Financial Planning: Income, Savings, and Investments

• Financial planning ensures adequate resources to meet current and future needs.
• Regular income can come from salary, business, or investments.
• Savings should cover periods of low or no income, such as retirement.
• Savings go towards creating assets to meet future needs.
• Financial planning streamlines income, expenses, assets, and liabilities.

Understand the Concept of Financial Planning (Example using Vinod)

• Vinod, 40, earns Rs.2 lakhs monthly and saves Rs.40,000 after expenses.
• His investments include tax savings, bank deposits, bonds, and mutual funds.
• Financial planning can help Vinod address if he has adequate emergency funds.
• It can also help determine if he has enough insurance to cover his family's needs.
• It helps to ensure the family has adequate health insurance.
• Financial planning assists in identifying and funding specific future expenses.
• It determines the required investment corpus size for future expenses.
• It checks if Vinod's savings are sufficient to create the required corpus.
• It explores options to cut expenses or increase income to meet savings goals.
• Financial planning uses existing wealth efficiently to meet needs.
• It identifies suitable investments to build the required corpus.
• It assesses Vinod's risk tolerance and manages investment risks.
• It ensures savings and investments align with changes in income, expenses, and future needs.
• It assesses the current situation, identifies current and future needs, and determines savings required.

Need for Financial Planning

• Financial planning enables better management of personal finances.
• It identifies key goals and creates an action plan.
• It considers the current financial position and evaluates future needs.
• It establishes a process to fund the needs and reviews progress.
• Financial planning bridges the gap between available financial products and client needs.
• Investment advisers use their expertise to match products with client needs.

Role of the Financial Planner

• The financial planner's role is significant because needs vary among clients.
• They recognize the exact needs and goals of individuals and families.
• They focus efforts on helping their clients achieve these goals.
• Personal financial management requires time and attention.
• Financial planners focus on income, expenses, future goals, assets, and liabilities.
• Individuals often lack time for detailed financial activities.
• Financial planners provide expertise and skill in setting financial goals.
• Every financial goal requires finding suitable products and asset allocation.
• They assist in selecting investment products, service providers, and insurance.
• They evaluate borrowing options using extensive research.
• They analyze products to enable efficient choices from competing products.
• Asset allocation is a technical approach requiring expertise.
• They align investments with financial goals and monitor performance.
• They modify asset weights in the portfolio periodically.
• Financial planning is a dynamic process, requiring constant attention.
• Financial planners match market changes with client needs and status.

How Financial Planning Differs from Financial Advisory Services

• Financial planning follows a specific process with the client's overall needs at the core.
• Financial advisory services often address specific needs in isolation.
• Financial planning is comprehensive, covering all aspects of a client's financial requirements.
• Financial advisory services often focus on a small part of the total needs.
• Goal setting is central to financial planning.
• Financial planning ensures all financial activities align and avoid cross-purposes.
• Financial planning ensures asset allocation meets risk tolerance.
• A financial plan monitors the situation and takes actions to stay on track.
• Financial planning selects what is right for an individual, considering returns and risks.
• Financial planning requires continuity, unlike short-term financial advisory.

Scope of Financial Planning

• Financial planning enables efficient management of personal finances.
• It aligns with short and long-term objectives and includes several elements.

Personal Financial Analysis

• Goal setting needs prioritization.
• Goals provide a clear target in the financial planning process.
• Goals should be specific, measurable, realistic, and time-bound (SMART).
• Once goals are set, they need to be ranked by priority.
• Prioritize important goals, such as education and retirement.
• Address short-term needs without compromising long-term goals.
• Prioritize financial health, addressing debts such as credit card balances.
• Focus on important goals for financial success.
• Retirement and children's education are important financial goals.
• Long-term goals often receive lower priority due to their distant nature.
• Short-term goals often receive higher priority.
• Deferring savings for long-term goals affects the final corpus.
• Relying on provident fund may not be adequate for comfortable retirement, plan early.
• Investment advisers should demonstrate inadequacy of current savings for retirement.
• Ensure clients save enough during earning years for retired life.
• The financial situation may not allow for all financial goals.
• Some financial goals may be deferred to ensure critical goals are met.
• Adapt the timetable to get the finances in order, even pushing timelines.
• Review annual expenses where necessary.
• Other personal goals need to be prioritized.

Cash Flow Management and Budgeting

• Income and expenses must be planned to ensure savings and investments.
• Ensure cash inflows and outflows match to avoid cash flow problems.
• Spending less than earnings can still lead to cash flow issues like delay of income.
• Short-term borrowings can be costly due to interest rates.
• A budget with cash flow dates helps avoid cash flow problems.
• A budget lists inflows and outflows with timing.
• A monthly budget helps manage income properly and ensures adequate savings.
• Making your own budget is key.

Insurance Planning

• Insurance manages unexpected expenses that cause financial imbalance.
• Insurance is a risk transfer mechanism, paying benefits for a small premium.
• Life insurance covers temporary or permanent loss of income due to disability or death.
• Health and accident insurance covers health care expenses.
• General insurance covers loss and damage to property.
• Insurance planning involves estimating losses and choosing the right products.

Debt Management and Counselling

• Advisers help plan liabilities efficiently, including those for homes, cars, and credit cards.
• Borrowing uses tomorrow's income today.
• Borrowing impacts the ability to save in the future.
• Evaluate assets or expenses funded by borrowings.
• Advisers advise households on financing assets and credit scores.
• Excessive borrowing can lead to a debt trap.
• Borrowers need counselling to get out of debt and advisors help to do so.
• Sometimes, assets may have to be liquidated to pay off debts.

Investment Planning and Asset Allocation

• Investment planning funds financial goals given their time and purpose.
• Investment planning estimates savings ability and chooses right assets.
• Goals can be short-term (car, holiday, family ceremony) or long-term (education, retirement).
• Investment advisers design a plan to save for goals and provide asset allocation.
• Focus is on asset allocation to deliver returns within the investor's risk profile.
• Advisers construct portfolios considering goals, savings, returns, and risk tolerance.

Tax Planning

• Income is subject to tax, impacting savings and investment returns.
• Advisers assess the impact of taxes and advise on saving and investment options.
• Consider post-tax returns and holding periods.
• Taxability of investment income varies.
• The taxability of gains differs based on the holding period.
• Advisers should bring in these aspects while constructing a plan.
• Tax efficiency should not be the basis of investment decisions, but more guidance and awareness.

Retirement Planning

• Retirement planning is essential, often ignored until it's too late.
• Understand the time value of money and inflation.
• Compounding benefits long-term savings.
• Select financial products best suited to long-term goals and risk tolerance.
• Rebalance the portfolio to less volatile assets in the pre-retirement stage.
• Focus on expenses, income from investments, and strategies to meet shortfalls.
• Consider the taxability of different income sources.
• Monitor and rebalance the retirement portfolio.
• Investment advisers design and execute retirement plans.

Estate Planning

• Wealth is passed on across generations involving legal aspects and documentation.
• Estate planning focuses on transferring wealth to heirs and charities.
• Use tools and structures in estate planning.
• Exercising choices during lifetime helps reduce burdens.
• Investment advisers help households make choices and complete legal processes.

Concept of Assets, Liabilities, and Net Worth

• Income is the basis of all financial activities.
• It is used to meet current and future expenses.
• Portion of the income earmarked for future is called savings.
• The adequacy of income is relative to expenses.
• Managing expenses within income leads to financial stability.
• Loans are liabilities and come at a cost.
• Savings of a household are put to work by investing in assets.
• Assets are classified as physical and financial assets.
• Assets appreciate or depreciate and have a resale value.
• Investors hold assets for returns.
• Returns classify assets as growth-oriented, income-oriented, or a combination.
• Physical assets are tangible like real estate and precious metals.
• They have intrinsic value impacted by supply and demand.
• They are natural hedges against inflation.
• They are growth investments bought for appreciation.
• Drawbacks of physical assets are illiquidity and limited regulation.
• They need investment skills and large ticket investments.
• Advisers should guide investors and avoid confusing consumption and investment.
• Financial assets represent a claim on benefits.
• Bank deposits give periodic interest and repayment of principal.
• Stocks provide dividends and appreciation.
• Financial assets are structured as growth-oriented or income-oriented.
• They are standardized and controlled by regulations.
• They vary on liquidity features.
• Standardization makes comparisons more efficient.
• Investments can be made in small amounts.
• Assets represent the investments made by the investor.
• Financial strength depends on how assets are acquired.
• Loans create liability and impose future obligations.
• Loans for appreciating assets add to long-term wealth.
• Leveraging is risky due to volatility.
• Assets acquired with savings add to financial strength.
• Net worth is calculated as assets minus liabilities.
• Greater net worth signifies better financial strength.
• Track progress to improve the financial situation.

Financial Planning Process

• Follow a process when providing financial planning advice.
• Acquire client data to make decisions.
• Define a relationship between planner and client.
• Six steps is a typical process for financial planning.
• Establish the client-planner relationship with defined work scope.
• Gather client data, including goals and future needs.
• Future needs define financial goals.
• Analyze financial status with income, expenses, assets, and liabilities.
• Savings determine investment vehicle selection.
• Develop and present financial planning recommendations.
• Augment income and savings plans.
• Implement financial planning recommendations.
• Execute the plan.
• Monitor financial planning recommendations and their performance.

Financial Advisory and Execution

• Investment advisers engage with clients at various levels.
• Regulatory action occurs in defining intermediaries.
• Conflicts of interest arise when advisors sell products and earn a commission.
• Product sellers may prioritize commissions over client needs.
• Mis-selling leads to unsuitable products.
• Those providing advice should earn revenue from clients.
• Distributors execute transactions and earn commissions.
• Financial advisers must register and earn from clients, not producers.
• Specific exemptions provided for those that offer advice incidental to a product they may sell.

Business Models for Financial Advisory

• Fee-only planners earn income from financial planning.
• They engage closely with clients offering advice on personal finance.
• Fees can vary, including one-time fees, ongoing review fees, and asset-based fees.
• Other variations include referral fees for experts.
• and fees based on assessment and analysis.
• Fee-only advisors often refer clients for execution to avoid conflicts of interest.
• Investment advisers cannot do both advisory and distribution.
• Advisory from distribution must be arm's-length.
• Individual investment advisers can provide execution services.

Execution-Only Services

• Execution only services distribute financial products but don't charge for advice.
• These distribution and investment platforms generate income from selling products.
• They execute transactions advised by others.
• They distribute products subject to multiple regulators apart from SEBI.
• Firms organize execution-only services into an aggregation model.
• Companies shortlist products based on selection criteria.
• They may have a central advisory team and products are selected through analytical data.
• Associates offer the products, share revenue and support.
• Aggregators offer support services to associates.

Wraps and Platforms

• Wraps and platforms utilize technology-based solutions.
• Offer standardized execution.
• Clients or advisers associate for execution.
• Provide models portfolio that investors can buy.
• Provide standardized model portfolios as choices.
• Clients can view portfolio performance and advisers can review and manage client profiles.
• Wraps and platforms may charge client a fee and share with advisor.
• They enable advisers to access clients via platform for financial advice.