Key Areas in which Financial Planning can be done…

Financial planning is all about milestones. You first identify the key milestones. Then you plan for these milestones (both in terms of returns and in terms of risk). Eventually, you need to monitor these milestones at regular intervals so that corrective action can be taken. These milestones are also called as various life events which have major financial and risk implications. Typically, your key milestones are specifically identified and then unknown goals are clustered into a generic category. Let us look at 6 of the key areas in which financial planning can be done…

  1. Retirement planning

This is probably the most important milestone that any financial plan needs to prepare for. There are a few basic reasons why this milestone becomes very important. Firstly, when you plan for your retirement you need to plan for your wealth, your spending power and your annuity earnings. You also need to practically admit that at that stage your ability to take on additional risk is limited and therefore there should be an element of security and stability to your retirement component. Above all, you also need to factor that after your retire, your income stops but your expenses do not stop. Better healthcare means that most people will live much longer than our predecessors and that needs to be provided for.

  1. College Planning

The cost of education has been going up sharply in the last few years. Today, a good post graduation course in a reputed university in India will cost you nothing less than Rs.40-50 lakhs. If you plan to send your child abroad to a reputed university then the cost will be at least 3 times that. Then there are incidentals and travel cost and the overall cost can add up to a princely sum. There are a few basic things you need to remember. Firstly, you need to start early and give a good allocation to risk equities as you need your money to work really hard for you. Secondly, insurance cover is a very important part of college planning. You do not want to start off planning with a bang and then realize that an unfortunate event has put paid to your child’s dreams. There must be adequate insurance built into the college plan so that even in your absence things can go on smoothly. 

  1. Mortgage Planning…

In terms of size and complexity, mortgage planning is not as complex as retirement planning or college planning. When you are buying a house on mortgage, you need to put a basic upfront margin. For example, if you are planning to buy an apartment worth Rs.1 crore after 3 years and your margin required is Rs.10 lakhs, and then you need to plan for that liquidity. Of course, being a 3 year plan, you cannot afford to take on too much of risk and hence your portfolio mix be more tilted towards liquidity and stability of returns. The purpose here is not to make money work for you but to ensure that inflation cost is covered and liquidity is available as and when you require it.

  1. Contingency Planning…

One may often wonder about the need for a separate contingency plan when you already have an element of contingency covered in each of the categories above. Contingency, here is slightly different. Let us consider a few examples. You may decide in the middle of your career to resign your job and invest your time and money in a start-up. It is good to chase your dreams but it is also necessary to have a practical back-up plan to support you during these uncertain times. Alternatively, you may meet with an accident that partially incapacitates you are reduces your productivity substantially. These are the kinds of risks that cannot be really envisaged and provided for. That is where contingency planning comes in handy.

  1. Lifestyle Planning…

This is not exactly as central as retirement planning or college planning or contingency planning. In fact, lifestyle planning is something you can always dispense with. The question is why should you? You do spend a lifetime trying to cater to the needs of your family. You are surely entitled to your own dreams too. There may be the Maldives beach vacation that you always craved for. Additionally, there could be the home interiors you always wanted to spend on but could never bring yourself to do. All these come under lifestyle planning. If you have decided to have a good life after retirement then as well plan systematically for it.

  1. Posterity planning…

Posterity planning is normally an aspect that most planners tend to ignore. Actually, it does deserve a lot of attention. When you work all your life to create wealth, you must take care how the wealth is utilized when you are not around. Firstly, create a unique safety net for your spouse. You must also register a will and specifically lay down how much of your liquidity and investments will go to charity and how much will be distributed among your children. If the methodology and ground rules are documented and registered, there will be no room for confusion. Also, in case of physical assets like land, property and apartments, you will needs to specify how the asset in its existing form or post liquidation will be shared by your children. Above all, if you are also bequeathing a running business, your succession plan needs to clearly lay down the process, the roles and the outcomes.

The above represent the major areas in which financial planning is done. There are miscellaneous areas that are clustered under a single head. But your primary focus needs to be on your really long term goals.

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