Financial planning
Also written Personal financial planning · Financial plan
The process of estimating what a person will need money for across their lifetime and building an investment plan to meet each of those needs — savings with a purpose attached.
In plain language
Saving money is not a plan. A plan is knowing what the money is for, how much of it you will need, and when.
The workbook's definition is exactly that: financial planning is the process of estimating financial needs of a person and implementing a comprehensive plan to meet those financial needs during his or her lifetime through investment. The needs it names are the ordinary ones — the birth of a child, education, purchasing a house, marriage, and emergencies such as an illness, an accident, a death or a natural calamity.
And it opens with the sentence that does most of the work: financial planning goes beyond savings. It is an investment with a purpose.
How it works
The workbook lays out a five-step approach.
- Identify specific financial goals, and estimate the money each will need.
- Classify them by horizon. Short-term goals arise within a few months to one year. Medium-term goals have a horizon of one year to eight years — a property, your own venture, a professional course. Long-term goals run eight years or more — a child's marriage, retirement.
- Choose investment options against risk, remembering the three pillars: safety, liquidity and return.
- Diversify — "don't put all eggs in one basket".
- Review and revise the plan regularly, because the goals themselves change over a lifetime.
The goals are grouped as basic (food, clothing, shelter), secondary or advanced (education, house, marriage), retirement planning and estate planning.
Every goal should be SMART — Specific, Measurable, Achievable, Realistic and Time-bound. "I will save for my daughter's marriage" is not a goal. "I will save Rs 50,000 every year for the next 10 years for my daughter's marriage" is.
And the order of operations, which the workbook quotes Warren Buffett on — don't save what is left after spending; spend what is left after saving:
Income − Savings = Expenditure
A worked example
The Kulkarnis, both 34, take home Rs 95,000 a month between them. They write down four goals.
| Goal | Horizon | Target | Monthly set-aside |
|---|---|---|---|
| Emergency fund (6 months of expenses) | Short term | Rs 3,60,000 | Rs 15,000 for 2 years |
| Car | Medium term (4 yrs) | Rs 8,00,000 | Rs 14,000 |
| Daughter's education | Long term (14 yrs) | Rs 40,00,000 | Rs 9,000 |
| Retirement | Long term (26 yrs) | — | Rs 12,000 |
Monthly expenses are Rs 60,000, so the arithmetic they were running — income minus expenditure leaves Rs 35,000, save what is left — never got past the emergency fund.
Reversed, it becomes a plan. Rs 95,000 − Rs 35,000 of savings = Rs 60,000 to live on, which is exactly what they were spending anyway. Same household, same rupees, and now four funded goals instead of a vague surplus.
On the education goal alone, Rs 9,000 a month for 14 years at an assumed 11% a year compounds to roughly Rs 38 lakh on contributions of about Rs 15 lakh. Starting it at 34 rather than 41 is what makes those numbers possible.
Why NISM asks about it
Chapter 3 is titled Financial Planning and is the most heavily examined chapter of the paper; Chapter 1 introduces the idea. Expect questions on the SMART acronym, on classifying a named goal as short, medium or long term against the one-year and eight-year boundaries, and on the identity Income − Savings = Expenditure. The five-step sequence itself is asked in order.
Common exam traps
- Financial planning is not the same as investing. Investing is one step inside it; the plan is the goals, the horizons and the review.
- Learn the horizon boundaries as printed: up to one year is short term, one to eight years is medium term, eight years and above is long term. Candidates guess three and five.
- Income − Savings = Expenditure, not Income − Expenditure = Savings. The whole point is the order.
- SMART is Realistic, not "Relevant", in this workbook's wording. Answer from the book.
- A plan is reviewed, not set once. The workbook lists review and revision as a step in its own right because goals change over a lifetime.
- Estate planning is a category of financial goal here, not something separate that happens after death.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- Asset allocationThe decision on how to distribute a client's wealth across asset classes — the first decision in building a portfolio, and the one that explains most of what the portfolio then does.
- Estate planningDeciding during your lifetime who is to receive which of your assets after your death, and documenting it — mainly through a Will and nominations — so heirs can claim them easily and cheaply.
- Risk profilingEstablishing how much risk an investor should carry by weighing three separate things — the need to take risk, the financial ability to take it, and the psychological willingness to bear it.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.
- Six-step financial planning processThe 6-stage sequence an Investment Adviser follows with a client — define the relationship, gather data, analyse, recommend, implement, monitor — set out in Chapter 1 of the Series X-A workbook.
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- Credit scoreThe number a credit information company builds from your loan and credit-card repayment history, and the first thing a lender looks at when your application arrives.
- Sukanya Samriddhi YojanaA Government savings scheme for a girl child, opened by a guardian when she is 10 or younger. Deposits qualify under Section 80C; partial withdrawal for education or marriage is allowed after 18.
- IncomeMoney earned from sources such as salary or wages. In the booklet it is the starting point of every budget: savings are what is left of income after expenditure.
- ExpenditureMoney spent on various items, both essential and non-essential. The booklet teaches you to save first and treat expenditure as what is left: Income − Savings = Expenditure.
- AssetsThings you own that have economic value, such as a bank balance, a fixed deposit, a house or a car. Assets minus liabilities gives your net worth.
- LiabilitiesWhat you owe to others or have borrowed from them, such as a home loan, a car loan or money borrowed from a person. Assets minus liabilities gives your net worth.
- Group insuranceOne insurance policy that covers a defined group of people together, such as the members of a society or professional association, or the employees of a particular employer.
- Solution oriented schemesOne of the five broad categories of mutual fund schemes: schemes that invest according to a personal goal such as retirement or a child's education.
- Risk appetiteAn investor's ability to take risk — one of four inputs, alongside age, financial situation and investment horizon, that the booklet says should shape how a person invests.
- Hindu Undivided FamilyAn HUF is taxed as its own person under the Income Tax Act — and, under Section 80TTA, one of only two kinds of taxpayer, with an individual, allowed the savings-account interest deduction.
- SafetyOne of the three pillars of investment — how well protected your invested money and its return are, and how likely you are to get it back when promised.
- Personal financeThe practice of managing your own money — income, spending, saving, investing, insurance, tax and retirement — so both daily life and future goals are funded.
- SMART goalsThe workbook's five-part test for a usable financial goal — Specific, Measurable, Achievable, Realistic and Time-bound — each illustrated with a wrong and a right version.
- Three pillars of investmentThe workbook's framework for every investment decision — safety, liquidity and return — weighed together rather than any one chosen alone.
- Disposable incomeWhat remains from monthly income after mandatory expenses — taxes and loan repayments — are met; essential living costs and discretionary spending are paid out of it, and what is left is savings.
- Savings ratioSavings relative to income, which the workbook says should ideally rise over the life cycle — read alongside a falling expense ratio and a debt-to-income ratio that peaks around a big loan.
- Emergency fundA pool of money held in liquid assets, sized at six months of household expenses, kept aside so that an interruption in income does not force the sale of long-term investments.
- Goal settingThe first step of financial planning: turning a vague wish into a goal that is specific, measurable, realistic and time-bound, then ranking the resulting list by priority.