Financial Planning – let us start our journey to financial freedom

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Financial Planning ?

Well, I hope everybody must have heard this phrase that sounds complex, but hold on… It isn’t any Rocket science that we cannot understand. Let’s break it down and make it simple for you.

Financial planning is nothing but drawing a future plan of how better you can make your living and lifestyle based on judiciously managing your present income and expenses. It is nothing but a roadmap of how well you can manage your future lifestyle by efficiently managing the surpluses and deficits from your present earnings and spendings.

Financial planning is a focused approach of achieving one’s financial goals; whether it is buying your dream home, buying your car, spending your dream holiday abroad with family, taking care of your children’s education, saving for your daughter’s marriage, securing your family’s unforeseen medical expenses by means of an insurance, planning for that rainy day by means of retirement planning, managing your debt repayments etc; all these are part of this vast topic.

Financial planning envisages certain goals in life which are as follows:

  1. It helps you in understanding your income-expenditure position in a better way so as to plan efficient utilisation of the income earned by an individual and spending a part of the same on his needs and wants.
  2. It helps you in planning your savings so as to take care of certain unforeseen emergency situations in life where you may incur expenses beyond our routine budgeted spendings.
  3. It helps you in achieving your wealth creation objectives by ensuring that you reserve a part of your savings to take care of your dreams of say buying your home, purchasing a vehicle, making investments etc.
  4. It helps you in transforming your dreams into reality by deploying funds at the right time in the best investment opportunities.
  5. It helps one’s family to deal with toughest situations such as loss of life and property due to accidents, natural calamities etc by making us to think in the direction of availing an adequate Insurance policy which helps in securing our family’s needs and maintains their standard of living even in the absence of the family’s breadwinner.

Hence a sound financial planning will ensure financial security of one’s family.

So the questions that should come to your mind at this point are these :
• What are my financial goals?
• Where am I placed in my journey to achieving my financial goals?
• How do I get there and more particularly, how and from where do I start?
• When do I intend to get there?

If you are able to get these questions in your mind then you’re ready to plan for your future. In that case, let’s understand these things in a better way by means of an example.

Let’s meet Mr. David, 34 years of age and a software Engineer by profession. His family consists of his wife Mrs. Mary who is aged 30, their 2 years old daughter Ann and David’s father Mr. Albert who is 65 years of age. Mrs. Mary is a practicing dentist and runs her own dental clinic. Mr. Albert is a retired pensioner who had served in the Government Health department for 35 years.

One fine day, David thought of making a financial plan for his family and for this purpose he fixed an appointment with Mr.Ameya of Finstor Financial Advisors and sought his help in planning his family’s finances.

Mr. Ameya explained to Mr. David of the various Vehicles of Financial planning, namely:

  • Bank Deposits
  • Equity/Stock market investments
  • Mutual Fund investments
  • Insurance
  • Gold
  • Real estate investments

David earns a salary of Rs. 1,00,000 per month and has been living with his family of 4 members in a luxurious 3 BHK house in the city of Bangalore by paying a monthly rent of Rs. 40,000. His family’s monthly household expenses comes to Rs. 30,000. His monthly income tax deduction is Rs. 13,300. After accounting for all these monthly expenses, he is left with a surplus of 16,700 per month. David’s wife Mary has no fixed monthly salary as her income varies depending upon the number of patients she treats, but on an average she earns around Rs. 40,000 per month after meeting with all the expenses of her clinic. Mr. Albert draws a monthly pension of Rs. 15,000 and he incurs expenses of about Rs. 8,000 on his medicine purchases and health check ups done every month and is left with a surplus of Rs. 7,000 per month. Also, Mr. and Mrs. David have together savings of Rs. 30 lakhs kept in their joint Savings Bank account and Mr. Albert has a fixed deposit of Rs. 40 lakhs in the Bank which he had made 5 years ago out of the retirement benefits he received after 35 years of his Government service.

Mr. Ameya understands from looking into Mr. David’s income details that he has not made any tax planning and has been paying around Rs. 13,300 Income tax per month.

Mr. Ameya upon understanding Mr. David’s family composition, their age and income details, suggested him the following:

Look for purchasing a house and convert the rental payment of Rs. 40,000 that they have been paying to the landlord into EMI repayment for acquiring their dream home. The EMI on a typical home loan of Rs. 50 lakhs availed from a Bank at 8.40% with a repayment tenure of 15 years would approximately be Rs. 49,000. They could use up Rs. 25 lakhs of the Rs. 30 lakhs that they have kept in their savings account for the down payment of their house and avail a home loan of Rs. 50 lakhs for purchasing a 3 BHK home costing Rs. 75 lakhs in a growing locality of Bangalore. The remaining Rs.5 lakhs in their account should be kept as a buffer to take care of any emergent needs of the family.

Under Section 24 of the Income Tax Act, an individual can claim tax deduction of interest payment on his/her housing loan up to a maximum amount of Rs.2,00,000. He also explains to Mr. David that he can avail tax benefits on the principal amount repaid on the home loan under Section 80C of the Income Tax Act. However, you need to keep in mind that one can only claim tax deductions up to a maximum amount of Rs.1.50 lakh under this section of the IT Act.

Mr. David has been paying an annual income tax of Rs. 1.60 lakhs. Now if he is able to claim the exemption of Rs. 2 lakhs on his home loan interest payment and Rs. 1.50 lakhs on his home loan principal repayment, his tax liability would get reduced by Rs. 70,000 per annum which transforms to a monthly tax outgo of Rs. 5800 from the Rs. 13,300 income tax that he has been paying otherwise. This corresponds to a monthly tax savings of Rs. 7500.

Also, Mr. Ameya suggests Mr. David to avail a Term Insurance Plan of Rs. 1.50 crores to protect and take care of the family’s needs to safeguard against the loss of life of the breadwinner of the family especially when he is planning to take up the burden of going for a home loan of Rs. 50 lakhs. Apart from availing a Term Insurance plan, Mr. Ameya suggests Mr. David to choose a good family floater Medical insurance for his family with a sum assured of Rs. 20 lakhs to take care of medical emergencies of his family members as medical expenses these days have become very expensive. Also, Medical insurance premium paid offers tax benefits under Section 80D of the Income Tax Act. He suggests Mr. David to use his wife Mrs. Mary’s income to start with a Recurring Deposit of Rs. 10,000 for 10 years with a Bank and also to opt for a child Plan Insurance to take care of their daughter’s future needs such as her Education, marriage etc.

On analysing Mary’s income profile, Mr. Ameya suggests David to start with a SIP (Systematic Investment Plan) of Rs. 5,000 each in 4 different Mutual Fund Schemes from reputed fund houses that have been yielding a CAGR(Compounded Annual Growth Rate) of 15% on an average for the past 5 years to take care of his family’s Wealth Creation Objectives in the long-term. He also suggests Mr. David to split his father’s Fixed deposit of Rs. 40 lakhs in the Bank into two parts: one, a Monthly Income scheme deposit product of Rs. 20 lakhs and another Rs. 20 lakhs’ long term Fixed deposit. By doing so, the family can take care of Mr. David’s daughter Ann’s yearly fee payments with ease. Also, this would ensure that David’s father wouldn’t feel the discomfort of breaking his retirement benefits to purchasing their dream home and at the same time, the family’s expenses is also very well taken care of.

David now understood the importance of what he was missing all these years and thanked Mr. Ameya of Finstor financial advisors for chalking out a brilliant financial plan for his family and proceeded to share the same with his family.

Friends, like David, you all too must have now understood the importance of financial planning in all our lives. We found out how Mr. David could convert his monthly rental expense of Rs. 40,000 and monthly income tax savings of Rs. 7500 saved by him through a Sound financial plan, could by itself pay their loan EMI of Rs. 49,000 for purchasing their dream home in a growing part of Bangalore, an asset which too would appreciate over time. At no additional cost or burden, David’s family could acquire an appreciating asset. David could also plan securing his family’s needs by availing a Term plan insurance and a medical insurance to keep guard of their medical needs. At the same time, they could plan for a better future for their daughter Ann through a well laid out plan as detailed above in our example.

All in all, this is what a sound financial planning could do to you. It’ll multiply your family’s happiness, it will keep you tension free from the question that most of us carry in our mind- what will happen of our tomorrow?, it’ll help you in growing your wealth. With all these positiveness, you tend to stay healthy. To enjoy all the wealth you create, one needs to enjoy life by remaining happy and healthy. After all, health is the greatest wealth.

Thanks for your time in reading our blog, please let us know your valuable views and opinion in the comments section below to keep us motivated to writing more such articles in the coming days.

-Vineeth Nair
(A Banker by choice, and a student of Finance by passion)

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A Banker by choice, and a student of Finance by passion. Knowledge is not in knowing everything but learning that which you do not know.

2 Comments

  1. Praveen
    25th August 2019

    This is so nice article telling the importance of proper financial planning and to start as early

    Reply
    1. Vineeth Nair
      28th August 2019

      Thanks for your opinion sir.

      Reply

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