planner or advisor, it’s crucial to follow these guidelines to ensure you’re making a sound choice:

1. Professional Certifications: Look for credentials such as CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), CA (Chartered Accountant), or other relevant qualifications that demonstrate expertise and commitment to professional standards.
2. Regulatory Registration: Ensure the advisor is registered with appropriate regulatory bodies like SEBI (Securities and Exchange Board of India) or relevant authorities in India. This ensures they operate under established guidelines and ethics.
3. Compliance and Regulatory Requirements: Verify that the advisor complies with all regulatory requirements and has a clean record without any disciplinary actions.
4. Track Record: Evaluate their past performance and client testimonials to gauge their track record and reliability in delivering financial advice.
5. Transparency in Communication: A good advisor communicates clearly and transparently about their services, fees, and any potential conflicts of interest.
6. Listening and Responsiveness: They should listen attentively to your financial goals and concerns and address all your questions with clarity and patience.
7. Realistic Expectations: Be aware of advisors promising unrealistic returns or guarantees that exceed market norms. A trustworthy advisor will provide realistic projections based on your risk tolerance and market conditions.
8. Clear Plan or Guidance: A good advisor will provide a clear financial plan or strategy as per your goals, outlining steps and recommendations for your financial journey.

In today’s digital age, be cautious of free advisors on the internet or social media, and carefully check their credentials and track record before relying on their advice. Choosing a qualified and trustworthy financial planner or advisor is essential for your financial well-being and future security.

What you should know about a professional financial advisor or planner:

When a financial adviser or planner earns a commission from selling a financial product, it can create a conflict of interest. They might push for products with higher commissions, not necessarily those best suited to your needs. This can lead to mis-selling.

To prevent this, regulations differentiate between advisers and distributors. Advisers should earn their revenue from clients, not from product producers. Distributors, who execute transactions, may earn commissions from producers.

In India, SEBI regulations require financial advisers to register with SEBI and not earn income from producers. However, there are few exemptions for those who offer advice incidental to a product they sell.

• Fee-only Investment Advisers typically do not execute their advice/plan.
• They refer clients to other agencies for executing recommended investments.
• SEBI rules state that individual Investment Advisers cannot do both the advice and selling of financial products; they must choose either of them.
• Individual Investment Advisors can help clients with execution, but only through direct schemes or products in the securities market, and they cannot receive any payment for these services at the adviser or family level.

Below are the different types of business models in the delivery of financial advice:

1. Fee-only financial planners and advisers
   1. One-time fee for a financial plan
   2. Fee for ongoing review and periodic revisions
   3. Asset-based fee charged as a percentage of assets being advised
   4. Referral fee for engaging experts to take care of specific aspects of the plan
   5. Referral fee for the execution of a plan through other agencies
   6. Selection and portfolio construction fees
   7. Fees for assessment and analysis of financial position
2. Execution-only services:
   • Some Investment Advisers do not charge you for advice as their core function is distributing financial products. Their income comes from the commissions from selling the product.
   • There are many examples around you like LIC schemes, Mutual Fund schemes, or any other insurance schemes.
3. Wraps and Platforms:
   • Wraps and platforms are technology-based advisory tools designed for easy execution. Advisers or clients can use these platforms to offer financial products as model portfolios that investors can understand and buy. Investment Advisors can also execute transactions in customized portfolios using these platforms. Clients can track their portfolio performance, and advisers can monitor and manage these portfolios across different financial products.
   • These platforms may charge clients a fee and share a portion with the advisers. They also allow advisers to connect with clients, provide financial advice, and share the fee with the platform provider.
   • Wrap platform providers bring different financial instruments like stocks and bonds under a single platform for easy handling and tracking. These services are not yet very popular in India.