Financial Planning

Financial Planning is a process by which one can ascertain his financial strength, plan his finances in such a way that he meets his current financial commitments as well as getting ready to his future financial goals at various points in time in future.

The biggest challenge the present generation in India face today is inflation which can keep many out of reach or difficult to meet their Health Care and Retirement.

Financial Planning process can help them to achieve their life goals comfortably.

Your Goals are your dreams you want to accomplish in your life time. They can be classified in to Short term goals and Long term goals

Short term Goals – Down payment for a new house, purchase a car, Plan for holiday abroad, sister’s marriage like that anything for which you need money within 5 years from now

Long term Goal – To purchase a new house, Children’s education, Daughter’s marriage, your retirement provision like that anything that comes after 5 years.

I have mentioned a few common goals of the people. Please remove the irrelevant one and add the relevant to your family structure and mention the amount required as if you were to make the commitment today. We shall arrive at the probable sum that would be required by the time the need arises.

Assets shall be classified into

• Liquid Assets – Cash in hand, Cash in SB A/c, FD less than 1 year and so on
• Investment Assets – FD more than 1 year, MF, Shares, Insurance Etc.,
• Personal Assets – House, Car, Furniture and fixtures and any other physical assets

Liabilities shall be classified in to Long term liabilities and short term liabilities.

• Long term liabilities like Housing loan, Car loan, any other liability which you need more than one year to clear.
• Short term liabilities like Credit card balance and other payments that you need to clear immediately or within one year

The difference between the assets and liabilities is known as Net worth. This numeric value is the one which talks about the financial strength of an individual. The real growth of an individual is based on the growth in the net worth of an individual year on year.

We shall discuss how to increase the net worth when we meet in person.

Just as we assess our physical fitness by undertaking various tests at a laboratory like Blood Sugar, Lipid Profile, ECG and so on, we shall also assess our financial fitness by calculating various ratios like Liquidity Ratio, Debt Ratio, Savings Ratio, Solvency Ratio and so on based on our assets, liabilities, income, savings, investments, expenses Etc.,

Liquidity Ratio

This ratio indicates your ability to meet monthly expenses by utilizing the liquid assets at times of emergency. It indicates the number of months the liquid assets will cover your monthly expenses and investment /other financial commitments.

Liquidity Ratio = Liquid Assets / Monthly Expenses and Commitments

It is suggested to maintain the liquidity ratio between 3 and 6

Debt to Income Ratio

This ratio indicates the percentage of your income that goes towards servicing debts.

Debt to Income Ratio = Amount of Monthly Debt Repayments / Monthly Income minus taxes

At any point in time one should not have the debt ratio more than 35% and with housing loan it can go up to 40%. This is healthy trend

Surplus to Income Ratio

This ratio indicates the percentage of net income that can be utilized for savings and investments for meeting your future financial goals.

Surplus to Income Ratio = Amount of Monthly or annual Surplus / Monthly or annual Income

This indicates what percentage of your income you still have as surplus to make investments to meet your future life goals

This is the basic exercise one has to do before making any commitment whether it is towards any investment or savings or Insurance or any purchase with a loan. Every family will have 3 types of expenses. They are discussed below.

Fixed expenses – could be the constant amount that you spend every month /every year like Housing EMI, Car Loan EMI, Insurance Premium Property tax / Children’s education related expenses Etc.,

Variable expenses – could be amounts that you spend every month / year that varies like expenses on food, groceries, clothing, holiday, Etc.,

Discretionary expenses – are those which you can spend at your convenience. This is not compulsory to make like entertainment, gifts and so on.

This income and expenses statement is important in financial planning process as this only will give you the amount of surplus you can generate to invest to meet your goals. If you do not find any surplus, please have a look at your expenses and reduce the unwanted expenses to create some surplus for investment. If you cannot reduce the expenses, the only way out to you to meet your future goals is to increase your income.