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Personal Financial Planning Aniruddha Bose Director & Business Head FinEdge Advisory Pvt. Ltd. www.finedge.in
Why? • Peace of mind • Compounding Effect – long term returns • Right product for right reason • De-risking • Balancing short term and long term • Goal achievement • Money saving (loans, taxes, etc) • Preparedness for emergencies • Wealth creation & improved lifestyle
Financial Planning leads to “sustainable wealth creation” TRUE, MONEY CAN’T BUY HAPPINESS… But it’s so much more comfortable to cry in a BMW than on a bicycle!
Who needs it? • Age 35 to 45 • Planning for your child’s education • Creating an emergency fund • Starting a retirement plan • Increasing your standard of living • Age 45 to 55 • Planning for your child’s marriage • Prepaying loans • Making provisions for medical expenses • Accelerating your retirement savings • Age 55 and above • Consolidating your investments & preparing for retirement • Increasing your provisions for medical expenses • Allocating funds for social & leisure purposes
But then again… … so is losing weight! Weight loss simplified – Eat Less, Exercise More! = “Simple” does not always equal “Easy!
FP Concept #1: Risk Profiling • What is Risk Profile & why is it relevant from an FP standpoint? • Two components: “Risk Tolerance” and “Risk Appetite”… What’s the difference? • Why is effective risk profiling generally considered the most important aspect of a Financial Plan? • How does Risk Profile influence investment returns and the Financial Plan of an individual?
FP Concept #2: KYP “Know your Priorities”! Vacations New car New house Loan Prepayment Increased Living Standard Children’s Education Retirement fund Emergency fund
FP Concept #3:The two “Magic Ratios” • Reserve – Surplus ratio: the percentage of your monthly inflow that you do not spend each month • Savings – Surplus ratio: the percentage of the above monthly surplus that you save/invest systematically and in a disciplined manner
Why is financial planning difficult? (Exercise… Volunteer required!) • Would you rather receive Rs. 100,000 in a year or Rs. 110,000 in 13 months? • Would you prefer Rs. 100,000 today – cash on the table – or Rs. 110,000 in a month? • The introduction of ‘now’ causes us to make inconsistent decisions – this phenomenon is called ‘Hyperbolic Discounting’ • Immediacy magnetizes us! • The capacity for delayed gratification is a reliable indicator for future success (Mischel, “The Marshmallow Experiment”, 1960). • The instinct to “defer” savings for “later” – instant gratification • Patience & discipline are indeed virtues!
FP Concept #4: Hyberbolic Discounting
FP Concept #5: Compounding • Would you care too much whether the rate of return on your savings is 7% or 10%? • Do you stop to consider how the length of saving really affects the goal planning dynamic? • The fact is that if you did, it would make a big difference to your wealth as time progresses • The benefit from compounding arises primarily from the fact that income keeps growing the principal to generate higher absolute returns each year • Higher rates of return or longer investment time periods increase the principal amount in geometric proportions
Compound Interest vs Simple Interest An illustrative exercise
Exercise: Goal Planning Income – Expenses = Savings Change This To Income – Savings = Expenses Source : Rich Dad Poor Dad
FP Concept #8: Delay Cost • Would you care too much whether you start saving today or a year later? • The cost of delaying the start of a savings plan can be more than you think! • What do you feel is the cost of delaying the start of your retirement savings of Rs. 5000 per month… by one year? • Answer: Rs. 46.6 Lacs! • This is an example of “Delay Cost”
What does a Financial Planner do? • First and Foremost: Acquires a base of clients… i.eSALES • Spends time asking questions and understanding a client’s current financial position • Understands and prioritizes client’s goals/ needs and plans how to best allocate their cash flows • Sets realistic expectations with client and helps puts finances in perspective • Helps client plan out and manage various financial risks • Facilitates investments • Regularly updates and discusses portfolio progress • Manages client relationship effectively to ensure high degree of loyalty and referrals • Revises the financial plan as and when required • Plans taxes and helps clients save taxes • Rebalances portfolio if required • Acts as a trusted Advisor and confidante – “one stop shop” for all financial advice
www.finedge.in servicedesk@finedge.in 011-45072800
