Financial Planning defined as ‘A Process to achieve your financial goals with high returns by minimizing risk’. But what exactly the Financial Planning Process means? Does it means savings & investment or choosing product/ services for investment? Or asset allocation & diversification? How and where to start? I can go on and on. Further, if it is a process then what are the main components of the process? Let’s try to understand this process in simple stages.
It is the first component of financial planning. To save money, a right spending plan (income and expenses) is necessary. As we all know, income resources are very limited but expenses are not, therefore minimizing expenses is the best way to save more money. Developing a budget for every expense, liability & debt is necessary. Keeping aside a fixed sum of money each month as savings is an effective idea.
Also, there should be a purpose of saving like buying a car/home, child education, marriage etc. Identifying savings purpose will help determine the duration and how much money is required.
Insurance planning is the second component of financial planning. There are different life stages – like a person who has just started earning or a person with family/dependents or a person approaching retirement and post retirement. At every stage insurance is important!
Insurance is not an “Investment” but a necessity. Before going for insurance, an Investor must take into consideration his needs, goals and his ability to pay the premium amount. Choosing a policy suitable as per needs helps achieve goals smoothly.
There are different types of insurance policies available in the market. Main ones are:
- Term Insurance: It is a pure form of insurance. It gives full protection against death as well as total & permanent disability. This insurance is a ‘must’ in every financial plan and at any life stage.
- Health Insurance: Health insurance covers you and your family from financial loss due to critical illness, accidents or disability. It also provides income when disabled or covers cost of medical care.
- Whole life Insurance & Endowment: These insurance policies are for protection and investments. This is a product where you can get insurance protection and part of money goes into investments which generate returns.
- Unit Linked Insurance Plans (ULIP): Unit linked insurance plans are the most popular insurance plans in India. It gives the benefits of investment, insurance and tax. But this is not the pure insurance.
There are various factors which impacts selection of a right insurance policy. Some of them are:
- Budget for different policies.
- Number of dependents and their age.
- Standard of living
- Amount of debts/Liabilities
By taking into consideration above factors one can make insurance planning a breeze.
Investment planning is third component of financial planning. This requires a lot of research and dedication. Before making any investments you need to assess some factors which are (but not limited to):
- Risk Capacity– Determining risk capacity for investment helps you choose right products. For risk averse investors debt securities are suitable while investors with high risk capacity can invests in equity.
- Investment Horizon: Investment horizon or time period for investment can help a lot in getting higher returns. Longer the period of investment higher will be the returns while risks gets lower. Young investors have longer time horizon available.
- Asset Allocation: Asset allocation is a technique to balance risk and diversify investment by making a portfolio of different asset classes like debts, equity, real estate and liquid assets.
- Diversification: Diversification is an extension of asset allocation. It’s a method which helps to minimize risk and earn high returns.
With the above factors as a guideline, one should also consider the life stages as one important aspect.
See you later!