Why personal Financial Planning is so much important for household?

The concept of personal financial planning is to some extent new in India. But in developed countries like USA, Great Britain, France etc, most of the individuals irrespective of income level consult with financial advisor before investment. Gradually it is gaining importance in our country also.

What is personal Financial planning

A personal financial planning is a process of evaluation of a household’s current and future financial state by using current known variable with the intention to predict future income level, Asset values and utilization plan.

What is the need of personal Financial planning.

In order to understand the need of personal financial planning it is better to study an example where you can gather a clear idea about the need of personal financial planning.

Example :-

Mr. Subrata Roy is 39 years and works in Price water house, a reputed company and earn Rs 2.0 lacs per month. The company provides him a car which is exclusively for official use. His family structure is such :- Mother – 59 years old, Wife – 33 years. Old and Two daughters, one is 14 years and another is 11 years old. His savings per month Rs 60,000 after meeting all the routine expenses of his family, paying car loan instalment, contribution towards provident fund and other needs. He is new searching for a flat as he now stays at rented house. His investment include LIC premium for his own and wife’s life, Tax savers bond, Bank deposit and some in Mutual Funds. Being a Financial Advisor, what should be your advice ? E : Book India \ 2018\ F\Adhya-1 2nd proof 11.6.18 [18]

Step–1

First you collect the known variables from the example given.
1. Mr. Subrata Roy is a well paid employee.
2. As he works in private company, most probably there is no pension scheme after retirement.
3. His residual working life is 21 years (60 – 39).
4. He is the sole income members of the family.
5. His family structure :- “Matured couple with grown up children.”
6. His two daughters are very young and school going.
7. He has made 2 LIC policies for self and his wife.
8. He presently stays at a rented house.
9. His savings is Rs. 60,000 per month.
10. His investment is in Tax savings bond, Bank Deposit and Mutual Fund.
11. His liability is to pay EMI for Car loan.

Step – 2

His savings ratio is 30%. That means he spends Rs. 1,40,000 per month. Apparently the savings ratio is satisfactory but actually not, why?

First you verify the expense schedule. There are two types of expense in the family
(i) Mandatory Expenses
(ii) Discretionary Expenses.

(i) Mandatory Expenses :- It means the expenses which are compulsory in nature and cannot be avoided. According to his family structure we can assume his mandatory expenses
(i) Livelihood Expenses – Rs. 20,000
(ii) Recurring Medical Exp. Rs. 5,000
(iii) Education Expenses Rs. 10,000
(iv) Provident fund contribution Rs. 20,000
(v) Tax Rs. 25,000
(vi) House Rent Rs. 10,000
(vii) Misc Exp (Electric bill, Telephone bill etc.) Rs. 10,000
Total Rs. 1,00,000

(ii) Discretionary Expenses :- This expenses which are not mandatory in nature are which are not essential. Here Mr. Roy’s discretionary expense is Rs. 40,000 (1,40,000 – 1,00,000). Which is 20% of his salary. Here, Car loan instalment and ancillary expenses toward car are treated discretionary expenses because he use the car only for personal use. If it is used official use then it can be taken as mandatory expense. The discretionary Expense seems to be in higher side. Actual discretionary expenses is Rs. 40,000 + Rs. 10,000 = Rs. 50,000. Incomes wise discretionary expenses are 25% of his salary.

Step – 3

His main concern areas :-
(i) He is sole income family member
(ii) He will not get pension after retirement
(iii) He leaves in a rented house. He has no own house.
(iv) His two daughters are school going and needs huge education expense as well as marriage expenses.

Step – 4

One interesting point to identify, His mother is 58 years old. But he and his family do not have any medical insurance. Is it his ignorance or idleness? Immediately, medical insurance is to be done for his entire family.

Step – 5

Another interesting point to note. He has car for personal use where he spent at least Rs. 10,000 including EMI. But he has no house. Now he is searching for a flat. It is not at all wise decision. His service life remains only 21 years. He should give preference to buy the flat first then car. So immediate booking of plat is urgently needed.

Step – 6

Another important point is that Mr. Roy has two daughters and they are school going. So huge amount of educational expenses will be needed in future. So it is advisable to make two education oriented Life insurance policy to meet the expenses in future study. It covers their life also. In future if Mr. Roy takes loan for their daughters for higher study then it must be tagged with insurance. This will help Mr. Roy in tax planning also. E : Book India \ 2018\ F\Adhya-1 1st proof [19]

Step – 7

Tax Planning :-
Medical insurance, Daughter insurance, Tax Savings bond, Mutual Fund, LIC premium will help Mr. Roy for his tax planning. It should be verified whether the maximum benefit he can able to derive or not. If the answer is no, increase the contribution to the Tax savings bond.

Comment :- Mr. Subrata Roy is a well paid employee but his financial life is not satisfactory. His immediate expense is nearly Rs 30,000.
EMI of New flat – Rs 25,000 per month
Insurance premium Rs 5000 per month
(Medical as well as daughter insurance) Rs 30,000/-

So his savings will come down to Rs 30,000 which is 15% of his gross income. He may face some problem in
retirement life. Another expenses has not yet unearth i.e. marriage expenses of daughters. So it is advisable to
reduce the discretionary expenses immediately, at least come down to Rs 20,000/- and are investment structure
should be like this.

(a) 20% of residual savings should be kept as Bank deposit from where he can draw money in exigencies.
(b) 60% of residual savings should be invested in equity based mutual fund.
(c) 20% of residual savings should be invested in Debt based mutual fund.
All mutual fund investment should be long term basis.

Conclusion :- If you go through the examples meticulously, you can understand the importance of financial
planning. So it is my suggestion to take help from professional financial planner irrespective of age and income
level