Introduction

Wealth means well being condition of an individual It is the quality of life that on leads. It needs to be easy- comfortable luxurious. Well being means different to different people. They may be
1. 2. 3. 4. 5. 6. 7. 8.

Knowledge Having number of children Happiness Relationship with parents & spouse Making more money Living in palatial house Having more cars Traveling world wide etc

Personal financial planning

Personal financial planning all inclusive

Investment mgmt

Tax planning

Asset protection

Debt mgmt

Succession planning

Real Estate planning

Insurance

Cash flow mgmt

Retirement solutions

Personal financial planning The process

Determine Develop The current Financial Financial goals situation

Identify Alternative Courses of action

Create & Evaluate alternatives Implement FP

Review The plan

Why people do not create Personal financial planning?

I do not know

I do not know whom to trust

F P is too complex

Takes care of the financial well being of the client like family doctor

Helps the client in achieving the goals

Maintains comprehensive relationship. Understands the client s financial position Maintains confidentiality . Spends more time with client to understand him well Works for mitigation of risks . Proposes a combination of banking & investment process.

Financial planner - Client focus

Current life style needs

Meeting the living expenses Needs of the children ST & LT financial & Personal goals

I T considerations

Inheritance goals
Succession plans Issues involving the succession plans

Philanthropic pursuits
Charities & donations

Investing In various Securities with tax benefits

Financial Goals
Data gathering

Time dimension

Prioritization

Goal setting

Client profiling

Client profile
Understanding your client Understanding financial personality Meet listen- understand- deeper understanding of the clients needs /

expectation/ constrains/ issues/fear.

Types of clients

Relationship client

Fear based client

Curious client

Greedy clients

Form bond They can trust the W M Feel comfortable They will come out Can keep them involved

No fin experience Bad fin experience Need to educate them Gain confidence

Knowledgeable They have no time Hence they work with F A They take interest

Look for short term results More demanding Ever changing

Goals setting
Very important phase in W M Is the foundation stone on which W M stands. Success of W M process starts with prioritising of goals of

clients.
The priorities are both in terms of time and amount. Investors are not sure about their goals. W Manager has to educate the clients about the importance of

goals
Understanding of clients goals will lead to the success of the W

M process.

Types of financial Goals- Time dimension

Time bound goals

Intermediate goals Before retirement (children education , their marriage , periodic fund required for various expenses, Second home, trips abroad etc) life time goals .

Consumption oriented goals

Funding living expenses. The client would like to retire with sufficient capital to fund his expenses. Capital may grow/ diminish or preserved. There will be constant feed back Between the client & W M.

Post retirement, financial independence Mortality estimation beyond planned period

Financial planning in action

Assess the current situation

Develop financial goals

Select appropriate Plan of action

Short term

( within one year)

Long term- More than one year Invest in instruments for long term growth Select tax deferred investments Pay off consumer debts & home loans

Implement a budget Pay off C C dues Obtain adequate insurance Establish regular savings program Invest in safe income financial products Save for purchasing a house

DATA Collection
Family profile Employment details Information on income Expenditure
No of members, age, education details, dependents, health status of family members etc No of working members & their employment status, particulars of availability of pension , health care & superannuation benefits. current income, possible increase next year, savings, fixed deposits, investments in stocks, MF, LIC, ULIP, pension , annuity Living expenses, utility charges, transportation, medical costs, outstanding dues, loan payments, interest payments etc.

Details of assets
Insurance Retirement plans Estate planning

Existing & new, house, car, jewelry, house hold appliances, land , securities etc
Health, motor vehicle, house, life, burglary, beneficiaries, nominations etc. PF, gratuity, leave salary encashment, annuity provided by employer, pension benefits, private pension if any.

Assets ( movable & immovable) , shares, MFs, LIC with M V, Housing loans , lien, mortgages vehicles, furniture's , will , POA,

Review to be done regularly

Time value of Money

Role of money/ Money value
Money plays a significant role in setting financial goals. It is the prime measurable factor in financial planning. Prime factor in deriving utility value of our life. Time value for money is the value of money at different periods There are two concepts for time value of money. Present &

Future value.
Future value is high if it earns +ve returns & low if it earns ve

returns.

Time value of Money

Future value of Rs 10,000 is _________ if it earns compound interest of 10% for 6 years

It will be Rs _________if it earns simple interest of 10% for the same period

n 6 6 FV = PV X (1+ i ) = 10,000 x ( 1+0.10) = 10,000x (1.10) = 17,772 100 n

PV = FV / (1+i/100)

6 = 10,000x 0.564= 5,640

= 10,000 / (1.10)

i.e Value of Rs10,000 after 6 years will be Rs 5,640

Annuity
Constant sum being paid at regular intervals for a continuous

period of time.
Premium payment of a pension product. Paid in the beginning of the month- Annuity due, At the end of the month- Deferred annuity. Future value of annuity

n A (1+i) -1 i

A= constant payment amount , i=interest rate, n= duration

Annuity
Example

Premium paid annually - Rs 10,000, Rate of return i=8%, Policy period-10 yrs .
After 7 years the value of the policy will be ? 7 Future value of the annuity policy= 10,000 (1+ 0.08) -1 / 0.08

= 89,230

n Present value - A / 1-1/(1+i) i Premium paid annually - Rs 10,000, Assumed discount rate i=8%, n=10 Yrs.
10 10,000 x 1-1/(1.08) / 0.08

= Rs 67,100

Financial statement analysis

The steps Listing out all essential information about the personal financial data. Helps to track down all the cash inflows and outflows Helps to assess the financial condition & net worth of the client. Helps in preparing the financial goals & evaluate the progress . The two statements for evaluation

Income & expenditure statement Sources of income & how they are spent Recordings of cash transactions Cash surplus/ deficit

Balance sheet Summary of financial position at a given period of time

Income & expenditure statement of Mr. Kumar

Income s, electricity,
Wages & salaries

Amt in Rs
Amount
2,50,000

Amount
7,00,000

Expenditure
Housing(rent, int, on H L , taxes

Other income

2,00,000

Utilities(gas, electricity, water , telephone etc)

Food, breweries , eating out etc Transport (vehicle loan, petrol, repairs etc) Medical expenses (Health insurance, medicines, doctors fees etc)

36,000
85,000 90,000 20,000

clothing
Insurance(life, MV householder policy etc) Income taxes Purchases (furniture, loan payments, appliances etc) Personal care (laundry, Cosmetics etc) Recreation, education, miscellaneous etc Cash surplus Total 9,00,000

10,000
60,000 2,40,000 80,000 10,000 44,000 50,000 9,00,000

Balance sheet of Mr. Kumar

Assets
Physical assets House Car (Santro0 Furniture & fittings Electronic appliances clothing 50,00,000 4,00,000 50,000 50,000 40,000

Amt in Rs
Liabilities
Long term liabilities Housing loan Car loan Appliances loan/ furniture loan Educational loan Current liabilities 20,00,000 2,00,000 30,000 10,000

Amount

Amount

Jewelry
Financial assets Cash on hand Savings in bank FD Lic, bonds , stocks Total

30,000

Insurance premium
Taxes

20,000
10,000 5,000 10,000 5,000 22,90,000 40,30,000

10,000 40,000 1,00,000 6,00,000 63,20,000

Medical bills C C payments Mobile payments Total liabilities Net worth

Ratio analysis

Solvency ratio

Liquidity ratio

Savings ratio

Debt ratio

Total net worth Total assets

Liquid assets Total current liability

Cash surplus Total income after tax

Monthly loan payments Monthly gross income (before tax)

40,30,000 63,20,000

1,50,000 50,000

50,000 6,60,000

20,000 75,000

64%

0.075 / 7.5% Ideal- 25 to 30%

0.267/ 27% Max- 35%

Cash flow
Cash inflows & outflows at regular intervals.
Important component of financial planning Difficult to achieve financial goals . Helps to check the financial position & control over the

expenditure.
Helps to match the income with expenditure & ensures that

expenses do not cross income.

Cash flow planning helps to identify the sources of all cash

inflows & outflows.

Salary, wages, dividends, interest, bonus, commission, maturity

proceeds of deposits in banks etc are inflows.

Living expenses, utility expenses, medical, loan repayments are

cash outgoes.

Cash budgeting
Prepared from estimated income & expenditure in future
Important component of financial planning Prepared based on future cash inflows & outflows. To assess & evaluate the major cash inflows & plan outflows

accordingly & to prioritize the outflows .

Means to compare the performance at the end of the year with

estimates.
Control the expenses & fall in line with budgeted figures.

Improves savings & reduces unwanted spending.

Reduces wastage of money & helps in spending in productive

assets.

Preparation of Cash budgeting

1.

Make list of all monthly income ( salaries, wages, professional income, honorarium, consultancy fee, other receipts etc) Prepare list of all monthly expenses (housing, food, clothing, utilities, entertainment, insurance premium etc) See for your self if the expenses exceeds income .

2.

3.

4.

Depending on the shortfall, reduce some of your expenses or plan to increase your earnings to ensure that your income surpasses the expenses.
Consider saving the surplus in various avenues depending on your risk aptitude.

5.

The mere purpose of preparing cash budget is to make sure that we have cash surplus for savings & investments

Retirement plan

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The plan
An attempt to find out how much money is required to be saved each month in order to live a comfortable life after retirement
While taking care of savings , one should assume the following 1. Inflation 2. Medical care 3. Contingencies

Objective
The main objective of retirement planning is to have enough savings & Investment so that one does not have to compromise on ones lifestyle postretirement & never runs out of money

Savings for retirement involves long term effort to accumulate enough money To support ones self & dependents during retirement years.
The retirement plan is to determine how big the nest egg needs to be
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Retirement planning phase

100
Amount in Lakhs 80 60 40 20

25
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45 Years

55

65

75

85

95
30

SOURCES / USES OF RETIREMENT INCOME

Sources
INVESTMENTS INCOME- 35% PENSION & OTHER RETIREMENT PLANS- 40% EARNINGS 25%

Uses
Food-25% Insurance-10% Entertainment- 5% Clothing- 5% Housing- 30% Medical- 15% Various contributions- 5% Savings- 5%
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Mistakes to be avoided
It is a tough task for retirement planning . Best way is to make proper assessment of required funds

Not to underestimate the retirement savings goal

Starting too late to invest for retirement Not contributing enough to PF Taking loans before retirement Underestimating the length of post retirement life.

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Retirement process
Where do you want to settle? Do you need to buy a house?

What type of life style do you want to lead after retirement?

How much money do you need to make your retirement a reality? Discuss these goals with your spouse / partner . Decide what is the perfect retirement program for you & your spouse. Retirement process can be dealt in three steps

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The three steps

Development of Retirement goals

Where to live Lifestyle

Analyzing retirement needs

Need not be the same for all. Needs will be in tune with goals Life style, martial status, life style, Health status previous occupation

Estimating the Retirement income

Gathering all the financial Information Listing the existing & future income Listing the tax liabilities Estimating the surplus for generating additional 34 income

Enjoyment
Hobbies Sports
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Estimating retirement income

Based on the current income, the retirement income needs can be assessed

1. Replacement ratio method

To maintain same standard of living , it is assumed that a person needs about 70 of his last drawn salary .

Mr. Sharma is drawing Rs 30,000/ month now & is going to retire in 2 months.
Easy to calculate as the retirement needs as his retirement is soon. 70% of his income= 21,000/ month. In case of retirement after 30 years? We need to assess the approximate growth of his income & replace the % to 80
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Estimating retirement income

2. Expense method
Expenses that may increase are Utilities/ telephones, medical & health insurance, House keep, entertainment, gifts, contributions etc.
Expenses that may decrease are Housing loan repayments, food / clothing/ IT, Transportation/ debt repayment/ education/ house furnishing etc.

Keeping the above aspects, the estimated income after retirement is calculated .

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Start Early
Mr. X
Age Years Contribution Yr. end value Age

Mr. Y
Contribution Yr end value

25 26 27 34 35

1 2 3 10 11

2000 2000 2000 2000 0

2188 4580 7198 33846 37021 35 2000 2188

36
37 38 65

12
13 14 41

0
0 0 0 20,000

40,494
44,293 48,448 545344 545344 525344

36
37 38 65

2000
2000 2000 2000 62,000

4580
7198 10061 352427 352427 290427

Total contribution

Value at retirement

The table assumes 9 % interest compounded monthly.

Role of financial advisor

The advisor should be able to assess the retirement needs
suggest suitable investment plans to meet the needs Suggest the client properly on the above aspects. select the fund size that can give sufficient returns Assess the various insurance needs

Understand the impact of inflation on the future needs.

Advise to maintain emergency funds to meet the unforeseen expenses. Periodic review of the situation
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Retirement plan- Problem

Mr Ashok aged 55 is likely to retire after 5 years He wants to maintain current life style after retirement.. His annual income is Rs 3,00,000 His wife is not employed & his two children are well settled. He has the following assets/ savings
particulars Annual pension benefits Amount (Rs) 1,20,000

PF & other gratuity

Personal savings LIC policy maturity amount Annuities

10,00,000
5,00,000 4,00,000 48,000

Rental income from house property

Total income available

60,000
21,28,000

His monthly pension after retirement will be Rs 14,000. Assuming that the savings fetch 8% interest, calculate his annual income after retirement. 23/01/2013 39

Types of pension plans

There are many annuity & pension products available in India They can be broadly into three areas

Defined contribution plan

Defined contribution plan

Defined benefit scheme

Annuity plan

Amount of contribution made by the employer/ employee. This is similar to employees Pension Scheme. The benefit of the plan depends on the performance of the fund. Ex- LIC Jeeven Akshay

Advantages
They are tax deferred retirement schemes. They can be easily understood by the participants. They can be funded through payroll deductions. Good investment results.
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Types of pension plans

Defined benefit scheme
The scheme promises the contributor a regularly payment at retirement monthly No investment decision need to be taken by the participant unlike the defined plan. The defined benefit plan is also referred as funded pension plan.

Advantages Guaranteed income security for the workers.

No investment risks to participants.

There are tax deferred retirement savings medium.

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Types of pension plans

Annuity Plans
Annuity refers to payment at regular intervals (monthly/ quarterly/annual etc) The insurer promises pay back of full value of the money invested with some additions. The investor keeps the money for long time.

There are three kinds of annuity products.

Life annuity
Paid out till the person is alive
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Immediate annuity
Plan starts immediately after it is purchased

Fixed annuity Fixed regular income for a long time. It offers death benefits by passing on the annuity to the nominee 42

Pension products in India

Superannuation provided by the employer
Pension & annuity products for self employed professionals. Pension & annuity products for individuals pension & annuity products for senior citizens pension products with ULIP

Pension plans of LIC are Jeevan Akshay, Jeevan Dhara, New Jeevan Suraksh
Pension products from ICICI prudential are Forever life, Life link super pension plan, Life time super pension plan etc. There are pension plan from other private insurance companies 23/01/2013 too

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Pension plan review

Comprehensive review of pension plan is must regularly. Review of retirement plan as decided earlier. Review of personal finances

Review of spending habits

Investment portfolio review.

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Pension reforms in india

Of the 314 million working class, only 11% are in organized sector . Others have to make their own savings for future towards pension. There is a new scheme started 2007 named Indira Gandhi old age pension scheme for weaker section.

The employees pension scheme (Defined benefits) is not doing well & is getting low yields.
Reforms are necessary in this area. In few years from now , India will have 35% of its population above 60 yrs and there will be more burden on government . The pension market will be vibrant in future.
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