financial planning 2015
TRANSCRIPT
Personal Financial Planning
Aniruddha BoseDirector & Business HeadFinEdge Advisory Pvt. Ltd.www.finedge.in
What?
Determining financial goals &
objectives
Understanding purposes &
priorities in life
After considering resources, risk
profile and lifestyle, detail a realistic plan to
meet those goals
Periodically reviewing the Financial Plan
How?
The need for Financial Planning…
Products (and conflicts of interest!) add to the confusion…
Why?
• Peace of mind• Compounding Effect – long term returns• Right product for right reason• De-risking• Balancing short term and long term• Goal achievement• Money saving (loans, taxes, etc)• Preparedness for emergencies• Wealth creation & improved lifestyle
Financial Planning leads to “sustainable wealth creation”
TRUE, MONEY CAN’T BUY HAPPINESS…
But it’s so much more comfortable to cry in a BMW than on a bicycle!
Who needs it?Age 35 to 45•Planning for your child’s education•Creating an emergency fund•Starting a retirement plan•Increasing your standard of living
Age 45 to 55•Planning for your child’s marriage•Prepaying loans •Making provisions for medical expenses•Accelerating your retirement savings
Age 55 and above•Consolidating your investments & preparing for retirement•Increasing your provisions for medical expenses•Allocating funds for social & leisure purposes
Is Financial Planning simple?
But then again…
=
… so is losing weight!Weight loss simplified – Eat Less, Exercise More!
“Simple” does not always equal “Easy!
FP Concept #1: Risk Profiling
• What is Risk Profile & why is it relevant from an FP standpoint?
• Two components: “Risk Tolerance” and “Risk Appetite”… What’s the difference?
• Why is effective risk profiling generally considered the most important aspect of a Financial Plan?
• How does Risk Profile influence investment returns and the Financial Plan of an individual?
FP Concept #2: KYP “Know your Priorities”!
Financial Planning
Wealth Creation
Achievement of your Financial Goals – your “priorities”!
VACATIONS NEW CAR
NEW HOUSELOAN PREPAYMENT
INCREASED LIVING STANDARDCHILDREN’S EDUCATION
RETIREMENT FUNDEMERGENCY FUND
FP Concept #3:The two “Magic Ratios”
• Reserve – Surplus ratio: the percentage of your monthly inflow that you do not spend each month
• Savings – Surplus ratio: the percentage of the above monthly surplus that you save/invest systematically and in a disciplined manner
Why is financial planning difficult?(Exercise… Volunteer required!)
• Would you rather receive Rs. 100,000 in a year or Rs. 110,000 in 13 months?
• Would you prefer Rs. 100,000 today – cash on the table – or Rs. 110,000 in a month?
• The introduction of ‘now’ causes us to make inconsistent decisions – this phenomenon is called ‘Hyperbolic Discounting’
• Immediacy magnetizes us! • The capacity for delayed gratification is a reliable indicator for
future success (Mischel, “The Marshmallow Experiment”, 1960).
• The instinct to “defer” savings for “later” – instant gratification• Patience & discipline are indeed virtues!
FP Concept #4:Hyberbolic Discounting
FP Concept #5: Compounding
• Would you care too much whether the rate of return on your savings is 7% or 10%?
• Do you stop to consider how the length of saving really affects the goal planning dynamic?
• The fact is that if you did, it would make a big difference to your wealth as time progresses
• The benefit from compounding arises primarily from the fact that income keeps growing the principal to generate higher absolute returns each year
• Higher rates of return or longer investment time periods increase the principal amount in geometric proportions
Compound Interest vs Simple InterestAn illustrative exercise
FP Concept #6: The Financial Planning Pyramid
Speculation Trading of Equities,
Forex, Commodities, Land Etc
Investments Stocks, Real Estate, Mutual
Funds
Savings SIP’s, RD’s, Endowment Life Insurance
Protection Debt Reduction, Life Insurance, Health Insurance &
General Insurance
FP Concept #7: Goal Planning
Source : Rich Dad Poor Dad
Income – Expenses = Savings
Income – Savings = Expenses
If I am a 35 year old planning to retire at 60 with an inflation adjusted annuity equivalent to Rs. ________ per month in today’s terms, I need to put together __________in 25 years
• Rs . ______ invested per month today will give me Rs. N Lacs after 15 years at ______ ROIC
College education in India is inflating at ___% P.A. If I require Rs. ____ Lacs today, then after ___ years I will require around ____ Lacs for the same quality education.
• Rs . ______ invested per month today will give me Rs. 2.5 Crores after 25 years at ______ROIC
Change This To
Exercise: Goal Planning
FP Concept #8: Delay Cost
• Would you care too much whether you start saving today or a year later?
• The cost of delaying the start of a savings plan can be more than you think!
• What do you feel is the cost of delaying the start of your retirement savings of Rs. 5000 per month… by one year?
• Answer: Rs. 46.6 Lacs!• This is an example of “Delay Cost”
What does a Financial Planner do?
• First and Foremost: Acquires a base of clients… i.e SALES• Spends time asking questions and understanding a client’s current financial
position • Understands and prioritizes client’s goals/ needs and plans how to best allocate
their cash flows• Sets realistic expectations with client and helps puts finances in perspective• Helps client plan out and manage various financial risks• Facilitates investments• Regularly updates and discusses portfolio progress• Manages client relationship effectively to ensure high degree of loyalty and
referrals• Revises the financial plan as and when required• Plans taxes and helps clients save taxes• Rebalances portfolio if required• Acts as a trusted Advisor and confidante – “one stop shop” for all financial advice
