INTRODUCTION TO PERSONAL FINANCIAL PLANNING

Introduction to Personal Financial Planning

Definition: Financial planning is a process that enables better management of a household or individual's personal financial situation, ensuring adequate income or resources to meet current and future expenses and needs.
Details: It involves streamlining income, expenses, assets, and liabilities to take care of both current and future needs for funds, and is a holistic approach that considers the existing financial position, evaluates future needs, and puts a process in place to fund those needs.

Financial Planning Process: A comprehensive process that centers on the client, their needs, and their goals, and involves identifying key goals, creating an action plan, and monitoring progress.
Need for Financial Planning: Financial planning is necessary because it bridges the gap between the available financial products and services and the specific needs and situations of the client, and provides a holistic approach to managing personal finances.
Role of the Financial Planner: A financial planner has a significant role to play in advising clients, recognizing their exact needs and goals, and making efforts to ensure those needs or goals are achieved.
Scope of Financial Planning: Financial planning enables a household or individual to manage its personal finances efficiently in line with their short and long-term objectives, and includes elements such as personal financial analysis, goal setting, and investment planning.

Goal Setting: The financial planning process starts with goal setting, which involves identifying what needs to be achieved, and gives a clear target that has to be reached.
Features of Goals: Goals should be specific, measurable, realistic, and time-bound, and should be prioritized in order of importance.
Prioritization of Goals: Important goals, such as children's education and retirement, should be put first, and should take priority over less important goals, such as spending on luxury items.

Financial Goal Setting: Focus on important goals such as retirement and education of children, and prioritize them over consumption goals.
Staggering Goal Timings: Defer non-critical financial goals to ensure critical goals are not compromised, and adjust goal timelines based on financial capabilities.
Cash Flow Management: Create a budget to match cash inflows and outflows, and avoid cash flow problems by having a reserve and prioritizing essential expenses.

Insurance Planning: Use insurance to manage unexpected expenses and risks, such as disability, death, health, and property damage.
Debt Management: Plan liabilities efficiently, and use borrowings judiciously to fund assets, while considering credit scores and repayment capabilities.
Investment Planning: Estimate savings and choose the right assets to invest in, considering financial goals, risk appetite, and required returns.
Tax Planning: Assess the impact of taxes on finances and choose tax-efficient saving and investment options, while considering post-tax returns and holding periods.
Retirement Planning: Plan for retirement by understanding time value of money, inflation, and compounding, and selecting suitable financial products for long-term goals.
Estate Planning: Transfer wealth to heirs, charity, and other beneficiaries in a tax-efficient way, using tools such as gifts, wills, and other structures.

Asset Allocation: Construct a portfolio of asset classes to deliver expected returns within the risk preference of the investor.
Net Worth: Calculate the net worth of a household or individual by subtracting liabilities from assets.
Cash Flow Budgeting: Create a budget to manage cash inflows and outflows, and prioritize essential expenses to avoid cash flow problems.

Financial Stability: The adequacy of income is relative to expenses, and managing expenses within income is crucial for financial stability.
Savings: A portion of current income set aside for future needs, which can be used to invest in assets.
Assets: Classified as physical assets (e.g., real estate, gold) and financial assets (e.g., bank deposits, equity shares), which provide returns and can appreciate or depreciate in value.

Physical Assets: Tangible assets with intrinsic value, often used as a hedge against inflation, but may have limitations such as illiquidity and require specific skills to manage.
Financial Assets: Represent a claim on benefits, standardized, and regulated, offering varying levels of liquidity and returns, such as growth-oriented or income-oriented investments.

Loans and Borrowings: Can create liabilities and impose repayment obligations, affecting financial strength, and should be used with discretion.
Net-worth: Calculated as Assets – Liabilities, indicating financial well-being, and should be tracked periodically to achieve desired financial goals.

Six-Step Process: Establish client-planner relationship, gather client data, analyze and evaluate financial status, develop and present recommendations, implement the plan, and monitor progress.
Financial Goals: Require clear definition of future needs, including the amount of money needed and when.

Regulatory Initiatives: Aim to prevent mis-selling by differentiating between advice and distribution, and requiring advisers to earn revenue from clients, not producers.
Business Models: Include fee-only financial planners, execution-only services, and wraps/platforms, each with varying levels of advice, execution, and revenue streams.

Fee-Only Financial Planners: Earn income from clients, offering comprehensive advice, and charging fees for services, without executing transactions or earning commissions from producers.
Execution-Only Services: Distribute financial products, earning income from commissions, and may execute transactions advised by other financial advisers.
Wraps and Platforms: Technology-based advisory solutions, standardized for execution, offering a range of services, including research, execution platforms, and support services.

Definition: Personal financial planning involves creating a tailored plan to manage one's finances, including investments, to achieve specific goals.
Details: It encompasses a comprehensive approach to managing financial resources, taking into account individual circumstances, risk tolerance, and objectives.

Wrap Platforms: Offer financial products as model portfolios that investors can buy, allowing for standardized investment options.
Platform Fees: Clients may be charged a fee for using these platforms, which is often shared with the Investment Adviser who executes transactions.
Adviser Benefits: Platforms may enable advisers to access clients, sell financial advice, and charge a fee, which is then shared with the platform provider.
Portfolio Management: These platforms allow advisers to holistically manage client portfolios across multiple products, enabling a unified view of their financial situation.
Performance Monitoring: Clients can view their portfolio performance, while advisers can monitor and review portfolios to make informed decisions.