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  • Writer's pictureTeam ArthaPurna

ArthaPurna Personal Finance Awareness Initiative:

Updated: Aug 24, 2022

With our experience of interacting with families for more than a decade, we still find a large section of society which is shying away by purpose or by ignorance from the concept of their own Personal Financial Management! Majority of the urban population as well is unaware about the basics of personal finance. Hence, we felt the need to contribute a little to the awareness of people.

Hoping that the initiative reaches as many people as possible for the overall benefit of the society!


Financial Planning

This is the first part of the awareness initiative we have started to bring most of the people who are kind of aloof from the concept of Personal Financial Planning, closer to one of the most important areas of money management!


“Financial planning is like navigation. If you know where you are and where you want to go, navigation isn't such a great problem. It's when you don't know the two points that it's difficult”.

- Venita Van Caspel


Financial planning

Financial planning is a step-by-step process for achieving one's life objectives. A financial plan serves as a road map as you travel through life. It essentially aids you in maintaining control over your income, expenses, and investments so that you may manage your finances and reach your objectives.


To achieve your objectives and dreams, you must have sufficient funds. More significantly, you must have sufficient funds at the appropriate time.


What are the Benefits of Financial planning?

Many investors are unaware of the need for financial planning and believe that if they can save money, they would be secure financially. However, saving is insufficient. Assume a life expectancy of 75 to 80 years. Your parents will take care of your needs for the first 20–25 years of your life. Your working life will normally last 35 years, during which time you must provide for the needs of your family (spouse, children, dependent parents, etc.) as well as save enough to meet your own needs during the 15 to 20 years you will be retired.

Inflation diminishes the purchasing power of money over time, therefore if you want to attain your financial goals, your money must rise at a quicker rate than inflation. Certain expenses, such as education and medical care, are rising at a far greater rate than the CPI. You must prepare for it. Also, as incomes rise, people's lifestyles change, resulting in increased expenses. It is difficult to change your way of life after you have become accustomed to it. If you want to achieve financial independence while simultaneously maintaining your lifestyle, you'll need to save significantly more money.


Given these obstacles, you should understand the importance of financial planning, including how much to save and invest, where to invest, and, most importantly, how to begin saving and investing early in your career to accomplish all of your goals.


The Financial Planning Pyramid



1st Level


To create a thorough financial plan, start with the most fundamental of requirements: emergency expenses. It is impossible to save for the future if your income does not exceed your costs. Although it may appear to be self-evident, this can be the most difficult aspect of the planning process. Even millionaires must periodically review their cash flow.


Working with a budget, cutting spending, and maybe raising your income are all ways to ensure good cash flow. It's difficult work, but it's so important that it's the foundation of the Financial Planning Pyramid, upon which everything else is built.


In order to have an accurate image of how much you can invest, a quarterly financial checkup (which you do, right?) should include an honest appraisal of what you spend each month. Even a small monthly payment of Rs. 500 might add up to a big sum.


You'll want to protect what you've built once you've found a solid balance between paying bills and investing. An emergency fund is the first line of protection you should put in place. This should be in addition to your usual savings, which you put money into after you've met your essential necessities for the week or month.


How much is sufficient?

It is recommended that you save three to six months' worth of costs, but you should use your own discretion. If you're self-employed or have a variable income, you might wish to save for a longer period of time.


2nd Level


The other aspect of protection is risk management. Insurance isn't the most fun aspect of planning, but it's critical that you have the right safety net in place in case of an unexpected disaster. It is so crucial that it is the second tier of the Financial Planning Pyramid. Life insurance, health insurance, personal accident, critical illness insurance, vehicle insurance, and homeowner's insurance are all designed to protect you from having to pay large out-of-pocket payments if you suffer a loss.


Following are few insurance to name but these are not limited to these:

  • The majority of Indians consider life insurance to be the second best investment choice after fixed deposits. This insurance is essential, whether you consider it as an investment or a safety net for your family. Life insurance can help you secure your loved ones' future. It assures that the family will not have to rely on others to meet their requirements if the breadwinner dies. In addition, there are tax advantages and long-term capital appreciation with this insurance.

  • Health is Wealth. Getting health insurance is a critical component of this strategy. It offers you a financial safety net in the event of a medical emergency. Health insurance might also help you save money on your taxes. Even if your employer provides medical coverage, you must purchase insurance for your family. Even if you leave or are fired from your employment, this will protect your family's health.


3rd Level


After you've established a solid foundation, you may begin investing and growing your assets in order to achieve your objectives.


Make a list of realistic financial goals that you wish to achieve before you invest. We should all prepare for retirement, but clever investors will also invest for other goals such as buying a car, a home, or paying for your children's college tuition. These savings objectives should be kept separate from your retirement objectives. What you want to save for is entirely dependent on your goals and expectations.


The most exciting aspect is still to come: investing! If you keep your money in a savings account, inflation will eat it up. Your money will quickly lose purchasing power if you do not invest it.


Investing alternatives should be chosen based on one's income and convenience. Conservative investors would want to put their money into safer investments. Aggressive investors, on the other hand, have completely different strategies. How you invest is determined by the amount of money you have, your level of education, and your risk tolerance. Your asset allocation should be in line with your risk tolerance.


Never put all of your eggs in one basket, and always strive to diversify your investments. High-quality assets include blue-chip stocks, long-term mutual funds, and bonds whereas Public Provident Funds, Fixed Deposits, and RBI Taxable Bonds are all popular investment options. Real estate and gold are other popular investment choices. Please note investment in assets is a function of your goal duration and risk profile.


Mutual funds are frequently regarded as a safe and reputable investment alternative. This is largely due to the fact that money is handled by experts. However, after investing in mutual funds, one cannot turn a blind eye. It is critical to check-in and make adjustments to your asset allocation.


4th Level


Retirement planning entails ensuring a constant flow of income after retirement. It means putting money away and investing it particularly for that purpose. Your retirement approach will be determined by your long-term objectives, income, and age.


Why do you need to plan for your retirement?

It can be costly to grow old. Medical bills are only going to climb, despite the fact that frivolous expenses may decrease. When inflation is factored in, not having enough money to cover future needs can be stressful and worrying. The goal of a retirement investing strategy is to achieve financial independence in your later years without relying on others.


When to start?

The sooner you start, the better. Although young people in their twenties may not be concerned about retirement, starting early allows for more flexibility. You can start from where you are if you missed the bus. Investment, accumulation, and withdrawal phases should all be separated in a smart retirement plan.


You should invest and build your corpus until you are in your early 50s. As you get closer to retirement, you should be able to move the money to safer investments so that you can rely on it after you retire.


How to Plan?

The first step in retirement planning is to visualize it. Consider how you want to spend your golden years and then calculate how much money you'll need to make it happen. Don't forget to factor inflation into your calculations. Next, figure out how much of it you can cover with your assets. This might assist you figure out how much of a deficit you'll need to plan and budget for in the future. Determine how much you can save by analyzing your current financial status. Ideally, you should set aside 30-50 percent of your total savings for retirement.


Following that, you can narrow down your investing options. The younger you are, the more time you have to benefit from compounding and take some risks. If you can afford it, invest actively in mutual funds and even business stocks. As you get older, you might wish to diversify your assets by adding lower-risk items like government-backed securities to your portfolio. Consider annuities and insurance products as part of your retirement strategy.


5th Level


Estate planning is concerned with the distribution of a person's assets after their death. It may entail drafting a Will or, if necessary, establishing a Trust. This is frequently put off until retirement, which creates a concern in the event of an early death.


A Will that states their preferences should be included in a basic wealth distribution plan. It should specify what will happen to the assets and whether the heir or family members will inherit them. The Will might also specify if all of the assets are to be donated to charity. If the deceased owned a business, a proper succession plan should be in place. In addition, a Will can specify who will serve as your Power of Attorney and Healthcare Proxy.


SO, WHAT LEVEL OF THE FINANCIAL PLANNING PYRAMID ARE YOU ON?

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