PERSONAL FINANCE
Module 1
LEARNING OBJECTIVES
Understand process of financial planning
Know about life stages of an individual
Understand importance of goal setting
Understanding type of investors
Know about financial planning services
FINANCIAL PLANNING IS A PROCESS OF
Identifying one’s life’s goals, translating these identified
goals into financial goals and
managing one’s finances in ways that will help one to
achieve those goals.
Through this process, one can thus chart a roadmap to
meet expected and unforeseen needs in one’s life.
These needs and goals can be short term, medium term
or long term.
"It's not how much money you make, but how much
money you keep, and how hard it works for you”
Life without personal financial planning is like
skydiving without a parachute in place.
Personal financial management is the bedrock upon
which you can build a comfortable and secure life.
Without financial plans, you run the risk of spending
without any aims, saving without any goals in mind,
and exhausting your earnings for no valid reason.
Financial plans do so much more than manage your
income.
They not only help you manage your monthly income
but also maximise it to its highest potential for a secure
present and future.
ATTRIBUTES OF GOALS
Your goals should be SMART
1. S-specific if goals are not specific they are just
dreams. The goal clearly states what you want, for
what purpose
Not Specific: "I want to be rich."
This is vague and does not define what "rich" means or
how you plan to achieve it.
SMART: "I want to accumulate ₹50,00,000 in the next 10
years for retirement."
The goal specifies the amount and the purpose
(retirement).
2. M-Measurable. You should be able to assign
money values to goals.
Not Measurable: "I’ll save money regularly for my
future."
There is no defined amount or way to track progress.
SMART: "I will save ₹15,000 every month and invest
it in a diversified mutual fund portfolio to reach
₹18,00,000 in 8 years."
The goal is measurable by monthly savings and
future value.
3. A-Attainable. Goals should be such that you can
achieve them. The goal is possible given your income,
expenses, skills, and constraints.
Not Attainable: "I will save ₹1 crore in one year, even
though my annual income is ₹6,00,000."
The goal is unrealistic and cannot be achieved with your
income.
SMART: "I will save ₹50,000 in one year by cutting down
on discretionary expenses and allocating ₹4,000 from my
monthly income toward savings."
This is realistic based on your income and spending
capacity.
4. R-Realistic/Relevant. Unrealistic goals will only lead
your financial plan astray. The goal fits your life stage
and priorities (e.g., family, career, retirement), not just a
random target.
Not Realistic: "I will buy a ₹1 crore luxury car within 2 years,
even though my current savings are ₹1 lakh and I earn
₹8,00,000 annually."
The goal is not aligned with your financial situation or
priorities.
SMART: "I will buy a ₹10 lakh car in 5 years by saving ₹15,000
monthly and investing it in a recurring deposit to earn
additional interest."
The goal is realistic and relevant to your financial capacity.
5. T- Time Bound. Goals should have a time frame in
which they need to be achieved.
Not Time-Bound: "I will save for my dream vacation
someday."
Without a deadline, there is no urgency or structure.
SMART: "I will save ₹1,20,000 for a vacation to South
India in the next 2 years by setting aside ₹5,000 every
month in a dedicated savings account."
A defined time frame ensures progress is tracked and
motivates action.
Example 1 – Young professional:
Relevant goals might include:
Building a 6-month emergency fund.
Repaying high-interest education or personal loans.
Starting investments for retirement via small SIPs.
A luxury car loan at this stage may be less relevant if it crowds out
essential goals.
Example 2 – Mid-career family person:
More relevant goals:
Children’s education corpus.
Adequate term life and health insurance.
Home loan prepayment.
Example 3 – Pre-retiree (55+):
Relevant goals may focus on:
Capital preservation and stable income.
Reducing debt before retirement.
Health-care contingency corpus.
COMPARISON EXAMPLE
Not SMART Goal:
"I want to save money for my child’s education."
It lacks specificity, a measurable target, realistic
planning, and a deadline.
SMART Goal:
"I want to save ₹20,00,000 for my child’s college
education in 15 years. I will invest ₹8,000
monthly in a balanced mutual fund with an
expected annual return of 10%."
Specific (education), measurable (₹20,00,000),
attainable (based on income), realistic (mutual
funds fit the timeline), and time-bound (15
years).
NEED FOR FINANCIAL PLANNING
1. to Fix a Budgeting System- Aimless spending often results
from not tracking expenses or differentiating needs from wants.
Personal financial planning helps you manage income, monitor
spending, and create a family-friendly budget.
2. to Save for the Future- Understanding where your money goes
allows you to prioritize necessities over wants. Financial
planning fosters savings and smarter investments, such as
recurring deposits or mutual funds, over static savings accounts.
3. to Invest and Grow Wealth-A comprehensive financial plan
aligns investments with your goals, budget, and lifestyle. It
promotes diversified portfolios with balanced debt, equity, and
hybrid options, reducing risks and maximizing growth.
4. To choose the right insurance-financial planning helps you
determine the appropriate insurance types, factoring in inflation,
living costs, and personal needs. It guides how much to allocate for
term, vehicle, or life insurance.
5. To prepare for emergencies- a financial plan ensures monetary
safety nets, including savings for six months to a year, strategic
investments, and insurance to navigate unexpected challenges
like job loss or medical emergencies.
6. To manage debts-without a plan, clearing debts becomes chaotic
and drains resources. Financial planning enables systematic debt
repayment while safeguarding and growing your income to avoid
financial strain.
7. To achieve retirement goals-financial planning ensures a
stress-free retirement by prioritizing long-term savings and
investments. It prevents dependence on others and secures a
comfortable lifestyle in your golden years.
LIFE CYCLE APPROACH TO FINANCIAL
PLANNING
The life cycle approach to financial planning focuses on
different stages of individuals life and their evolving
financial needs goals and capacities at each stage.
This approach takes into account that as people
progress through various life phases their income,
expenses, responsibilities and Financial objective
change influencing their financial planning and
decision making process.
The life cycle is typically broken down into distinct
phases:
1. Early career 20s to early 30s
2. Mid career 30s to 50s
3. Pre-retirement 50s to 60s
4. Retirement 60s and beyond
EARLY CAREER 20S TO EARLY 30S
1. Characteristics:
This is usually the starting phase of financial independence.
People in this stage are building their career.
Often have lower incomes and may raise higher expenses
related to lifestyle, education loans or starting a family.
2. Financial focus: At this point individuals focus on
i. Building an emergency fund,
ii. Managing student loans and
iii. Starting retirement savings example via investment in
retirement plans or pension schemes.
Risk taking ability is usually high leading to more aggressive
investments.
3. Freedom of financial domain
Limited freedom due to lower savings in higher liabilities but
significant freedom for risk taking in investment
MID CAREER 30S TO 50S
1. Characteristics: Income tends to peak during these years but
so do financial responsibilities such as home ownership
children's education and health care needs.
2. Financial focus
Individuals focus on wealth accumulation, securing insurance
(life health and asset insurance) and planning for their
children's future.
The financial focus shift towards tax planning, investment
diversification and long-term financial stability.
3. Freedom of financial domain: Moderately increased
freedom due to rising income and wealth, but with major
commitments like family and loans which can constrain
flexibility.
PRE-RETIREMENT 50S TO 60S
1. Characteristics: People nearing retirement often aim to
consolidate their wealth. Expenses may shift towards
healthcare and saving more aggressively for retirement.
2. Financial Focus: The focus moved towards
i. Preserving accumulated wealth
ii. Reducing debt
iii. Ensuring retirement readiness and
iv. Revisiting financial goals to ensure sustainability through
retirement.
3. Freedom of financial domain: Financial freedom can be
higher if planning has been successful but the focus on lower
risk investments may limit high reward.
RETIREMENT 60S AND BEYOND
1. Characteristics: Income typically shifts from active
employment to passive sources such as retirement
accounts pensions and investments.
2. Financial Focus: This phase is about maintaining a
stable income stream through conservative investments,
controlling healthcare expenses and estate planning.
3. Freedom of Financial Domain:
The freedom is mainly in managing retirement assets to
ensure they last through life expectancy.
However, the ability to take risk or make major financial
changes is limited.
Individuals have a life cycle with seven stages – namely
that of
1. Learner; High School 13 to 17
2. Earner; Young Adult Age 18 to 24
3. Partner; Adult With or Without Children Aged 25 to
34
4. Parent; Working Parent or Adult Age 35 to 44
5. Provider; Mid-life Ages 45 to 54
6. Empty Nester three retirement age 55 to 64
7. Final stage the twilight years when one is retired.
People in certain age groups tend to have similar life
cycle needs.
Each stage brings with it corresponding responsibilities
and liabilities.
FINANCIAL PLANNING PROCESS
Managing finances can be a stressful task without proper planning.
Effective management of your money involves financial planning stages
that can be divided into various steps. Given below is a step by step
financial planning pattern that helps you achieve your short and long-
term financial goals.
The steps can be expressed by the acronym EGADIM:
Establish financial goals
Gather data
Analyze the data
Develop a plan
Implement the plan
Monitor the plan
STATEMENTS OF INDIVIDUALS WITH
PROPER FINANCIAL PLANNING
“My money works for me. I don’t work for it”
“So what if I pay a little more? It makes my life
easier”
“I can afford to be generous”
“I can afford to make investments for the future”
“I want something created especially for me, not
cookie-cutter for everyone else”
“I work hard and I want the best”
“Yes, I can do that”
“I trust the people around me”
“If I invest now, think how much I’ll gain later”
“My business operates without me day to day”
TYPICAL STATEMENTS OF THE
FINANCIALLY UNPLANNED
I’ll never be able to afford that”
“Once I do XYZ, I’ll be rich”
“I need money now so I can buy XYZ”
“I’ll be working for the rest of my life, so I might
as well buy X”
“Don’t raise my taxes!!!”
“Things will never change”
“It just doesn’t matter what I do”
“That’s not for people like you and me”
“Money is the root of all evil”
As Robert Kiyosaki says: "We do not have to
work hard for our money, rather our money
should work hard for us.“
Financial planners are not only for wealthy but
for everyone who wants to ensure that their
money is not rusting away and is put to
optimum use.
A financial planner can help you get answers to
questions such as:
1. How much should I save for my retirement?
2. How much life insurance do I need, and how do I best
get it?
3. What is the ideal health insurance for my family?
4. How will inflation hit my investments?
5. How can I achieve financial freedom to pursue my
passions in life?
A financial planner can be your best friend to answer
some of the following broad thoughts. These are the
issues that you are not able to ask even your best
friend Some of these opinions could be:
1. I am worried about my job as I may be asked to quit
in the next 3 months
2. I want to have a confidential Will made
3. I don't know the value of the house I should buy
4. Should I save for my retirement first or my child's
education
5. I want to invest a lump sum amount in an aggressive
mutual fund but is it the right time to enter the
market
A Financial planner would work very closely to study
your family's financial health. You may call this as a
process.
Like a doctor, he first makes the diagnosis and
then prescribes.
Financial planners have questionnaires and an online
test to understand your situations in detail.
These are procedures, and most professional planners
have systems and processes in place. This brings you
confidence and saves you time and energy too.
He would first ask about:
1. The income of the family
2. Expenses of all kinds of the entire family
3. Where do you save and invest?
4. Your Loans and all liabilities
5. Your Future Needs
6. What are your financial goals (for every member)?
7. What are the family's aspirations, desires and dreams?
8. Where are the current investments lying, and what are they
worth?
Makes you understand the basics of personal finances
1. Takes you through a risk appetite test to evaluate your risk-taking
ability regarding the financial market,
2. Gives you an understanding of investment risks of various kinds.
3. You need to provide all the relevant information.
4. The financial planner will continually educate you on things which
are relevant and vital to you.
5. He informs about the pros and cons of essential aspects of
taxation. Moreover, the implications of tax for each kind of
investment are also discussed.
Depending on the diagnosis and prescription, continuous
monitoring of your financial health becomes critical
during the review meetings.
By altering medicines or reevaluating your current
health, your doctor ensures continuity in your goal of
health.
Similarly, your financial planner endeavours to update
your financial investments during regular financial plan
review meetings. All your questions and doubts also get
cleared.
Besides, planners have a vast network with other
related professionals. Like doctors who may recommend
you for an Ultrasound or CT specialist, planners
recommend you to competent persons like Chartered
Accountants, Advocates. The entire process gives you
complete faith and all-round service.