Setting up Financial goals are important ?

Financial goals are nothing but the future expenses which are apart from the regular expenses and come in lump sum in addition to your regular expenses. We have to prepare for this because our regular income may not have the capacity to accommodate them.

There are majorly three types of expenses in life.

 Liabilities:    eg household expenses, life style expenses, EMI’s of existing loans  Dependents expenses. Etc.

    Responsibilities :  eg. Children’s higher education , marriage ( now a days it is optional J ), Your retirement , Creation of medical fund after retirement day to day medical expenses which may not be covered by Mediclaim.

    Aspirations :  eg. Buying a car, international tours, Domestic tours, buying a real estate property other than residential house, cars, wealth creation etc.

Out of above expenses 2 and 3 are considered as financial goals.

There is one more classification of the goals which can be done on the basis of the duration of the goal viz.

1.Immediate goals : these are the goals which are in need of financial support within a year’s time  means in same financial planning year this may be any kind of goal , every goal acquires this status when it comes to maturity or implementation.

 2. Short term goals : these are the goals which are having horizon of 1 to 3 years.

3. midterm goals : Goals having a time horizon between >3 years to <7 years.

4.Long term goals : These are the goals which are having a time horizon more than 7 years.

How to setup a financial goal ? :

This is one of the important question everybody asks specially when it comes to child education funding plan. “ The problem is my child is too small and I don’t know what type of education he will go for then how I can plan for and I don’t want to force him like what “Virus” had done in “3idiots”.

This is a normal answer.However financial goal for child’s higher  doesn't mean any specific education it is about the funds which we have to made available. Having a money is not a problem if you plan for say Rs.1500000/- for higher education and because of some means your child doesn't used it then this will help you to achieve your future goals more faster. But you child requires Rs. 1500000/- and you have prepared for 500000/- will create big problem.

 “ How I can predict the expenses at that time as I don’t know what would be the situation then “ this is where financial planner will help you , you have to plan for all your future expenses in today’s term and financial planner will grow it at appropriate growth rate to reach the funds as on then.

For eg. If you are planning to fund Rs.500000/- in today’s term for higher education of your child who is of 2 years old  , considering say 11% growth in expenses you will be requiring Approx.Rs.2656000/- at your child’s age 18.

In a same way you have to think about your each financial goal this will give you the picture of the expense in future.

Prioritizing the financial goals :

Once the goals are set you have to prioritize the goals on the basis of the importance of such a goal in your life. Prioritizing will help you to understand your needs and your wants, this may help you to understand you better.

It also helps in channelizing the resources towards the goals on the basis of its priority.

Why setting up financial goals are important

We may be in any type of work , may be a salaried , or Businessman , or a professional we have some goals to achieve, these goals gives us a fuel to work and plan and execute.

In the same way we have to plan our life as well achievements for life, it is all about how you would like to see your life to be financially.

It helps in optimization of the resources what we have as well as help in defining a clear-cut strategy for the financial decisions, gives a more structured and articulated approach to our financial management .

The duration of the goal also help us in setting up a proper strategy for investment.

Advantages of setting up financial goals :

   1. Gives clarity about the expenses in future.

   2. We get to know the time duration available for the specific
   financial goal.

   3.We can plan the strategy to achieve these goals.

   4.We can analyze where these goals are affordable or not and

       rework the financial goals if needed.

   5.It increases the success rate of achieving financial goals which
  ultimately gives you satisfaction.

   6.The money can be made available in the right amount at the right

      time.

Happy Financial Planning !!!

About the author : Ashish Ramesh Bhave is a CERTIFIED FINANCIAL PLANNER, focused and specialized in financial planing for individuals and families. Can be reached at arbfinancials@gmail.com or Cell : 08793107044

Adequate Insurance cover

As we all know insurance is a protection tool. It helps to protect your family and love ones after any unfortunate event (your Death or Disability). But most difficult part is to ascertain your life value or income generation capacity . If you take higher cover than required then burden of higher premium can diminish family savings or in case of lesser cover, family may not able to cope the essential future expenses. Hence knowing proper cover is most important and essential step of your financial planning.

It creates another important question, how can we know the proper cover? And because there is no awareness and clarity what to do backed by biased advice ,customer end up taking many insurance policies still may not have a proper insurance cover. This situation not only affect saving capacity of an individual but on worst part his /her family still at risk of miserable life.

Let’s understand today how to calculate your Life cover or can say risk cover. There is two scientific method of calculation of Human Life Value.

1) Income replacement method:

In this method financial planner measures present value of client’s contribution towards family up to his retirement or working tenure considering appropriate discount factor. Here most important factor is to consider future changes/growth in income.

Let’s take an example: Mr. Rajiv is employed in IBM Limited earning 55000 per month , while his self expenses are 8000 per month and yearly tax is 40000.

Mr. Rajiv is expected to get 7% rise every year on his salary. His current age is 35 years and retirement age is 60 years. In case of Mr. Rajiv his yearly contribution towards family is 524000. Hence his adequate cover/HLV (in income replacement method) should be 1.48 cr. Mr. Rajiv’s family’s future in jeopardy if he takes less than 1.48 cr. or no insurance.

2) Need based Analysis: In this method financial planner ascertain future key expenses (inflation adjusted) of client’s life and calculate the cover required by him/her. As the name suggest only future needs are covered in this method i.e. Child education expenses, dependent’s expenses (Parents), Child’s marriage etc…

Example on Need based Analysis : Mr. Narayan Shetty is a working in Wipro earning 18 Lakh per annum his house hold expenses are 340000 pa. Lifestyle expenses are 240000 p.a. Apart from that he had a Home loan of 45 Lakh and paying EMI of 45000/ month. Mr. Shetty’s parents residing with him annual expenses on them is 60000.His age as on today is 32 years and he is planning to retire at the age of 58. His future expenses are as follows:

Neha’s (Child current age 5) Graduation fees 10L and 15L on post graduation on today’s value . He want to create a reserve 0f 15L for child’s marriage. 

He wants to change his car after every 7 years. Mr Shetty loves to visit different places and every year his expenses on such vacation are around 1 Lakh. 

He is planning to go abroad tour in every 4 years of now and create a budget of 4 Lakh for every such tour. 

He loves to throw parties on every occasion his yearly expenses are around 2L. He likes to maintain same lifestyle and want to create retirement corpus of 4cr.

He want to protect all his above said goals even if he is not there.
In above case understanding his Life important needs are important while suggesting proper cover. His most important needs where he required protection in case of unfortunate death are child education, child marriage, home loan repayment, dependent Expenses, retirement corpus for her spouse, house hold and normal lifestyle expenses. 

Assuming inflation rate is 7% and expected rate of return on corpus post death is 9%. His adequate Life cover is 2.19 Cr. as per need based analysis.

Individual should take a proper care and should ask agent or advisor to do the HLV for you and take that cover , Term plan is the purest and cheapest form of insurance available and you should go for it .Insurance is like twin blade sword if you know how to use it you can win the battles, otherwise you will hurt yourself.

This article is written by Mr.Hitesh Paliwal, Risk analysis and insurance consultant, ARB financial consultants.

You can reach him on : 8551905999

Term Life Insurance plan or Endowment life insurance plan

The above question always comes up when ever we purchase any insurance product. Every time we baffled and select wrong product most of the time obviously such wrong choice sometimes hamper our future anticipation. Let’s understand both product then we compare.

Term Plan, as name suggested, it is for specific period of time i.e. 5/10/15/20/30 years. It is the purest and cheapest form of insurance. In case of unexpected death, dependents /nominee will receive cover amount. This policy do not give any maturity benefit however provide high cover at less premium.

Now a days online term plans are also available which you can take directly.

Endowment Plan are contracts designed to give two benefits sum assured in case of death or Maturity amount if policy holder survived the term.

After knowing both any one can choose Term plan over Endowment  plan. But insurance agent will always guide to buy endowment plan (In that case they are most precious blessing of God and they are our well wisher).

Then why every financial planner suggests Term Plan?

Sadly we are still not looking into bigger picture. Let’s understand it with a simple example:

Particulars	Mr. X	Mr. Y
Plan Choice	Term	Endowment
Age	30	30
Term	15	15
Sum Assured	1000000	1000000
Approx. Premium Yearly	2356	67000

Now as Mr. X is saving around 64644/- yearly on premium so he invested this excess in market (secured fund) and earns 9% return annually. While Mr. Y is relying on endowment plan savings.

After 15 Years
Particulars	Mr. X	Mr. Y
Plan Choice	Term	Endowment
Age	30	30
Term	15	15
Sum Assured	1000000	1000000
Sum for investment	64700	0
Return on investment	9%	SA + Bonus
Bonus	0%	30000/ year
Return	1946000	1450000

In above case Mr. X. earning better returns then Mr. Y. Now it’s very evident that in any case Term plan is far better choice then endowment plan.

Note : This calculation is done on the basis of consideration that the investment made by Mr.X earns him 9% pa returns.

I know you are enough smart to take a right decision.

About author : Article is written by Hitesh Paliwal , Risk analysis and insurance consultant with ARB financial consultants, You can reach him on 8551905999