What is Financial Planning

What is Financial Planning

When it comes to financial planning and wealth management, most of you believe that creating savings is all that you require for fulfilling your financial plan. It is a misconception. What is personal financial planning? A personal financial planning process encompasses a wide range of activities which you need to carry out in order to achieve financial independence. It does not stop at savings. Do you know what these activities are?

Many of you, sadly, don’t! As it is essential, let’s understand financial planning and what it involves –

What is financial planning?

Financial planning is a process wherein you make financial decisions to meet the different financial goals of your life by managing your finances. Thus, financial planning involves making sensible and practical decisions about your money for future goals, not just creating savings.

What does financial planning involve?

Financial planning is a six-step process wherein you can plan for your finances and achieve financial independence. Let’s look at what are the six steps in the financial planning process–

1. You should estimate your current net worth
– you should analyse and find out your assets and liabilities to arrive at your net worth. Your assets are your investments and other owned belongings which give you an income. Liabilities, on the other hand, are the debts which you have to pay off. Your liabilities should be deducted from your assets to find out your current financial standing. This is called your net worth which you should know.

2. You should chalk out your goals
– goals are important as they dictate how much to save and for how long. A strategic financial planning process involves planning around some common goals such as marriage, child education, asset creation, buying a home, wealth maximization and retirement. Chalk out your goals based on your life stage. If your children are independent, your goal might be to create wealth and plan for retirement. On the contrary, if you have just started a family, planning for your child’s future might be an important goal. So, list out your goals to understand your financial requirements.

3. Find out your financial requirement – your goals help you find out the amount of money you need in life. Segregate your goals into short, medium and long-term to find out your investment horizon. Then choose investments whose tenure matches the horizon of your goals. . With goal planning, you can see when you need the money and invest accordingly. Don’t forget to factor in inflation. It has a direct bearing on the amount of money required to fulfil your medium and long-term goals.

4. Create a budget and stick to it – The next step is finding out your disposable income. Until and unless you know the income you can direct towards savings, you cannot create a portfolio. For maximum savings, create a budget. When spending, stick to your budget to avoid overspending. Budgeting helps you save more and meet your goals successfully.

5. Understand your risk appetite to know your investments – different investments have a different risk profile. Understanding of your risk appetite is important to find out in which assets you can invest. To understand your risk-taking ability, factor in your dependents, age, income, existing investments, etc. Once you know your risk profile you can choose equities if you are a risk taking investor or debt investments if you are risk-averse. Once you know your investment horizon and risk appetite you should pick the investment avenues. Some common and popular investment avenues include equity, debt, fixed-income, real estate, gold, etc. when picking assets, don’t stick to one asset class. Diversify. Diversification would help you spread your risk over different investments and minimize it. The returns, however, would be better.

6. Monitor and review your portfolio – financial planning is not a one-time affair. You need to monitor and review your portfolio from time to time. With time your financial requirements change. Your financial plan should be changed to factor in the change of your requirements.

Financial planning is a broad concept, an ongoing process and confusing it with only one factor of savings is wrong. Understand the entire financial planning process, follow it and achieve financial freedom.

Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


Insurance and PPF are not the only tax-saving options

Traditional wisdom tells everyone to maximize tax-saving investments. After all, it has a two-fold benefit of tax-saving as well as building wealth for the future. So, all possible tax-saving options should be optimized, especially the investment ones. And while Public Provident Fund (PPF) and Life Insurance are the most popular income tax saving options, you may want to consider the other, myriad options available too, especially under Section 80C of the Income Tax Act. To remind you, you can invest up to Rs 1.5 lakh every year for a tax deduction under this section as one of the tax saving investment options. Let’s look at the multiple 80C investments available in detail: Investment Options U/S 80C:   Other available tax-saving deductions under Section 80C: You can also use these tax saving options in India or tax-saving deductions to reduce your net taxable income. • Children tuition fees: The fees paid towards your children for school tuition is eligible for tax-saving deductions U/S 80C• Repayment of home loans:   o The repayment of the principal amount of your Home Loans can be considered as tax deductions U/S 80C. This is subject to      a limit of Rs 1.5 lakh per annum  o The interest can be used for an additional tax deduction of Rs 2 lakh U/S 24  o An additional amount of Rs 50,000 can be deduction U/S 80EE by first-time home buyers. This is only valid if the property      has a value of less than Rs 50 lakh or the loan amount is lower than Rs 35 lakh. Other Investment Options 1. RGESS: If your income is less than Rs 12 lakh a year and you have never invested in equity before, then you can invest Rs 50,000 in Rajiv Gandhi Equity Saving Scheme or RGESS. This gets you an additional deduction of Rs 25,000. This can be done by investing in RGESS Mutual Funds or buying some specified stock options. 2. Health Insurance:     a. The premium paid towards your health insurance plan for self, spouse and dependent children is eligible for a tax         deduction of Rs 25,000 per annum U/S 80D and     b. An additional amount of Rs 25,000 per annum for premium payment towards health insurance premium for dependent         parents    c. The amounts are Rs 30,000 per annum if either you or your parents are senior citizens    d. So, the maximum amount you can deduct under this section is Rs 60,000 per annum. 3. Donations: Any donation made to any tax-saving trust or listed charitable organization qualify for a deduction U/S 80G. This is applicable only if the receipt is submitted. However, the amount of tax deduction you get on your donations varies—not all give you a 100% deduction. Donations towards some trusts like Jawaharlal Nehru Memorial Fund, National Children’s Fund, Prime Minister’s Drought Relief Fund, etc. qualify for a 50% tax deduction. 4. Savings Account: The interest accumulation in your savings account is tax free till Rs 10,000 per annum U/S 80TTA. 5. Medical costs: The amount you spend while taking care your differently-abled dependents can get you a tax deduction of up to Rs 1.25 lakh U/S 80(U). Medical treatments for such dependents can also help you lower your taxable income by Rs 1.25 lakh U/S 80DD. Conclusion: Insurance and PPF are definitely two lucrative options but they are not the only ones. There are multiple options available for tax saving. All you need to do is choose the most appropriate one according to your risk appetite and asset allocation. Disclaimer:Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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Tax Planning & Management FAQs

1) Tax filing is not part of tax planning and management. True or false? a) True b) False Correct Answer: False. Tax filing is an important aspect of tax planning. This also helps you audit your finances for tax. 2) It’s better to plan taxes after investing a) True b) False Correct Answer: False. Always plan your taxes before you plan to invest. There are various methods of tax planning you can use. One of the things tax planning does is identifying the tax bracket you fall in. This can help you choose investments that are tax-efficient as per your IT slab rate. 3) The concept of tax planning involves deduction and exemption. What is the difference between tax deduction and exemption? a) Tax deduction is when you get tax-free income; tax exemption is when an expense helps you lower your taxable income. b) Tax deduction helps lower your taxable income; Tax exemption is when an income is tax-free and thus, not a part of your taxable income. Correct Answer: B. Tax deduction is when you make an investment or an expense that lowers your taxable income. An exemption—as the name suggests—is when something is not taxable to begin with. 4) Various types of tax planning and tax-saving investments help you… a) Build your retirement kitty b) Buy a house in the next 2 years Correct Answer: Tax-saving investments have lock-in periods of 3-15 years. This helps them compound returns and thus grow money in time for retirement. It may not help a short-term goal. 5) Tax planning in India means investing in options that get you a tax deduction of up to Rs 2 lakh a) True b) False Correct Answer: False. Tax planning also includes other aspects like reducing your taxable income, looking for tax-efficient investments, etc. 6) Which of the two Equity-based investments get you only tax exemptions, not deductions? a) National Pension Scheme b) Equity Funds Correct Answer: NPS. All Equity Funds don’t get you a tax deduction. Only ELSS—a type of Equity Fund avails tax deductions under Section 80C. NPS, meanwhile, helps you lower your taxable income. 7) Those in the lower income tax slabs feel dividends are more tax-efficient. a) True b) False Correct Answer: False. The DDT is over 28%. Such investors may find income sources that are taxed at their income tax slab rate of 5-20% or lower to be more tax efficient. 8) Members can receive a salary from the HUF. But this is taxable. a) True b) False Correct Answer: False. You can receive a salary as a member, but it is tax-free. 9) Can expenses get you an income tax exemption? a) Yes b) No Correct Answer: No. Income tax is generally levied on income—either through service, business or investments. You can only get tax deductions on expenses, not exemptions. 10) Which of the two is more tax-efficient at the final payout stage? a) Life insurance b) National Pension Scheme Correct Answer: Life insurance payouts are tax-free. Meanwhile, withdrawals from NPS funds are taxable as per your IT slab rate. FINAL SCORE: How did you score? 0-3: You may want to read through and understand the chapter on Tax Planning once again. Or, speak to one of our experts for better understanding. 3-6: You’ve half-way there on your goal towards minimal taxes. But continue the efforts to be great at tax planning. 6-9: Very good. Go back to the few wrong choices and read those chapters better. 10: Congratulations! You are ready to make a tax plan of your own. Run it past one of our Tax planners for better chances of success.Disclaimer:Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing

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