Personal Financial Planning, Peace, and Independence

1. Personal Financial Planning

3. Why invest? • Most of us in private job with no job security • Inflation rate doesn’t match the increment rate • To have regular income after retirement • Taking care of children’s needs • Investments must, hence, be foremost in the order of priority barring any financial emergency

4. Understanding cash flow • Preparing a Cash Flow statement of income and expenses • Helps to focus or curtail unwanted expenses • “The secret to getting rich is to pay yourself first (i.e., invest for your future), before you pay others (utilities, shops, etc)” – Kiyosaki (author of Rich Dad Poor Dad)

5. Example of a cash flow statement Total (savings) +Rs 10,000.00

6. Where to Invest? • Different avenues of investment • Stocks, mutual funds, government bonds, post office schemes, bank fixed deposits, commodities, gold, real estate, art, etc.

7. Inflation • Inflation is the rate at which the cost of goods and services rises • As inflation goes up, purchasing power decreases • Three years ago, you could have bought a three bedroom apartment in a premium suburb of Mumbai for Rs 75 lakh; today, the same amount will probably get you a one bedroom apartment in the same locality • Inflation reduces the value of money

8. Impact of Inflation on financial goals • Over the years, you have to spend more in order to maintain your standard of living • A management course that costs Rs 15 lakh today will cost around Rs 41 lakh (at 7 per cent inflation), 15 years hence when your child is ready for it!

9. Real return • To fight inflation, invest in a product which gives not just a higher rate of interest than inflation, but also leaves with a substantial amount that enables to meet the goals • Real return = stated return – Inflation • Investing in an investment product provides 10% return then actual return is 3% (10 – 7) • If we consider 30% tax on return then the return is almost nil • Consider investing in equities, real estate and commodities which are insulated from inflation

10. Accelerate earnings: The concept of reinvestment • Are you investing the interest earned? • The simple act of reinvesting the interest earned means you earn interest on the interest and make more money • Suppose you invested a sum of Rs 2 lakh in the Post Office Monthly Income Scheme (MIS) @ 8 per cent per annum. Every month, a sum of Rs 1,333 will be deposited into your savings account, for a period of 6 years. “Where should i invest such a small amount?”, you may ask. Well, the Department of Posts has a Recurring Deposit (RD) scheme, where you can invest as little as Rs 10 each month @ 8 per cent per annum. Your MIS interest over 5 years would be Rs 80,000. Reinvesting would, hence, earn you an additional interest of 8 per cent on the Rs 80,000, without much effort. 

11. Accelerate earnings: The concept of reinvestment • The following table demonstrates the value of Rs 10,000 invested at 7 per cent over a period of 35 years, assuming that the interest is reinvested.

12. Compounding • “Compounding the greatest mathematical discovery ever” – Albert Einstein • Reinvest your income from interest on investments, your capital or principal that is invested goes up • Another factor that influences compounding is the frequency of compounding • Compounding is such a powerful financial tool that if you invest and reinvest your savings and profits regularly, your investment portfolio will steadily outgrow your salary! 

13. Financial Planning • Financial planning is the process of developing a personal roadmap for your financial well being • The output of the financial planning process is a personal financial plan that tells you how to use your money to achieve your goals, keeping in mind inflation, real returns, and taxes • Process of systematically planning your finances towards achieving your short-term and long-term life goals

14. Benefits • Helps monitor cash flows and reduces unnecessary expenditure • Enables maintenance of an optimum balance between income and expenses • Helps boost savings and create wealth • Helps reduce tax liability • Maximizes returns from investments • Creates wealth and ensures better wealth management to achieve life goals • Financially secures retirement life • Reviews insurance needs and therefore also ensures that dependents are financially secure in the unfortunate event of death or disability • Lastly, it also ensures that a will is made

15. Financial Planning Process • Identify your current financial situation • Identify your goals  • Identify financial gaps • Prepare your personal financial plan • Implement your financial plan  • Periodically review your plan

16. Tips for Financial Planning • Start now. Even if you are in your mid thirties or forties, it’s better to start now than dawdle for another five years. Every day counts • Be honest with yourself. Seek help when needed. • Set sensible, measurable goals for yourself. Be realistic in your expectations of the results of financial planning • Review your plan and financial situation periodically and adjust as needed • Always review the performance of your investments; pull out if needed and reinvest the money elsewhere. • Be hands-on. It’s your money and no one else will do your work for you

17. Types of Investment • Stocks • Mutual funds • Government bonds • Post office schemes • Public Provident Fund • Bank fixed deposits • Company fixed deposits • Commodities • Gold • Real estate • Art Why Insurance is not categorized as Investment?

18. Stocks • Risk • High • Returns • High • Tax impact • Capital gains tax will be calculated based on your gain • Requirements • Demat account to be opened

19. Mutual Funds • Risk • High to Low based on the type of funds chosen • Returns • Medium • Tax impact • Requirements • KYC process to be followed • Investment type • Fixed amount more than Rs. 1000 or SIP

20. Government Bonds • Risk • Low • Returns • Low • Tax impact • Tax free based on type of bonds • Requirements • Demat account or buy in paper form • Investment type • Fixed amount more than Rs. 5000 as one time investment with specific period

21. Post Office Savings Scheme (POSS) • Risk • Nil • Returns • Low • Tax impact • Interest is taxable • Requirements • None • Investment type • National Savings Certificates (NSC), National Savings Scheme (NSS), Kisan Vikas Patra, Monthly Income Scheme and Recurring Deposit Scheme

22. Public Provident Fund (PPF) • Risk • Nil but poor liquidity • Returns • Medium • Tax impact • Tax free • Requirements • Should be opened on individual’s name • Maximum savings can’t exceed 70000 per year • Can remit in a single installment or in max of 12 installments • Can avail loan • Can liquidate only after 15 years

23. Bank FDs • Risk • Low • Returns • Medium • Tax impact • Interest is taxable • Interest rate will vary based on RBI’s monetary policy

24. Company FDs • Risk • Medium • Returns • Medium • Tax impact • Interest is taxable • Interest rate is high when compared with Banks but risk is high • Fixed term

25. Insurance • Provides financial protection to dependants • Doesn’t make sense if there are no dependants • Finalizing Life Cover • Life cover should be 10 times your annual income • Consider other debts, pre-existing medical complication, etc. • Fund performance • In case of ULIP, evaluate the performance of the company in the past years • Types of Insurance Products • Term Insurance • Endowment Insurance Plans • ULIP • Pension Plans • Money-Back Plan

26. Best Practices in investing • Diversify your portfolio • Constantly monitor your investment and try to correct bad performing assets • Use online portfolio tools to have consolidated view of your investments • Don’t save what is left after spending but spend what is left after saving • Add nominee in all your investments • Constantly review your financial goals with the investments you have made

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