Financial planning is a subject of great importance and requires one to be vigilant of the economic and financial circumstances that surround him.

Pablo Picasso very aptly said, “Our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”

Financial planning is a subject of great importance and requires one to be vigilant of the economic and financial circumstances that surround him. Financial planning is the process of considering multiple variables all together to estimate and plan for all future financial goals.

To further help you with this complex task, we have listed below a few Do’s and Don’ts that will go a long way towards preparing an efficient and effective financial plan.

Do consider Inflation

Inflation is the factor that eats away the purchasing power of money, slowly and gradually. As on date, Rs 100 can buy what Rs 50 could have bought a few years back. That’s the simplest way to understand inflation. Inflation currently sits at around 7.34 percent, which means that the basket of goods is 7.34 percent dearer than before.

While making a financial plan, one should take into consideration the compounding effect of inflation on the net savings that is available for investment.

In case someone misses to consider the effect of inflation, the person will most likely understate his expenses and end up with an overstated portfolio. Specifically, this is applicable in the case of future goals, viz. kids education, home etc.

Also, it is pertinent here to note that, we should calculate the amount needed on the date of the goal and not today. In other words, we should consider the inflation-adjusted future cost of the goal and not the present value.

Do create emergency funds

We must understand that change is permanent. Change can create both positive and negative situations.

While making a financial plan, a person should set aside a sum of money which can cover expenses for a period of 6 to 12 months (depending on the comfort of the person). Such an emergency fund would ensure that the person and the family are prepared, both mentally and financially, for any unforeseen event like a job loss, sudden medical emergencies etc.

However, the emergency fund should not be invested in any long-term investments and should be deployed only in liquid assets, viz. overnight funds, liquid funds, bank deposits, etc., so that one can tap into it immediately.

Do not under insure yourself

Insurance is an essential product for both a person and his/her family. Insurance, out of many benefits, saves one from enormous medical bills (medical insurance) or helps the family of the deceased to maintain their lifestyle (life insurance). There are a variety of Insurance products (health, car, home, life, etc.) available in the market and one needs to be discerning while choosing the right one.

One must ensure that an appropriate value of insurance is opted for and human life value (‘HLV’) is an essential concept in determining the same. The amount that is required today which will compensate for the loss in income/replacement of expense of the bread earner/his or her family, due to loss of life or disability, is known as HLV. Life insurance should always be at par with HLV.

Further, while selecting an insurance product, the focus should not be solely on the insurance premium but also on the claim settlement ratio, additional features, etc. A good insurance policy will reduce hassles at the time of settlement, which is an essential requirement of the policyholder.

Do not ignore succession planning

Financial planning does not stop until the end of a person's life but continues for the life of his/her spouse and the next generation (in some cases, a few generations). Essentially it undertakes the planning for the division and transfer of assets of a person, at the time of his/her death, to beneficiaries.

Preparation of a will is highly recommended to avoid the possibility of family disputes. Also, it ensures that the assets are apportioned in an intended manner and to not get frozen in legal rigmarole.

The nomination is another aspect that is critical and each investor should ensure all their assets have necessary nomination (wherever applicable), joint holders, or necessary mention in the will. This helps the smooth and immediate transfer of assets (especially financial) to the dependants/nominee without hassles and unnecessary costs of probate/succession certificates that could be required in case of no nomination.

Do not invest in equity for short term goals

Equity is a volatile asset class and difficult to predict in short periods i.e. less than 3 years. However, research shows that beyond 3 years and more so after 5 years, the chances of equity generating positive and reasonable returns becomes high.

Any allocation into equities, for short term goals, puts the investor at risk of having to sell in desperation or panic, which might lead to his financial plan going awry. This also renders him into not meeting certain goals for which the investment was intended.

Do cover tax planning

In financial planning, tax is an additional income-linked cost and will reduce the overall cash inflows. Taxes affect all the facets of investing, be it redemption, intermediate interest/ dividends, or allocation (investment).

A good financial plan must ensure that the tax structure of the person should be optimized in a way that the cash outflow by way of tax is minimized. For the same, the person should first opt between the newly introduced regime or the existing regime of taxation.

Although it differs on a case-to-case basis, we are inclined towards opting for the existing regime which helps the person in saving taxes through investments in avenues that allow for tax deductions and it also helps to inculcate the habit of saving.

However, the investor should maximize his tax deductions through suitable investments. This includes investments made under section 80C of the Income-tax Act (which includes ELSS, Provident fund, Sukanya Samriddhi Scheme, kids’ tuition fee, principal payment of housing loan, etc), under section 80CCD (National Pension Scheme), under Section 80D (Health Insurance of self and family), etc.

Vivek Banka, Founding Member, GoalTeller

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