What is Financial Planning & How to do it ?

We have always said in our services that we do Financial Planning for our clients. But, what do we actually mean when we say that ?

Often, we have seen files of papers at our home containing various LIC premium receipts, FD certificate, insurance papers and what not.

In our everyday life, we have made financial planning so complicated.

A financial plan has 2 basic qualities –

  • First, it should be simple to plan and
  • second, simple to execute.

You should not buy such financial instruments, which are very cumbersome to buy at first and also for which you later regret.

A good financial plan is the right balance of instruments or investments that give us –

  • Good returns,
  • Save Tax,
  • Emergency Fund,
  • Insurance Cover.


Let’s learn how to make an ideal financial plan in a step by step process.

Preparing your financial plan requires following these steps – 

  1. Emergency Fund
  2. Insurance
  3. Retirement Planning
  4. Debt Management
  5. Tax Planning
  6. Investment Planning

Let’s understand them in detail.

1. Emergency Fund: First and foremost, it is very important to be prepared for emergency situations. This include:

  • Keeping  at least 6 months of your income in liquid funds or savings account


2. Insurance: You do not need various kinds of insurance. Just keep it simple. This includes:

  • Life insurance policy, only for the earning member of the family. You should take a life insurance policy that covers 20 times of your annual income. For example, if your annual income is Rs 5 lakh, then you should take a cover of 1 crore.
  • health insurance policy for you and your family ;


3. Retirement Planning: You can invest in NPS. In NPS, you need to contribute a sum of money till 60 years of age. After that, you can withdraw 60% of the corpus and the remaining corpus is kept for annuity i.e, you get a monthly pension to meet your daily needs. And, as compared to other retirement products, NPS gives you better returns. And, you also get tax benefit of upto Rs 50,000 per annum.


4. Debt Management: While making financial plans, we also need to consider our debt. So, here comes the loan management part. One should always avoid loans which are very high in interest such as Credit Card, Personal Loans, unsecured loans.


5. Tax Planning: Then comes tax planning. For tax planning, there are many instruments available including government bonds etc, but investing in ELSS will not only give you tax benefits but also good returns. ELSS has a lock-in of 3 years. So, you can get upto Rs 1,50,000 tax benefit under 80 C while investing in ELSS. ELSS can serve as both a tax planning and a wealth creation instrument.


6. Investment Planning: For good returns, investment in good products is required. So, investment in Mutual Funds is suggested as compared to direct stocks. Because the risk of your capital being eroded due to market volatility is high in direct stocks. Whereas, in mutual funds you get diversification along with good returns. And, also the funds are categorized according to your risk taking ability.

However, there are other options like Property, Gold which you can include in your financial plan.

 If you want any help in preparing your personalized financial plan, connect with Financial Friend.