Introduction to Financial Planning Financial decisions form the basis of much of what we do in our lives. Poorly thought out personal finance decisions can at best cause great anxiety and at worst lead to bankruptcy, whereas well thought out, sound financial decisions can lead to a prosperous lifestyle. We are confronted by countless financial opportunities in our daily lives. To make the best of these, we need to understand the complexities of our financial circumstances to make sound decisions. Everyone has concerns about their personal finances. Most important question in Financial Planning is – Where do I want to get to? If we are not clear where we want to get to it is not possible to do any planning. Hence most important step in Financial Planning is Goal Setting. Financial planning is the process of making decisions about money which helps us achieve our goals. Financial Goal Setting Many of our Goals are almost similar. But the amount we need for the goals will vary depending on our Income and Lifestyle. Common Financial Goals Emergency Funds Children’s Education Children’s Marriage Home Car Vacation & Pilgrimage Financial Freedom and Retirement Charity & Donations Giving Wealth to next generation Family Function Capital for Starting a business Step 1: Identify Financial Goals There could be other goals than what is listed above. First step is to identify what all goals to be pursued. It is also recommended that number of goals is to be limited to a maximum of 3 at a time. If we have more goals, then we will not have enough resources to allocate to all goals and goals may not be achieved. Example of Goal Identification Alok is an MBA working as a Sales Executive with a leading car manufacturer in Mumbai. He got married recently and his wife is an engineer looking for a job. His current monthly income is ₹80000 and lives in single bedroom apartment in suburbs of Mumbai. He is not able to manage his expenses with his monthly income ever since his marriage 4 months back. He has been meeting the deficit through credit card which has now accumulated to ₹15000. He is hoping that he will get a bonus of around ₹40000 in another 3 months and will be able to repay credit card loan. What could be possible financial goals for Alok? Based on Alok’s present family situation, Financial Goals for Alok could be: Emergency Funds for meeting any unexpected expenses Buying a Home Retirement Step 2: Prioritize Goals All of us want to achieve many goals. But given the fact that resources are limited it may not be possible to achieve all goals together. Prioritizing goals will help us achieve goals faster. Exercise: Goal PrioritizationAbhishek is a small business man. He has his own shop in Allahabad selling seeds and gardening equipment. His average monthly profit is ₹ 50000. Abhishek lives with his wife, son and daughter in his ancestral house What goal should Abhishek pursue immediately? Saving for daughter’s marriage or Saving for son’s education? Step 3 – Estimate Amount Required for the Goal The most important factor in a financial goal is the amount required. For example, the estimated amounts for different goals could be: Emergency Fund – At least 6 months' income, which is ₹480,000. Buying a Home – Since it is not easy to buy a home by paying full amount most of us have to avail home loan to fulfill our goal of buying a home. If we assume, that Alok’s home will cost ₹1cr in Mumbai then atleast ₹20Lakhs will be required as down payment. If this going to be difficult, may be Alok will have to buy a home in other city where rates are lower Retirement Goal – To be discussed in detail later. Step 4 – Estimate the time when the Goal will be realised Second most important factor in a Financial Goal is estimate when the goal will be realised or likely to happen. For estimating goal timelines, we need to look at available resources today and expected monthly savings.In Step 1, we had considered 3 possible goals for Alok and priority goal could be to accumulate ₹480000 towards emergency fund. If Alok saves ₹10000 per month towards emergency fund, it will take 4 years for him to accumulate ₹480000. If he has to achieve earlier, then he will have to save more every month. Based on the above 3 steps, we can write Goal for Alok as: I WILL ACCUMULATE ₹480000 TOWARDS EMERGENCY FUNDS BY 31.12.2020 BY SAVING ₹10000 EVERY MONTH IN XYZ INVESTMENT SCHEME The above goal setting has all the features that is required for a SMART Goal