Introduction of Personal Finance for beginners

PERSONAL FINANCIAL
PLANNING
BY – DR.YOGESH DHOKE

Course Outcome
 Examine the meaning and appreciate the relevance
of financial planning.
 Demonstrate the concept of investment planning
and its methods.
 Examine the scope and ways of personal tax
planning.
 Analysis the insurance planning and its relevance.
 Interpret insights into retirement planning and its
relevance.

CONTENTS-:
1. Introduction – what is Planning and personal financial planning.
2. Benefits of financial planning
3. Financial planning pyramid.
4. Financial planning process and steps.
5. Financial planning concepts.
6. Factors determining financial planning.
7. Basis of financial planning.
8. Conclusion.

1.Introduction-:
1. What is planning - Planning is the process of thinking about the
activities required to achieve a desired goal. It is the first and foremost
activity to achieve desired results. It involves the creation and maintenance
of a plan, such as psychological aspects that require conceptual skills.
2. A proper planning prevents poor performance, So a proper planning is
necessary in every day life whether it is related to personal financial
planning or in any other sports related activities , at the time of presenting
your views before everyone, preparing for any type of exam such as
competitive exams or academic exams, planning a vacation, et cetera.
3. Planning thus precedes all efforts and action, as it is the plans and
programmes that determine the kind of decisions and activities required for
attainment of the desired goals.

Personal Financial Planning-:
1. Financial planning has become one of the most important aspects of life.
Correct planning helps you in achieving your personal financial goals and keeps
you financially secure for unforeseeable situations.
2. In general usage, a financial plan is a comprehensive evaluation of an
individual's current pay and future financial state by using current known
variables to predict future income, asset values and withdrawal plans. The entire
gamut of financial planning is explained by RETIIRS, which means-:
R – RISK, E – ESTATE, T – TAX, I – INVESTMENT, I – INSURANCE,
R – RETIREMENT, S – SAVINGS.
3. A financial plan acts as a guide as you go through life’s journey. Essentially, it
helps you be in control of your income, expenses and investments such that you
can manage your money and achieve your goals.

Benefits of financial planning-:
1. Correctly managed cash flow.
2. Personal finances.
3. Achieving personal goals.
4. Clear retirement goals.
5. A secure retirement income.
6. Reduced risk.
7. Insurance.

The steps in the financial planning process are as
follows-:
 Establish and define the relationship with the client-:
The financial planning professional informs the client about the financial
planning process, the services the financial planning professional offers, and
the financial planning professional’s competencies and experience. The
financial planning professional and the client determine whether the services
offered by the financial planning professional and his or her competencies
meet the needs of the client.
 Collect the client’s information-:
The financial planning professional and the client identify the client’s
personal and financial objectives, needs and priorities that are relevant to the
scope of the engagement before making and/or implementing any
recommendations. The financial planning professional collects sufficient
quantitative and qualitative information and documents about the client
relevant to the scope of the engagement before making and/or implementing
any recommendations.

 Analyze and assess the client’s financial status-:
The financial planning professional analyzes the client’s information,
subject to the scope of the engagement, to gain an understanding of the
client’s financial situation. The financial planning professional assesses
the strengths and weaknesses of the client’s current financial situation
and compares them to the client’s objectives, needs and priorities.
 Develop the financial planning recommendations and present them to the
client-:
The financial planning professional considers one or more strategies
relevant to the client’s current situation that could reasonably meet the
client’s objectives, needs and priorities; develops the financial planning
recommendations based on the selected strategies to reasonably meet the
client’s confirmed objectives, needs and priorities; and presents the
financial planning recommendations and the supporting rationale in a
way that allows the client to make an informed decision.

 Implement the financial planning recommendations-:
The financial planning professional and the client agree on implementation
responsibilities that are consistent with the scope of the engagement, the client’s
acceptance of the financial planning recommendations, and the financial
planning professional’s ability to implement the financial planning
recommendations. Based on the scope of the engagement, the financial planning
professional identifies and presents appropriate products and services that are
consistent with the financial planning recommendations accepted by the client.
 Review the client’s situation-:
The financial planning professional and client mutually define and agree
on terms for reviewing and re-evaluating the client’s situation, including
goals, risk profile, lifestyle and other relevant changes. If conducting a
review, the financial planning professional and the client review the
client’s situation to assess progress toward achievement of the objectives
of the financial planning recommendations, determine if the
recommendations are still appropriate, and confirm any revisions
mutually considered necessary.

Financial planning concepts-:
 Cash flow analysis-: It includes – Sources of cash, Uses of cash, change in cash balance.
 Current asset allocation-: Asset allocation is an investment portfolio technique that aims to balance risk by
dividing assets among major categories such as cash, bonds, stocks, real estate, and derivatives.
Each asset class has different levels of return and risk, so each will behave differently over time.
 Networth-:Your net worth is the amount by which your assets exceed your liabilities. In simple
terms, net worth is the difference between what you own and what you owe. If your assets exceed your
liabilities, you have a positive net worth. ... Your net worth provides a snapshot of your financial situation
at this point in time.
 It is calculated as -: Total assets(-)Total liabilities
 Risk profiling-: Risk profiling is a process Advisers use to help determine the optimal levels of
investment risk for clients. It aims to identify the risk required to meet your investment objectives,
your risk capacity, and your tolerance to risk.
 Emergency fund analysis-:An emergency fund is a readily available source to help you
solve financial crises due to unexpected reasons. This fund helps improve financial security by creating
highly liquid cash to meet any emergency and reduce the use of unsecured loans.
 Protection planning-:Just as you implement risk management strategies to protect your investments, you
should have strategies in place to protect yourself. Insurance is a key element of any financial strategy.

Estate planning-:Estate planning is the process of arranging and planning your
succession and financial affairs. ...Assets, Life Insurance, Pensions, Real Estate, Cars,
PersonalBelongings, and Debts are all part of one's estate.
Tax planning-:Tax planning is the process of analysing afinancialplan or a situation
from a tax perspective.The objective of tax planning is to make sure there
is tax efficiency.With the help of tax planning, one can ensure that allelements of
a financial plan can function together with maximum tax-efficiency.

Basis of financial planning-:
 Life cycle of individual -:
 Childhood stage – Learner.
 Young unmarried stage – Earner.
 Young married stage – Partner.
 Young married with children stage – Parent.
 Married with older children stage – Provider.
 Post family/pre-retirement stage – Empty Nester.
 Retirement stage – Enjoyer.
 The 3 phases of one’s life -:
 Birth and education – 22 to 23 years.
 Earning years – 30 to 40 years.
 Retirement – At 58 or 60 years.

Conclusion-:
 Introduction Personal finance is all about how to effectively manage your
money in order to achieve set goals. To achieve financial goals it is crucial
that you adequately plan your life such as how, when and on what to spend
your money because this discipline will enable you to stick to your goals.
Therefore, you have to have a budgeted life. Budget refers to the financial
plan which contains information on expected expenses and income within a
set period of time.

 In this course (personal financial planning), we do this
assignment and carry out some conclusion. All of that, were
about its beneficial of financial planning, what should we do or
how we can prevent when we face to financial problem and
planning for the better life style. For this personal financial
planning is a kind of useful soft skills in our future life, it will
bring us improvement of standard of living and achieve or
goals. After discussion in this assignment, we gain of
understanding for financial planning process, we also learn
more about beneficial of using the personal financial planning
by influencing economic environment. For example, we can
classify about our investment and planning our wealth for
better when make our decision in future planning.

Cash Flow Budgeting
 A cash flow budget is a summary of the
projected cash inflows and outflows for
a business over a period of time. The
time period is usually a future
accounting period and is divided into
quarters or months.
 As a primary purpose is to estimate the
amount and timing of future borrowing
needs and the ability of the business to
repay loans.

Insurance planning
 Risk-: A condition where there is a
possibility of adverse outcome,
however the outcome is uncertain.
 This is applicable to individuals as well
as corporate houses. Probability of risk
lies between 0 to 1
 There are four ways to manage the
risk.
i) Avoiding ii) Controlling iii)
Accepting iv) Transferring- Insurance

Introduction of Personal Finance for beginners

Concept :
Insurance is the tool used for the protecting asset from
risk arises of uncertainties (insurance can protect only the
economic value of the asset), as there is a chance of
damage to asset before the expected life through
accidental occurrences.
Such accidental occurrences are called as PERIL.
Insurance is a contract between Insurer ( insurance co.) &
Proposer / insured ( cover holder), where insurer accepts
the risk according to the terms & conditions, and for same
insured pays some consideration called as premium.

Working principles of Insurance:
1. Uncertainty. : Covers only uncertainties
2. Shearing of losses. : The total loss is shearing among large no. of
units having same risk.
3. Law of Large numbers. : Large no. assure the correctness in the
statistics of premium calculations.

Following are the characteristics which can be
covered by insurance :
1. Loss must occur by chance
2. Loss must be definite, quantifiable.
3. Loss must be significant.
4. Loss rate must be predictable.
5. Loss must not be catastrophic to insurer.

Principles of Insurance:
1. Principle of Utmost Good Faith
2. Principle of Insurable Interest
3. Principle of Indemnity
–Principle of Contribution
–Principle of Subrogation
4. Principle of Proximate Cause
5. Principle of Average

Principle of Utmost Good Faith :
•It is a voluntary duty to disclose all material facts which can affects the
judgment in analyzing the risk.
•
•– Examples:
• Life insurance – medical history, financial status,
• lifestyle (smoking, drinking) etc.
• General insurance – previous convictions, previous
• losses, claims, policy cancellations.
• Personal accident – nature of occupation
• Fire Insurance – Construction of building
• Motor Insurance – purpose for which vehicle is used
• Marine Insurance – Method of packing
•Normally all insurance application forms has questionnaire to collect this data.
•The principle of utmost good faith is applicable while entering into the contract
& come in force again at the time of revival

Principle of Insurable Interest :
• Generally insurable interest exits only if insured would
•suffer a financial loss in the event of damage to or
•destruction of the subject matter.
•– Insurable interest can be acquired by:
• Ownership, legal possession, custody of property
•belonging to others
•e.g. marriage-spouses on each others life,
•Employer - employee vice versa,
•partners,
•debtor and creditor.
•A parent usually deemed to have insurable interest in his or her child’s life
•The insurable interest is applicable at the time of entering in the contract in
the life insurance & applicable at the time of entering in the contract as well
as at the time of claim in the general insurance except Marine insurance.

Insurance Terms :
Types of deductibles which form part of general insurance policy in most
cases
Excess
• Portion of any claim that is not covered by insurance provider
• Deductible must be met before benefits of the policy can apply
• Motor insurance deductible applies to claims arising from damage to his
own vehicle.
• Travel insurance policies have deductibles
• Health insurance policies have deductible which does not
• Cover cost of routine visits
Franchisee
• Kind of excess with a difference
• Like in excess if reported claim is below limit of franchisee it is not payable
• If claim amount is more than franchisee amount the insured gets full
amount of
claim without any deduction

Types of insurance policies :
3 types of life insurance policies
– Term Insurance (Risk Cover only ): provides life insurance protection for a
specific
period of time
– Pure endowment plan (Pure Investment): insurer pays fixed sum of money
periodically, while insurer will give survival benefit to insured
– Endowment (Combination of Term Insurance + Pure endowment ) : in
addition to
life insurance protection, it also builds internal cash values. So policy holder
gets
both life cover as well as maturity survival benefit.

•Term Insurance Plans
Level term
Decreasing term
Increasing term
Renewable term
Convertible term
Term insurance with return of premium
•Level term: Sum Assured (SA) same and uniform throughout term of policy,
in case
of death anytime during term, SA is payable.
•Decreasing term: Premium remains constant, but benefit payable decreases
with
time: for mortgage
•Increasing term: premium and benefit increases with time, wherein the
increase
could be linked to fixed %
•Renewable term: policy is issued for fixed term, with option to policy holder
to renew
without providing proof of health status

•Convertible term: policyholder has option to convert his term insurance to a
permanent insurance plan without undergoing medical test
•Term insurance with return of premium: same as level term, except
policyholder
on survival gets back full premium paid

Life insurance products.:
•Whole life policy
Ordinary life insurance:
Limited paying life insurance
Endowment Policy
Money Back Policy
Unit Linked Policy
Pure Investments
Annuities/Pension plans
ULIP ( Unit linked insurance plan ) :
Policy rider:
Gives additional benefits that supplement basic benefit of SA. You have to
pay extra premium for same.

Life insurance products.:
•Riders :
•Critical illness cover rider
•Disability benefit rider:
•Waiver of Premium (WOP)
•Accident death benefit:
•Level term cover rider:
•Payor rider.

General Insurance Products
•Home Insurance
•Motor Insurance
•Accident & Disability Insurance
•Mediclaim
•Critical Illness
•Overseas Travel: Actual Travel
•Guard Policy
•Liability insurance

Tax Benefits on Insurance.
•Section 80C deduction: Upto 1 lac for premium paid on life of self, spouse,
children including adult children and married daughter
•Section 80D deduction: for medical insurance and all health riders
• upto 15000 pa (Rs. 20000 for senior citizens)
•Section 10(10D): Any sum received under insurance policy including maturity
bonus etc is exempt. If annual premium is > 20% of SA on maturity,
• then differential between SA & Premium paid is taxable

Accident & Disability Insurance
•Cover:
Physical loss to an individual due to accidental bodily injury (including fatal)
24 hour worldwide cover
Any individual aged between 5 and 70, Subject to medical exam at
70,
person can be covered upto 80
• Scope of Cover
Death 100% of SI
Permanent Total Disablement 100% of SI
Loss of 2 limbs/2 eyes or 1 limb + 1 eye 100% of SI
Loss of 1 limbs or 1 eyes 50% of SI
Permanent Partial Disablement Varying % of Sum insured as per policy
Temporary Total Disablement : 1% of SA per week, subject to Rs. 3000 max
per week, for max of 104 weeks

Accident & Disability Insurance :
Exclusions:
• Compensation under more than one clause for same period of disability
not
exceeding CSI
•Any payment after admission of claim for 50%/100% of CSI
• Any claim in the same period of insurance exceeding the CSI
• Suicide, attempt there at, criminal breach of law, accidental death/injury
under
• influence of liquor/drugs
•Pregnancy related claim
•War and nuclear perils

Mediclaim :
•Covers:
Expenses incurred by insured for hospitalization/domiciliary for
illness/diseases
or injury sustained. Includes:
•Hospital charges(room, boarding, operation theatre)
•fees for surgeon, anaesthetist, nursing, specialist etc.
•diagnostic tests, cost of medicines, blood, oxygen etx,
•cost of appliances like pacemaker, artificial limns etc.
•Domiciliary Hospitalization is capped at 20% of Sum
•Assured
•Any person in age group of 5 to 75 years, children between 3 months and 5
years can be covered only along with parents.
•Usually claim permitted only subject to minimum hospitalization of 24
hours except for specific ailment

Mediclaim :
•Exclusions:
• Diseases contracted within 30 days of insurance
• Dental treatment except arising out of accident.
• Debility and General Run Down Conditions.
• Sexually transmitted diseases and HIV (AIDS)
• Circumcision, Cosmetic surgery, Plastic surgery unless required to treat
injury
or illness
• Vaccination and Inoculation
• Pregnancy and child birth
• War, Act of foreign enemy, ionizing radiation and nuclear weapon.
• Treatment outside India
• Naturopathy
• Experimental or unproven treatment
• All external equipments such as contact lenses, cochlear implants etc.

Introduction of Personal Finance for beginners

More Related Content

Similar to Introduction of Personal Finance for beginners (20)

More from Yogesh Dhoke (13)

Recently uploaded (20)

Introduction of Personal Finance for beginners