Financial Planning Imp Notes!!!!!
Financial Planning Imp Notes!!!!!
Financial Planning Imp Notes!!!!!
Financial Planning is the process of framing policies, objectives, plans, procedures, programmes and
budgets regarding the financial activities of a concern. Therefore this project ensures adequate and
effective financial and investment policies.
• Save and invest more for your goals: Investors who are able to save and invest
more will be able to create more wealth. Saving and investing according to a
financial plan instils a greater sense of purpose in your journey for financial well-
being and financial independence in the long term. The most important aspect of
a good financial plan is goal linkage with investments. We have emotions
attached with goals like buying your own home, children’s higher education,
children’s marriage, leaving a estate for your loved ones etc. The emotional
attachment makes your more committed to your financial plan. This is
the significance of financial planning.
• Disciplined investing: Discipline in investing e.g. sticking to your SIP
irrespective of market conditions, adhering to your asset allocation, regular re-
balancing etc., are essential in achieving success. You are likely to be more
disciplined if you are investing according to a plan.
• Helps you reduce debt / be debt free: Cost of debt can be a huge burden on
your savings and harm your long term financial interests. If you invest according
to a financial plan, you can fund big ticket spending e.g. vacation, buying /
upgrading your vehicle, bigger down payment for home purchase etc. from your
investments and reduce your debt burden.
• Better risk diversification: Asset allocation and risk diversification is a critical
component of a financial plan. If you do not have a financial plan, you may invest
in assets that give higher returns in bull markets and this may increase the risk
in your portfolio. One of the benefits of financial planning is to protect your
financial goals from the vagaries of capital markets.
• Improve lifestyle in a sustainable way: Despite rising disposable incomes,
average household debt in India is rising. This shows that investors are funding
their lifestyles through credit cards, personal loans etc. Debt funded lifestyle
improvements may not be sustainable. Sometimes it is seen that, parents spend a
bulk of their savings on their children’s higher education and then compromise
on lifestyle to save for their retirement. If you practise goal based investing, you
can improve your lifestyle in sustainable way, without relying on debt or
compromising on other financial goals.
• Save taxes: Having an investment plan can help you save taxes under section
80C and also invest in the most tax efficient investment options according to
your financial goals and asset allocation.
Master Budget
On the basis of function: Sales budget, production budget, purchase budget, cash budget, etc.
On the basis of time: Long term, short term, and current budget.
Advantages of Budget
Disadvantages of Budget
Advantages of Forecasting
1] Assists in Planning
One of the biggest advantages of forecasting is that it enables the
manager to plan for the future of the organization. Planning and
forecasting actually go hand in hand. Without an idea of what the
future hols for the company, we cannot plan for it. Thus, forecasting
plays a very important role in planning.
2] Environmental Changes
When done correctly, forecasts should be able to point out the
upcoming changes in the environment. This means that it can allow
the company to benefit from such environmental changes. When the
changes are favorable to the company it can expand and grow its
business. And in conditions that are adverse, it can plan and prepare
to protect itself.
Limitations of Forecasting
Along with the benefits, there are also some limitations of
forecasting. Let us take a look at a few of them,
1] Just Estimates
The future will always be uncertain. Even if use the best of
forecasting techniques and account for every aspect imaginable, a
forecast is still just an estimate. One can never predict future events
with 100% success. So even the best-laid plans may amount to
nothing. This will always remain one of the biggest limitations of
forecasting.
2] Based on Assumptions
The basis of any forecasting method is assumptions, approximations,
normal conditions, etc. This makes these forecasts unreliable. So one
must always keep in mind the inherent limitations of forecasting and
be cautious in being over-reliant on them.
Emergencies
Having money set aside for emergencies helps you in a testing situation. An
emergency fund provides financial security in times of need. It can help you avoid
using credit cards or taking out high-interest loans. Navigating through a financial
emergency in good shape serves as a useful reminder of the value of preserving
money.
Big purchases
Since the goal is to save money rather than spend it, you might not consider that
expensive purchases are one of the important reasons for saving money. However,
there are a variety of reasons you would wish to save funds to purchase expensive
items.
Accumulating wealth
If you want to focus on building wealth, you must save money. When you do so, you
develop excellent financial practices and increase your cash reserves. It also helps
you invest, which is the only way to build actual long-term wealth.
You might begin by saving money in an interest-bearing bank account. It will allow
your money to earn interest. There are different types of savings accounts you can
put your money into if your goal is accumulating wealth. You can have a look at what
IDFC FIRST Bank offers in terms of savings accounts to get the best rates in the
market. You can earn up to 6% per annum and get monthly interest credited to your
savings account.
The correct investment strategy and sound financial advice will determine how you live today and
in the future. There are six stages to develop a financial plan and to carry out personal money
management. From beginning to end, a certified financial planner professional guides you through
the financial planning process - keeping in view your current financial situation and economic
background.
The first stage of the financial planning process constitutes assessment on what is happening in
your life right now and how you can change your financial situation. The key areas to reflect are:
Household budgeting –This is an important area as after calculating the monthly costs spent at
home, you’d be able to figure out how much you are left with to save or invest.
Family commitments and Living Expenses – Are you single or married? Do you have children?
What are their living and lifestyle expenses?
Tax Standing and Strategies – How do you manage taxes? Are you living or working abroad?
Current investments or saving reserves – How much savings or debts you have right now?
Other Financial obligations – These may involve some miscellaneous costs you might be
planning ahead for future such as:
This step serves as a foundation for developing your plan and gives you a good reference point to
achieve your short as well as long term financial goals.
Experts say when you have identified your goals; you’re most likely to achieve them. Highlighting
the financial goals serves as an important aspect of financial planning. Subjected to what phase in
life you have reached, these goals could be:
The sole purpose of this step is to differentiate your needs from your wants. Apart from these, the
goals or objectives may range from spending your entire income into developing a long lasting
investment program for future financial security. However, you must select which goals you need
to pursue.
After a thorough understanding of your financial needs has been taken and all the appropriate
financial goals have been cemented down, next thing is the investment alternatives or specific
recommendations from your financial planner.
By taking a good look at your short, medium and long term goals, an integrated investment strategy
would be developed based on your set requirements. Furthermore the objectives would be looked
upon again and it will be analyzed how far you are down the road to achieving your short and long
term financial goals. Taking in account your timeframe, cash flow, risk tolerance, current insurance
coverage, tax strategies and investment goals, a range of ideas and financial planning alternatives
would be presented in order to determine which one suits you the best. This will help you produce
more actual and satisfying decisions.
4) Evaluate Alternatives
The proposed recommendations are then further assessed. This is your chance to discuss the
alternatives face-to-face and take necessary actions bearing in mind your current situation,
financial standings and personal interests. If you have any concerns regarding your financial
planner’s recommendations, those can be altered and revised. Alternatives can be closed down
based on the decisions you make. For instance:
The idea to carry on your education attests you cannot do a full time job. Decision making thus
stands as an ongoing process which works side by side with your personal and financial situation
so lost opportunities as a result of your decision making should always be kept in mind while
analyzing the alternatives.
Risk Evaluation
While evaluating the options you might end up having uncertain ideas. For instance, choosing your
career over studies involves risk. How can you ensure if it’s rewarding in your future?
Other financial decisions involve a comparatively low degree of risk such as saving your money in
a savings account or purchasing some object of great value with it. The option of losing that object
is low in such scenarios.
Thus while making financial decisions; finding out risks and evaluating them is tricky. You need to
collect data based on your experience and the experiences of others as well. Decision-making
process will require you to frequently update your knowledge politically, economically and socially
so you can make informed decisions.
Once you are content with the recommendations and feel good to proceed, the implementation of
the plan would be carried out. This step of financial planning process can be considered as an
action plan where you will pick ways to achieve your short, immediate or long term goals. Often
taken as the toughest step for some people, but makes a huge difference in the long run!
The key thing to consider here is to carry it out as early as you can. The longer it’s left unattended,
the longer it will take you to grow your wealth – ultimately a great shortfall in your savings when
you retire.
Financial planning is an on-going and dynamic process and it’s unlikely that your financial condition
will remain same throughout your life. You need to assess your financial decisions periodically as
changed personal, economic and social factors will require you to alter your decisions to fit into
your new situation.
As you progress through the different phases of your life, you financial needs will be reflected and
financial process will serve as a tool to let you adjust to these changes. Monitoring your plans will
help you prioritize your decisions and make necessary adjustments that will bring your financial
needs and goals in line with your current life situation.
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Term insurance is the most popular one in life insurance category. It has a specific
period and expires at the end of the term. The best things about a term plan are
the premiums are quite affordable. These plans can be bought by people who have
just started their career as the premiums are low. Some of the best term life
insurance plans offer critical or terminal illness cover – that means the policyholder
will be paid a lump sum amount on diagnosis of life-threatening diseases to help
them cover the medical expenses.
As the name suggests, it is a policy that covers you till you turn 99. That means, you
can be protected till you are 99 years of age. Whole life insurance plans have a
death benefit along with cash value. The life insurance policy’s cash value will grow
over time and can be withdrawn by the policyholder when it accumulates enough
value. Or, it can also be withdrawn if the policyholder opts for a loan on the life
insurance policy.
ULIPs are investment plus insurance plans so that you can enjoy best of both the
worlds. This is a type of life insurance policy that offers life cover along with
investment opportunities. Most of the ULIPs have a lock-in period of 5 years, hence,
it can be considered as a long-term investment plan. It function as per market
dynamics and you should understand your risk appetite before buying a ULIP.
This is a type of life insurance policy that offers you a life cover along with an
avenue for savings. If you buy the best saving plan, you can save regularly over a
period and this will lead you to get a lump sum amount at maturity. Buying an
endowment or saving plan is beneficial if you have long-term financial goals such
as funding your child’s education, buying a new house, or spending a carefree
retirement life.
Money back policy is a type of life insurance policy that gives money-back at
regular intervals. A percentage of the Sum Assured is paid back at intervals during
the policy tenure. These life insurance plans offer Survival Benefits, which are paid
out during the plan tenure and at maturity. If the policyholder passes away when
the policy is in force, the entire Sum Assured is paid to the beneficiaries irrespective
of the Survival Benefits already paid.
6. Child Insurance Plan
Child insurance plans are life insurance policies that are opted to safeguard the
future of your child. Along with providing a life cover, it helps in building an
education fund to support your child’s dreams and aspirations. Child plans are
investment plus insurance plans designed to assist you in creating wealth for your
child’s future needs. You can invest in these plans right when your kid is born to
build a strong financial cover.
7. Retirement Plans
These life insurance policies help you build a retirement corpus so that you can
enjoy your post-retirement life. You can make your spouse the beneficiary to your
life insurance plan.
1. Efficiency
These ratios are helpful in analyzing whether the assets owned by the company
are sufficient to meet the short and long term viability of the company. These are
looked by the debt rating agencies such as the S&P and the Moody’s to present
how risky is the company for investment. These include coverage ratios, current
ratio, quick ratio and so on.
3. Liquidity
This is the ratio that implies how much a company has invested in cash and near-
cash securities and is helpful in analyzing how much money could the company
generate at a short notice to fulfill an unforeseen event. However, a very high
investment in liquid assets can also imply that the company is missing out on
greater interest from the investment in less liquid securities. Therefore a right
level of liquidity is desired.
4. Market Performance
Ratios such as the P/E ratio, P/Sales ratio, P/BV ratio, EV/EBITDA and so on help in
understanding whether the company is over or undervalued in comparison with
its peer group and should an investor include the stock at the given level of risk
involved. Further, it also helps the management to understand how a company’s
performance reflects the share price and what kind of future strategy should it
adopt.
5. Profitability
Ratios such as the Gross Profit Margin, Net Profit Margin, Return on Equity help in
understanding how much is it worth investing in the company. If the Net Profit
margin is very low but the Gross Profit Margin is very high, this implies that the
overheads of the company are a little on the higher side and the company should
look into these to find out if there is an area of improvement.
6. Planning
Once the management has the ratios in front of them, they can develop future
strategies such as capital expansion related investments or whether leasing is a
better option than buying a fixed asset. Combining the information with the
future market expectations helps the management in developing a long term
expansion plan which is executed in phases over time.
7. Budgeting
Operating expenses and other annual expenses and investments are also planned
based on the ratios, for example, if the inventory turnover ratio is very high, the
management can place bulk orders and build up inventory to reduce ordering cost
if the expectation of demand remains unchanged
Source of dividend
You can receive dividends from the following sources –
From a domestic company in whose shares you have invested
From a foreign company in whose shares you have invested
From equity mutual funds if you have chosen the dividend option
From debt mutual funds if you have chosen the dividend option
Revocable and irrevocable trusts are two of the most common types of
estate planning trusts.
1. Revocable Trust
A revocable trust, as the name suggests, can be adjusted, revised, or
canceled completely. These types of trusts are beneficial to the grantor,
as it avoids any legal battle. However, the creditors of the grantor can
have access to the estate by getting a court order.
2. Irrevocable Trust
2. Charitable Trust
A charitable trust is beneficial to the trust maker, as it reduces or avoids
paying taxes. It also helps when the trust maker owns very high-value
assets. By putting the high-value assets in the charitable trust, they avoid
paying huge taxes and also receive a huge payout, while a portion of it
goes to charity.
Meaning - Section 80G of the Income Tax Act primarily deals with donations made towards
charity, with an aim to provide tax incentives to individuals indulging in philanthropic
activities. This section offers tax deductions on donations made to certain funds or charities.
An amount donated by an individual to an eligible charity can be claimed as a tax deduction
while filing of an income tax return.
80CCC Deduction 80CCC allows deduction for payment towards annuity pension
for life insurance plans Pension received from the annuity or amount received upon
annuity plan. surrender of the annuity, including interest or bonus accrued on
the annuity, is taxable in the year of receipt.
Section 80D
Deduction For: Premiums Paid Towards Health Insurance Policies
Health check-up expenses are also eligible for a tax rebate of ₹5,000 under
Section 80D.
Section 80DD
Deduction For - Medical or rehabilitation expenses paid for a handicapped
dependent.
Deduction Limit:
HUFs and individuals paying for a disabled family member's treatment and
wellbeing are eligible to claim exemptions under Section 80DD on the total
income spent.
The coverage limit is determined by the percentage of disability, with people
with 40-80% disability eligible for a deduction of ₹75,000.
Whereas, families that are caring for an individual with a disability of more
than 80% can receive ₹1.25 lakh for all their related expenses. This benefit is
only available to the dependent individual's family.
Section 80DDB
Deduction For - Medical expenses paid for oneself or dependents in treating a
specific illness or disability
When you pay for the treatment of a family member diagnosed with one or
more specific diseases, you may be eligible for a tax waiver.
A waiver may be given for the treatment of critical illnesses such as malignant
cancers, chronic renal disease, AIDS, haematological ailments, and
neurological diseases (causing 40% or more disability).
Section 80E
Deduction For - Interest Paid Towards Education Loan
In the financial year, the interest part of the EMI is deducted. There is no
maximum amount that can be deducted.
A deduction will be allowed for the total interest paid. No deductions will be
allowed for the principal repayment.
Section 80EE
Deduction For - Home Loan Interest for First-time Buyers
If the property value is less than ₹45 Lakh, first-time home-buyers can claim
additional interest benefits up to ₹50,000 over Section 24(b) on home loan
EMIs. This effectively allows up to ₹2.5 Lakh to be saved in taxes in addition
to the Section 80C deduction.
For a tax rebate on EMI payments under Section 80EE, an applicant must not
have owned any other property before applying for a home loan.
Section 80G
Deduction For - Donations Made to Charitable Organisations
Cash donations are exempt from tax calculations for up to ₹2,000 per year.
Such contributions must, however, be made to registered charitable
organisations.
Section 80GG
Deduction For - House Rent Allowance (HRA), if NOT Included in the Salary
Breakdown
Section 80GG allows you to claim exemptions on your total taxable income if
your company does not include the HRA component in your salary breakdown.
In the case of tax-saving investments other than 80C, tax waivers are granted
to the least of the following:
• Monthly ₹5,000
• The total annual income of 25%
• 10% of the basic annual income.
Section 80GGA
Deduction For - Donations for Scientific Research and Rural Development
Tax exemptions can be claimed under Section 80GGA for donations for
scientific research and rural development.
Such deductions can be made on 100% of the income spent, as long as it was
made through a bank account and documented.
Section 80 GGB
Deduction For - Donations Made to Political Parties or an Electoral Trust
According to Section 80GGB of the Income Tax Act 1961, any Indian company
that contributes any amount to a political party or electoral trust registered in
India can deduct that amount from its income tax liability.
Section 80 GGC
Deduction For - Donations Made to Political Parties or an Electoral Trust
Individuals, Hindu Undivided Families (HUF), firms, AOPs, BOIs, and Artificial
Juridical Persons are eligible for making contributions under Section 80GGC.
However, the government should not fund the Artificial Juridical Persons.
Section 80TTA
Deduction For - Interest Earned on Savings Account Deposits
For interest income that exceeds ₹10,000 in one year, only the excess amount
over the cap is taxed at rates determined by the aggregate annual income.
Section 80U
Deduction For - Individuals with Disabilities Receive Income Tax Benefits
Deduction Limit:
Section 80U allows disabled individuals to claim tax waivers if they are
certified by a registered medical authority to be 40% disabled.
People with disabilities whose disabilities are between 40% to 80% can claim
₹75,000, while those with disabilities more than 80% can claim ₹1.25 lakhs in
tax benefits.
Section 24(b)
Deduction For- Income from house property
You can earn tax exemptions on your home loan interest payments as well.
Under Section 24(b), interest of up to ₹2 lakhs is tax-free, provided that the
construction is completed within five years of the loan term.
Section 10(13A)
Deduction For - House Rent Allowance Provided Under Salary Break-Up
Section 10(10D)
Deduction For - Sum Assured Upon Maturity of Life Insurance Policy
Under Section 10(10D), the entire amount paid by the life insurance company
upon maturity of the life insurance policy either on untimely death of an
insured or end of the policy term can be claimed as a tax rebate.
However, such death benefits are exempt from tax calculations if they are
taken after April 1, 2012, and the total premiums are less than the full sum
assured.
Do not depend entirely on Section 80C to reduce your tax liability. Though
Section 80C does offer a major tax-saving deduction, there are other sections
that one can explore. So, use the above-mentioned sections of the Income Tax
Act and save your tax outgo.