Financial Planning: The Ties That Bind

DISCLAIMER
y Not pitching for selling any product y Idea is to make you aware about basics of FP y You may launch yourself in more detailed study to gain

insight into various avenues open for investment

y Self learning is the best form of learning y Open to conduct further talk on specific products/ asset

classes

Learning Objectives
y Why personal financial planning is so important. y Five basic steps of personal financial planning. y Set your financial goals. y List fifteen principles of a solid financial strategy. y Explain how career management and education can

determine your income level.

Why Personal Financial Planning?

y Need a financial plan because it s easier to spend than to

save.
y Want a financial plan since it helps you achieve financial

goals.
y Use financial planning, not to make more money, but to

achieve goals.
y Control your finances or they will control you.

Here s What You Can Accomplish

y Manage the unplanned y Accumulate wealth for special expenses y Save for retirement y Cover your assets y Invest intelligently y Minimize tax payments

The Personal Financial Planning Process

y FP is an ongoing process - it changes as your financial

situation and position in life change.

y Five basic steps to personal financial planning:
y Evaluate your financial health y Define your financial goals y Develop a plan of action y Implement your plan y Review your progress, reevaluate, and revise your plan

Personal Financial Planning Process

y Step 1: Evaluate Your Financial Health
y Examine your current financial situation.
y y y

How wealthy are you? How much money do you make? How much are you spending and what are you spending it on?

y Assess your financial situation using careful record keeping.

Personal Financial Planning Process

y Step 2: Define Your Financial Goals
y Define your goals: (Short, Medium & Long Term)
y y y

Accumulate wealth for retirement. Provide funds for a child s college education. Buy a new automobile.

y Over time, goals change.

Personal Financial Planning Process

y Step 3: Develop a Plan of Action
y Flexibility
y

y Protection
y

Plan for life changes and the unexpected. Immediate use of cash by quickly and easily converting an asset.

Prepare for the unexpected with insurance. Keep more of what you earn.

y Liquidity
y

y Minimizing Taxes
y

Personal Financial Planning Process

y Step 4: Implement Your Plan
y Carefully and thoughtfully develop a financial plan, then

stick to it.
y Your financial plan is not the goal - it is the tool used to

achieve goals.
y Keep goals in mind and work towards them.

Personal Financial Planning Process

y Step 5: Review Your Progress, Reevaluate, and Revise

Your Plan
y Review progress and be prepared to formulate a different

plan.
y The last step in financial planning often returns to the first.

No plan is fixed.
y Goals are fantasy without a plan.

Establishing Your Financial Goals

y Financial Goals Cover 3 Time Horizons
y Short-term -- within 1 year y Intermediate-term -- 1 to 10 years y Long-term -- more than 10 years

Fifteen Principles of Personal Finance

y These principles form the foundation of personal finance. y They will provide you with:
y An excellent grasp of your own personal finance y A better chance of attaining wealth and achieving financial

goals

Principle 1: The Risk Return Trade-Off

y Savings allow for more future purchases. y Borrowers pay for using your savings. y Investors demand a minimum return to delay

consumption - above anticipated inflation.

y Investors demand higher return for added risk.

Principle 2: The Time Value of Money

y Money has a time value. y Money received today is worth more than money

received in the future.

y Compound interest - interest paid on interest.

Principle 3: Diversification Reduces Risk

y Don t put all your eggs in one basket. y To diversify, place money in several investments, not just one. y Diversification reduces risk without affecting expected return. y Won t experience great returns or great losses receive an average return.

Principle 4: All Risk Is Not Equal

y Some risk cannot be diversified away. y If stocks move in opposite directions, combining them can

eliminate variability.
y If stocks move in same direction, not all variability can be

diversified away.

Principle 5: The Curse of Competitive Investment Markets

y In efficient markets, information is instantly reflected in

prices.
y Cannot earn higher than expected profits from public

information.
y Difficult to beat the market -- bargains don t remain

so for very long.

Principle 6: Taxes Affect Personal Finance Decisions

y Taxes influence the realized return of investments. y Maximize after-tax return. y Compare investment alternatives on an after-tax basis.

Principle 7: Stuff Happens, or the Importance of Liquidity

y Have funds available for the unexpected. y Without liquid funds:
y Long-term investments must be liquidated. y Results in lower price, tax consequences, or

missed opportunities.

y With nothing to sell:

y Pay higher interest to borrow money quickly.

Principle 8: Nothing Happens Without a Plan

y People spend money without thinking, but you can t save

without thinking about it.

y Saving must be planned
y Start off with a modest, uncomplicated plan. y Later modify and expand your plan.

y Remember - financial plans cannot be postponed.

Principle 9: The Best Protection Is Knowledge

y Take responsibility for your financial affairs:
y Protect yourself from incompetent advisors. y Take advantage of changes in the economy and interest

rates.
y Understand personal finance then apply it.

Principle 10: Protect Yourself Against Major Catastrophes

y Have the right insurance before a tragedy occurs. y Know your policy coverage. y Insurance focus should be on major catastrophes which

can be financially devastating.

Principle 11: The Time Dimension of Investing

y Take more risk on long-term investments. y Large-company stock prices up 10.4% annually over the

past 78 years.
y 20 year-olds investing retirement money will likely earn

more in the stock market than other investment alternatives.

Principle 12: The Agency ProblemBeware of the Sales Pitch

y The agency problem - those who act as your agent may

actually (Always) act in their own interests.

y Insurance salespeople, financial advisors, and

stockbrokers receive commissions, so select them carefully.

y Find an advisor who fits your needs, is ethical and

effective (Best become your own advisor).

Principle 13: Pay Yourself First

y For most people, savings are residual. Spend what you

like, save what is left.

y Pay yourself first so what your spend becomes the

residual.
y Reinforce the importance of long-term goals, ensuring

goals get funded.

Principle 14: Money Isn t Everything

y Extend financial plans to achieve future goals. y See more than just money - know what is important in

life.
y Money doesn t bring happiness, but facing expenses

without the funding brings on anxiety.

What to Do?
y Personal insurance immediately after you start earning. y Personal medical insurance, don t depend upon Company

Insurance.
y Save for Medium & Long Term Goals Where to save?

Investment in Gold

DON T IGNORE INVESTMENT IN SILVER

SENSEX Performance

Best Systematic Investment Plans in India

Mutual Fund 3 Years 5 Years 10 Years 12 Years Investment 36000 Investment 60000 Investment 120000 Investment 144000 % Amount % Amount % Amount % Amount

Scheme Name

Birla Sunlife Equity Fund DSP BR Equity Fund

26

51990

17

92033

29

570925

27

847695

30

55142

22

103852

32

656368

28

890730

Franklin India Blue Chip Fund HDFC Equity Fund

28

54785

20

98935

29

549491

27

860441

39

61979

26

112626

34

721916

32

1142897

May 2011 Equity: Large Cap DSPBR Top 100 Equity Inst ICICI Prudential Focused Reliance Quant Plus Retail Equity: Large & Mid Cap Fidelity India Growth HDFC Top 200 ICICI Prudential Dynamic Inst I Mirae Asset India Opportunities Regular UTI Dividend Yield UTI Opportunities Equity: Multi Cap HDFC Equity Quantum Long Term Equity Reliance Equity Opportunities Inst Religare Contra

Risk Grade Low Low Below Average Below Average Below Average Low Above Average Low Below Average Below Average Low Average Below Average

Return Grade High High High High High High High High Above Average High Above Average High High

SENSEX vs REAL ESTATE

y Both markets represent the two major asset classes for

growth investing. y Both allow investors to participate in long-term appreciation of values. y Both asset classes should be included in a balanced investment portfolio depending on the risk-return profile and in-depth understanding of the particular asset class.

Happy Investing!