Financial Planning Case Analysis
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FINANCIAL PLANNING
“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 creating assets that will meet these requirements. 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.
The following are a set of indicative issues that financial planning will help a person resolve:
As the sole earning member has a person made provisions for taking care of his expenses if his Current income is interrupted for any reason?
Does a person have adequate insurance cover which will take care of his family’s requirements in the event of his untimely demise?
What are his/her specific future expenses and how will he fund them?
If a person has to create a corpus to fund large expenses in the future, what is the size of the investment corpus he/she should build?
Given the current income and expenses is he/she saving enough to create the corpus required?
Will a person have to cut back on his current expense or can he increase his//her current income so that his expenses in the present and the savings for the future are met?
What is the wealth the person; so far build from his savings and how can he/she best use it to meet his needs?
How should saving be deployed? What kinds of investments are suitable for a person to
build the required corpus?
How much of risk is he/she willing and able to take with his investments? How would those risks be managed?
How should a person ensure that his savings and investments are aligned to changes in his/her income, expenses, future needs?
The income of a household 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 the 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 a household 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 financial plan are the following:
List and total the regular and definite incomes that will be received in the period.
List and deduct the mandatory expenses from the total income. What is left is the disposable income.
Identify essential living expenses of the household and deduct from the disposable income.
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. A debt rationalization exercise with a financial planner may help reduce the burden to some extent. Discretionary expenses and living expenses to some extent are areas where a house hold can focus on cutting back or postponing till the income expands to accommodate them without compromising on the required savings.
PREPARING HOUSEHOLD BUDGET
The investment adviser performs an important role in helping the family understand its household budget. Preparing a household budget entails an understanding of the sources from which the family receives income, and the application of these funds in a typical month. The difference between monthly surplus in hand and savings is to be noted. The monthly surplus in hand is calculated after mandatory deductions for contributions to funds and various investments. These are added back to the monthly surplus in hand to arrive at the savings.
STATEMENT OF INCOME
MR. Arun S
Date of Birth:
30.11.1991
Marital Status:
Unmarried
Time Period for Investment:
10 Years
Occupation:
Business(Undertaken by Arun and Father)
INCOME
Monthly
Yearly
Father
Father
(+) Net Take Home Income
80,000
9,60,000
(+) Investment income
10,210
1,22,520