Top 7 Golden Rules of Personal Financial Planning in India

Last updated May 22, 2022
Personal Financial Planning by negi financial

Table of Contents

1. What is Personal Financial Planning?
2. What is meant by Personal Financial Planning?
3. Personal Financial Planning India for Individuals
4. Personal Financial Planning – 7 Golden Rules to Know
5. Types of Financial Advisor in India for Financial Planning

Personal Financial planning aims at ensuring that a household has adequate income or resources to meet current and future expenses and needs.

The regular income for a household may come from sources such as profession, salary or business.

The normal activities of a household and the routine expenses are woven around the regular income. However, there are other charges that may also have to be met out of the available income.

The current income of the household must also provide for a time when there will be no or low income being generated, such as in the retirement period.

There may be unexpected expenses which are not budgeted, such as a large medical expense, or there may be needs in the future that require a large sum of money, such as education of children or buying a home, all of which require adequate funds to be made available at the right time.

A portion of the current income is therefore saved and applied to create assets that will meet these requirements.

What is Personal Financial Planning?

Personal Financial planning refers to the process of streamlining the income, expenses, assets and liabilities of the household to take care of both current and future need for funds.

Personal Financial Planning Example

Rajesh is 40 years old and earns Rs.2 lakhs a month. He is able to save about Rs.40000 a month after meeting all the routine expenses of his family, paying the loans for his house, car and other needs.

His investments include those for tax savings, bank deposits, bonds and some mutual funds. He pays premiums on life insurance for himself and his wife.

Rajesh is the sole earning member of his family and he believes he takes care of his finances adequately to take care of his current and future needs.

How would personal financial planning help him?

The following are a set of indicative issues that personal financial planning will help Rajesh resolve

a) As the sole earning member, has he made provisions for taking care of his expenses if his current income is interrupted for any reason?

b) Does he have adequate insurance cover which will take care of his family’s requirements in the event of his untimely demise?

c) What are his specific future expenses and how will he fund them?

d) If Rajesh has to create a corpus to fund large expenses in the future, what is the size of the investment corpus he should build?

e) Given his current income and expenses, is He saving enough to create the corpus required?

f) Will he have to cut back on his current expense or can he increase his current income so that his expenses in the present and the savings for the future are met?

g) What is the wealth Rajesh has so far built from his savings and how can he best use it to meet his needs?

h) How should his saving be deployed? What kinds of investments are suitable for Rajesh to build the required corpus?

i) How much of risk is Rajesh willing and able to take with his investments? How would those risks be managed?

j) How should Rajesh ensure that his savings and investments are aligned to changes in his income, expenses, future needs?

A formal treatment of the issues Rajesh’s faces will require a personal financial planning process to assess the current situation, identify the current and future needs, determine the savings required to meet those needs and put the savings to work so that the required funds are available to meet each need as planned.

What is meant by Personal Financial Planning?

Personal Financial planning is thus a process that enables better management of the personal financial situation of a household.

It works primarily through the identification of key goals and putting in place an action plan to realign the finances to meet those goals.

Personal Financial planning is a planned and systematic approach to provide for the financial goals that will help people realise their needs and aspirations, and be happy.

It is a holistic approach that considers the existing financial position, evaluates the future needs, puts a process to fund the needs and reviews the progress.

Personal Financial Planning India for Individuals

In today’s world, things are changing and we are living in a modern lifestyle. What is your purpose determining the financial planning things?

Personal Financial Planning is a process of taking a holistic view of your financial needs whose objective is to achieve financial goals.

Time is an important factor in personal financial planning in India.

Personal Financial planning starts with you. You decide that what are important things you want to do in your life with a proper action plan embedded in a written financial plan.

Read more: why should you hire fee-only financial planner?

Personal Financial Planning – 7 Golden Rules to Know

1) Focus on important Goals

Goals such as retirement and education of children are important financial goals for which adequate provision of funds have to be made.

Long-term goals such as retirement often get lower priority for allocation of savings because it has time on its side.

The urgent, shorter-term goals often get a higher claim on the available savings. While this may be acceptable for short-term goals that are also important, such as accumulating funds for a down payment on a home, it may not be right to prioritize consumption goals, such as holidays and large purchases, over long-term important goals.

The delay in saving for such goals will affect the final corpus since it loses the longer saving and earning benefits including that of compounding.

You often believe that the provident fund, superannuation and gratuity corpus they will receive on retirement will be adequate to ensure a comfortable living during the retirement years. In many cases, it turns out to be inadequate.

Therefore, you need a retirement plan.

2) Identify your goals

Financial goals can be retirement planning, child education planning, house purchase planning, debt planning, child marriage planning, domestic or international vacation, emergency.

Most people are not eligible for a pension, old age security, income plan after you don’t want to work and Certain age people don’t get jobs or they become self-employed.

They have to work in some company or Financial planners ask you for your financial goals. If you don’t have any goals. Still, you need to save monthly and start investing as per your risk tolerance.

Get a piece of paper and start writing your future goals. Goals changes with time or your age.

3) Prepare a Budget

The income of an individual has to be adequate to meet the current expenses as well provide the savings to create the assets that will help meet future expenses.

If the current expenses are controlled, then it is better possible to secure the financial future of the household.

It is essential to understand the nature of income and expenses of the household to be able to manage the personal financial situation.

Income has to be regular and stable to be able to be assigned to expenses. The income is first used to meet mandatory expenses such as repayment of loans and payment of taxes.

The remaining income is next used to meet essential expenses, such as living expenses. Discretionary expenses, such as those on entertainment and recreational activities, are next met out of available income.

The excess income available is the savings of the household. However, meeting goals and future needs cannot be done if savings is ad hoc.

Prudent financial management requires that a defined level of savings should be targeted that is essential to meet goals.

A budget helps an Individual, plan its income and expenses so that the income available is utilized in the best possible way to meet current and future requirements.

The steps to making a budget are the following:

  1. List and total the regular and definite incomes that will be received in the period.
  2. List and deduct the mandatory expenses from the total income. What is left is disposable income.
  3. Identify essential living expenses of the household and deduct from the disposable income.
  4. List the discretionary expenses and deduct it from available income to arrive at the savings.

Once the incomes and expenses are identified and listed, it will be easy to assess where the problem lies, if the savings are seen to be inadequate. The income cannot be expanded beyond a certain level.

The focus should be on managing the expenses to enhance savings. If the mandatory expenses are too high, it may be because of the pressure from loan repayments.

4) Personal Risk Management

Several unexpected expenses that can cause an imbalance in the income and expenses of a household can be managed with insurance.

Insurance is a risk transfer mechanism where a small premium payment can result in payments from the insurance company to tide over risks from unexpected events.

The temporary loss of income from disabilities and permanent loss of income from death can be covered with life insurance products. Health and accident insurance covers help in dealing with unexpected events that can impair the income of a household while increasing its expenses on health care and recuperation.

General insurance can provide covers for loss and damage to property and other valuables from fire, theft and such events.

Insurance planning involves estimating the losses to the household from unexpected events and choosing the right products and amounts to cover such losses.

5) Investment Planning and Right Asset Allocation

A crucial component in personal financial planning India and advisory is the funding of financial goals of a household.

Investment planning involves estimating the ability of the household to save and choosing the right assets in which such saving should be invested.

Investment planning considers the purpose or financial goals for which money is being put aside. These goals can be short-term such as buying a car, taking a holiday, buying a gift, or funding a family ceremony or can be long-term such as education for the children, retirement for the income earners, or high expense goals such as the marriage of children.

Fee-Only Financial Planner helps with a plan to save for these goals and suggests an appropriate asset allocation to pursue.

Investment Planners do not focus on the selection of stocks or bonds, but instead takes a top-down approach of asset allocation.

The focus is on how much money is invested in which particular asset class in order to deliver the expected return within the risk preference of the investor.

The Financial Planner job is to construct a portfolio of asset classes, taking into account the goals, the savings, the required return, and the risk-taking ability of the investor.

6) Tax Planning

Income is subject to tax and the amount a household can save, the return they earn on their investment and therefore the corpus they are able to build for their future goals, are all impacted by the tax regime they fall under.

A financial advisor should be able to assess the impact of taxes on the finances of the household and advice appropriate saving and investment options.

The post-tax return of financial products will have to be considered while choosing products and estimating holding periods. The taxability of various heads of income such as dividends, rents and interest differ.

The treatment of return if accumulated, rather than paid out periodically, varies. The taxability of gains differs based on the holding period. A financial advisor should bring in these aspects while constructing a plan for the household.

7) Estate Planning

Wealth is passed on across generations. This process of intergenerational transfer not only involves legal aspects with respect to entitlements under personal law but also documentation and processes that will enable a smooth transition of wealth in a tax-efficient way.

Estate planning refers to all those activities that are focussed on the transfer of wealth to heirs, charity, and other identified beneficiaries.

There are several tools and structures to choose from, in estate planning.
Some choices such as gifts can be exercised during one’s lifetime, while choices such as wills come into play after death.

A financial advisor helps Individuals and families make these choices after considering all the implications, and help them complete the legal and documentation processes efficiently.

Types of Financial Advisor in India for Financial Planning

Fee-only financial planners and advisors

Some financial advisors choose to earn a primary component of their income from enabling clients to plan their finances in a comprehensive manner.

They engage closely with the client, offer advice on most if not all aspects of their personal finance, and charge a fee for their services. The fee may be of various types and a combination of the following:

  • One-time fee for a financial plan.
  • Fee for on-going review and periodic revisions.
  • The asset-based fee charged as a percentage of assets being advised.
  • The referral fee for engaging experts to take care of specific aspects of the plan.
  • The referral fee for the execution of a plan through other agencies.
  • Selection and portfolio construction fees.
  • Fees for assessment and analysis of the financial position

Fee-only financial planners usually do not take on the execution of the plan or advice. They refer the client to other agencies who may enable execution of the recommended investment transactions.

This is to ensure that the commissions earned on selling financial products, does not influence their advice to their clients.

Fee-based financial planners and advisors

Some financial advisors offer all the above services that are offered by a fee-only planner, but they also execute client transactions in the financial products recommended by them. They may therefore earn both a fee income for their advisory services and commissions and other incomes from the products that they recommend.

Such advisors let their clients know that they earn commissions by executing the transactions for them; they also provide the client with the option to execute their transactions with other service providers.

Institutional advisors such as banks and brokers, have to keep separately identifiable division or department (SIDD) that offers financial advice, distinct from the pure execution services.

Both business verticals need to operate independently and with complete transparency and disclosure to clients.

Clients tend to choose their advisors to execute the transactions, when they trust the advisor to offer products suitable to them, for the convenience of having all the information about their wealth in one place.

Execution services also help advisors to monitor, review and revise financial decisions that were made earlier by a client, as the years go by.

Execution only services

Some advisors may not charge their clients for advice, if it is incidental to their core function of distributing financial products like mutual funds, NPS (National Pension Scheme), Insurance products.

Their income comes from the commissions from selling the product. They may also execute transactions advised by another financial advisor.

Such advisors may also distribute a range of products including investment products, insurance products, banking and loan products, which are subject to regulations by multiple regulators apart from SEBI.

Some firms may organise the execution only services into an aggregation model. The aggregating entity has several distributors associated with it, who take a range of financial products to clients. In this case, the company short-lists the products it would offer, based on its selection criteria.

It may also have a central advisory team that selects products after research and data analysis. Those that like to offer these products to their clients, may associate with such company, and share their revenue with the company for using their research services, or execution platforms.

Many aggregators offer a range of support services to their associates, including training, development, customer relationship management software, execution platforms and facilities that may be expensive to set up on a standalone basis.

The shared facility helps the distributors to scale up their business, and pay the aggregator a share of the revenue for the benefits offered.

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By Devendra Negi

Devendra Negi is a SEBI Registered Investment Adviser and Certified Financial Planner from Dehradun, Uttarakhand, India. He helps individuals to achieve their financial goals through fee-only or advice-only financial planning and investment advice. He is a fee-only (advice-only) financial advisor and does not sell any financial products.


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