Types of Financial Planning

2024-08-02

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Prudence is needed in financial planning and decision-making to ensure that resources are used in a way that best meets the needs of the individual or organization. Different types of financial planning can help you achieve discipline and a clear action plan for your money according to your life.

Financial planning can ensure that your spending is in line with income, debts are manageable and important goals are adequately funded. It is important to be mindful of the potential risks and rewards of each decision and to make choices that are in line with one's financial goals.

What are the Different Types of Financial Planning?

There are many areas where financial prudence is needed in life, but some of the most common include: -

1. Cash Flow Planning and Budgeting

The first step in the financial planning process is to develop a budget and cash flow plan. This step is essential if you want to get control of your money and begin financial freedom. A budget lists a plan as to how you will spend your money each month. It is a tool to help you live within your means and make sure that your spending is aligned with your financial goals.

A cash flow plan helps you how much money you have coming in and going out each month. It also projects your cash flow for the next 12 months. Both budgeting and cash flow planning are important tools for financial success.

2. Insurance Planning

Insurance planning is the type of financial planning involving the assessment of your risk exposure and developing strategies to protect against or transfer that risk. The goal of insurance planning is to protect assets and income from the financial consequences of unexpected events.

You must buy a life insurance to protect yourself and your family from the financial consequences of an unexpected event, such as death, disability, or hospitalization. Here are a few life insurance policies that you may consider adding to your portfolio:

a) Term Life Insurance

When choosing a life insurance, you are protecting your family financially after your death. There are different options for life insurance and each one has different features and benefits. Term life insurance has no survival benefit, but pays the sum assured in case of your unfortunate demise during the term of the policy.

b) Mediclaim

Mediclaim is a type of health insurance policy that reimburses you for medical expenses incurred in case of an accident or illness. The policy covers both inpatient and outpatient treatment, and also provides for pre- and post-hospitalization expenses.

c) Critical Illness

Critical illness cover is a rider that pays out a lump sum if you are diagnosed with a specified serious illness. The money can be used to help you pay for medical treatment, make adaptations to your home or replace an income if you are unable to work.

3. Retirement Planning

Retirement planning helps you calculate how much money you need in your retirement kitty to live comfortably after you retire. This includes factors such as how long you expect to live, what your anticipated expenses will be, and what sort of lifestyle you want to maintain.

Listed below are some financial instruments that may help you save for retirement:

a) National Pension System (NPS)

NPS is a defined contribution pension system designed to give the pensioner a steady and secure income after retirement.

b) Public Provident Fund (PPF)

Public Provident Fund (PPF) is a long-term savings scheme that offers a guaranteed return on investment. The minimum investment/year in a PPF account is Rs. 500 and the maximum investment/year is Rs. 1.5 lakh. The maturity period of a PPF account is 15 years, which can be extended for 5 years at a time.

c) Provident Fund

Employees' Provident Fund (EPF) is a retirement savings fund for employees in India. Employees contribute a small percentage of their monthly salary towards the fund, and the employer contributes an equal amount.

d) Unit Linked Insurance Plan (ULIP)

A Unit Linked Insurance Plan, or ULIP, is a life insurance policy which is bundled with an investment component. The premium that you pay is used to provide life insurance coverage as well as to invest in a variety of financial instruments. The investment component of a ULIP is managed by a fund manager, who invests the premium in a mix of equity and debt instruments.

e) Equity Stocks

Equity stocks offer good returns in the long term and help you to create a corpus for your retirement. One approach is to invest in stocks that offer consistent dividend payments. Another approach is to invest in stocks that have the potential for capital appreciation. Some investors choose to invest in a mix of both dividend stocks and growth stocks. This can provide the benefits of both income and capital appreciation.

4. Investment Planning

Planning is more than just a financial plan. It’s a way to help you figure out how you want your money to work for you. You expect your money to be handy when you require it to fulfil your life goals at various milestones.

This includes regular savings and investment planning and foresight for future needs like retirement planning, purchasing a house, health, and children’s education.

The cost of a college education has been on the rise in recent years, making it more important than ever to start saving for your child’s future as early as possible. With the following investment cum insurance plans, by Canara HSBC Life Insurance, make a robust choice to build an education kitty for your child:

a) iSelect Guaranteed Future Plus:

This plan offers a life cover, in addition to a guaranteed maturity benefit. Moreover, you can claim tax benefits as well.

b) Invest 4G:

If you are planning to create wealth, this ULIP is an ideal choice because you get a life cover with market linked benefits. Each month your money would be systematically rotated to high-growth equity funds that can give you better returns in the long run.

5. Tax Planning

Every investment has three tranches:

Investment
Growth
Maturity

You invest money from your taxable income and earn interest which may also be taxed. Some investments can be deducted from your taxable income. Similarly, some instruments are exempt from tax on maturity. Look for instruments that fall under the Exempt-Exempt-Exempt (EEE) category.

6. Legacy Plan for Wealth Distribution

Whole life insurance plans cover the risk of financial loss so that your family does not struggle for money. At the same time, it covers you for life, implying, your nominee/spouse/child will get the sum assured whenever you pass away. They will get a lump sum amount from the plan. It is an inheritance that you leave behind to help your loved ones cope up with the finances in your absence.

Setting financial goals is an important part of financial planning. It can help you focus your efforts and ensure that you are on the right track to achieve them. There are different types of financial goals that you can set, and you should tailor them as per your circumstances.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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