FINANCIAL PLANNER

Financial Planning Inflation Future cost of important goals would be much higher than present Why Financial Planning? Lack of planning is the biggest cause of financial stress Traditional investment not as attractive Changing Life Stage & Life Style Needs Vacation, Gizmos, Car, House, Children…

Impact of Inflation ItemCost today Cost in 1996 % Increase Projected cost in kilo potatoRs 18Rs 5260%Rs 65 1 litre petrolRs 49Rs 20145%Rs 120 Movie ticketRs 150Rs 25500%Rs 900 Inflation hasn’t ruined everything. A coin can still be used as a screwdriver!

Debt Returns – then and now 1985 : 14% - 5 years for money to double 1995 : 10% years for money to double 2006: 6.5% - 11 years for money to double ? Rates for 5 year term deposits

Equity – for long-term returns WORST RETURN BEST RETURN 1 YEAR HOLDING PERIOD +90% -26% WORST RETURN BEST RETURN 5 YEAR HOLDING PERIOD +44% -1% BEST RETURN 10 YEAR HOLDING PERIOD +32% +12% WORST RETURN

The power of compounding The longer the period of investing, the more you accumulate Makes your money work for you from an early age Invest Rs 25,000/ year for 15 years from age Assume return of 8% p.a. Invest Rs 10,000/ year for 30 years from age 25-55

The Financial Planning Journey 1. Assessing your current situation Savings & Liquidity Budgeting to save Investing excess cash 2. Goal setting Identifying & prioritizing goals Quantifying monetary requirement 3. Making the right investment Risk profile Asset allocation

Assessing your current situation Goal-setting Making the right investment

Current situation Purpose : To Asses persons current financial position Points to consider True details of clients current scenario are required to access his situation and rightly guide him for his financial goals. Cash and money in ATM account forms part of saving account. Insurance amount is the present surrender value (approax the amount paid as premium till date) Value of farm/property which can be liquidated at time of need should be considered

Current situation Points to consider (contd.) Do not use the value of house being currently used for present residence Use income after tax or the amount which one gets as paycheck from the company.

Savings rate Savings rate = Savings/Income Bare minimum :10% Good : % Very Good : % Excellent :above 50% Exercise: How much are YOU saving ? Money was invented so we could know exactly how much we owe. - Cullen Hightower

Liquidity or Contingency cash Liquidity ratio = Cash in savings ac/Monthly expenses Ideal :3-6 Inadequate :less than 3 Excess cash :more than 6 Exercise: What is your liquidity?

Assessing your current situation Goal-setting Making the right investment

Life Worksheet Purpose : To Asses life cover needed by an individual. It helps to get a general sense of how much life insurance one needs to protect his family if something was to happen to him. Points to consider The Capital needed tells the amount of corpus needed to provide current level of expenditure. Immediate Expenses takes account of present liabilities of the person.

Life Worksheet Points to consider (contd.) Future Expenses takes care to create corpus in order to meet future financial expenses for important life stages of his/her children. In existing life insurance use the value of existing life cover the person has.

Planning for Future of Children You have the option to do a simplistic or detailed child planning for the client. A detailed child planning allows to plan for education expenditure required at various stages of education like 10 th Class,12 th Class etc. It gives option to plan for five such different stages. Points to Consider Entering name of the child is important. Planning would not work if you do not enter the name of the child. Either use life worksheet for planning for children or use detailed child planning worksheet, do not enter data in both. Recommended inflation rate for education expense of a person is 6% to 8%. Recommended inflation rate for wedding expense of a person is 7% to 10%

Goal Setting Purpose : To aid in planning for finances to meet important goals of one’s life. Points to consider Emergency fund planning helps in having a emergency corpus to meet any emergency coming in life. This is needed if a person’s liquidity ratio is less than 3. Event Planning: It enables to have a financial plan to Accomplish an event like buying a house, buying a car etc. in life. To reach expected CARE take current annual expenses, reduce expense on children and leisure and add the increase in medical and gift expenses.

Goal Setting Points to consider (contd.) For retirement planning recommended inflation rate is between 6% to 8 % For PPF the expected growth rate to be taken is 8% Health Assurance: Incidental expenses refer to traveling and other expenses which may happen because of critical illness of person. Care should be taken to not to commit same existing investments for different goals of life.

Assessing your current situation Goal-setting Making the right investment

Risk Profiler An aid to understand the risk appetite of an individual and recommend an Asset allocation plan to meet various goals of life. It helps to determine ideal debt-equity ratio for various investment goals of individual life. Points to consider Explain clearly all options to the client while getting his/her risk profile On Asset allocation sheet put the asset allocation values as acceptable to the client for various goals of life.

Assessing your Risk Appetite Exercise : Choose any one goal from the ones that you identified. Take risk-profiling test. Calculate total score. Suggested Asset Mix in line with your risk appetite : Score < 10 :Follow a Cautious approach, Take % Debt Score :Follow a Conservative approach, Take 80% Debt, 20% Equity Score :Follow a Balanced approach, Take 50% Debt, 50% Equity Score :Follow a Growth approach, Take 30% Debt, 70% Equity Score > 24 :Follow an Aggressive Growth approach, Take 10% Debt, 90% Equity. Important: Discuss your risk profile with a good financial planner before you accept or deviate from the recommendations above.

Investment Plan It gives a brief summary of various investments to be made by the client at different times for each and every goal of life. A step up investment plan gives details of how much investment every year is needed in order to meet the financial goal in life. It takes into account that investments can be increased as financial income of the client increases.

Investment Plan This worksheet first gives a brief of all the goal setting exercises done till now and then shows investment plans under various options. Options Available The client can choose between step up and constant sum approach for any of the goals The client can delay his investment plan for any goal.

Investment Plan Points to consider They delay in number of years should be less than the years to goal After considering various options in terms of step up and delay the client may choose one plan which would lead to an acceptable financial plan.

Expected Cash Flow Purpose : It shows the expected cash flow for income, expenditure, Existing investments, Proposed investments and surplus for the client. Options Available One can put the details of different loans for different time periods. One can put details of sources of other income, after how much time the income would begin, the time period for which one would receive that income and expected annual growth rate for the same. One can also put details for one’s investment commitments.

Financial Review Implementing the Financial Plan Choosing the right products in line with your goal and suggested asset mix Developing the Financial Plan Risk Profiling to understand your Risk Appetite Deciding your Asset- Mix (Debt-Equity allocations) that you should choose. Reviewing the Financial Plan Periodically review Take appropriate action Assessing Current Situation Need Analysis & Goal Setting Bucketing & Prioritization of Goals Quantifying time horizon & future financial value of the objective

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