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Ultimate Financial Planning Guide

Simple & Crisp Do-It-Yourself Tool

Nikhil Kale

Copyright © 2017 by Nikhil Kale

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the author, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the author.

ISBN: 978-93-5281-134-2

Legal Disclaimer

The Book is offered to the user/s upon the following terms and conditions and understanding.

Ultimate Financial Planning Guide hereinafter referred to as “Book” is presented solely for educational and knowledge purposes. Nikhil Kale herein after referred to as “the Author” does not offer it as a legal, accounting, financial, investment advice or other professional services advice. While best efforts have been taken in preparing this Book, the Author makes no representations or warranties or guarantees or assurances of any kind and assumes no liabilities of any kind with respect to the accuracy or completeness of the contents and specifically disclaims all warranties and conditions with respect to the Book, either expressed, implied or statutory, including, but not limited to, the implied warranties and/or conditions of merchantability, of satisfactory quality, of fitness for a particular purpose, of accuracy, of quiet enjoyment, and non-infringement of third party rights.

No warranty as to correctness is given and no liability is accepted for any error or omission or any loss which may arise from relying on this Book. The Author of this Book does not take any responsibility and shall not be responsible or liable with respect to the accuracy, integrity, completeness, compatibility, reliability, security, satisfactory quality, suitability or timeliness of the data or the resultant outcome for any particular purpose. In no event the Author of this Book shall be liable for any damages of whatsoever type arising out of any use or inability to use this Book.

No investment, strategy, or suggestions in this Book is approved and authorized by government or any regulatory body/board. Both, principal value and investment returns will fluctuate over the time. It is essential that the decisions relating to tax, legal, insurance planning, investment planning, etc. should be taken only with the advice of your attorney, accountant, insurance professionals and investment professionals respectively. This Book should not be construed as offering legal or accounting or investment or any other professional advice. The contents of this Book, including, but not limited to, any illustrations that may be provided, do not in any way constitute “investment advice” of any kind or establish any kind of investment advisory relationship between You and the Author of this Book.

Every person has different financial situation, needs and objectives. The contents provided in this Book may or may not be suitable for you. Before making any financial decision, you need to consider carefully, with or without the assistance of a financial and investment professional, whether the decision is appropriate keeping in mind your individual investment objectives, financial situation and personal needs. The Author of this Book shall not be liable or responsible for the outcome of any of your investment decisions or consequent results. You alone will be responsible for your own decisions, choices, actions and results.

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Table of Contents

I - Introduction to Financial Planning

II - Data Gathering

III - Monthly Financial Budgeting

IV - Assessing your Financial Risk Profile

V - Assessing your Income and Expenses

VI - Assessing your Assets and Liabilities

VII - Assessing your Insurance Needs

VIII - Financial Goal Planning

IX - Retirement Planning

X - Asset allocation and Rebalancing

XI - Periodic Review of Financial Plan

XII - Financial Planning for Kids

XIII - Financial Planning for Young Professionals (Age 20 – 35)

XIV - Financial Planning for Middle Aged Professionals (Age 35 – 50)

XV - Financial Planning for Senior Professionals (Age above 50)

Glossary of Financial Terms

Sample Monthly Financial Budget - Formulated by Ultimate Financial Planner application

Sample Financial Plan - Formulated by Ultimate Financial Planner application


An investment in knowledge pays the best interest.”

- Benjamin Franklin

My aim is to make everyone self-equipped to handle their own personal finance and achieve a secured financial life. To achieve this aim, I have written this book Ultimate Financial Planning Guide so that I can share my knowledge on the subject of personal finance with everyone. This book is a simple, easy to understand and a crisp guide to personal financial planning. Your time is the only investment that you need to make for gaining the fundamental financial planning knowledge. You will easily get acquainted with the essential concepts and process of financial planning with the help of this book.

I have also developed Ultimate Financial Planner application to help you easily formulate a personalized and comprehensive financial plan for yourself. This application can be used on any computer having Windows operating system and Excel installed. The application, helps you keep a track of your Monthly Budget, assess your Risk Profile, Assets & Liabilities, Income & Expenses, Insurance Cover Requirement and most importantly plan for your Financial Goals & Retirement. This application could be purchased worldwide for a onetime small fee of $9.99 only!! Please visit the following link to know more and purchase Ultimate Financial Planner application.

Link: https://gum.co/UFPA

I am confident that with the help of this book and Ultimate Financial Planner application, even if you are a novice, you will easily understand the fundamentals of personal finance and also formulate your own detailed Financial Plan.

It is highly recommended that you carefully read and understand the financial planning concepts and process detailed out in this book before beginning the activity of financial planning and formulating your financial plan.

My best wishes for your Healthy and Secured Financial Life!

Warm Regards,

Nikhil Kale

I - Introduction to Financial Planning

Everything must be made as simple as possible but not one bit simpler.”

- Albert Einstein

Most of us have a perception that the concept of financial planning is too technical and complex to understand. This wrong perception keeps us away from understand the important concept of financial planning and taking control of our finances. Believe me, the concept of Financial Planning is simple to understand, provided it is presented in a structured way and that is what this book essentially does. I have written this book with the sole purpose of making the concept of financial planning simple and easy to comprehend so that even if you are a novice, you will easily understand the fundamentals of personal finance and also formulate your own detailed Financial Plan. Let us start the process of understanding this concept with its definition.

Definition: Financial Planning can be defined as the process of assessing & managing your financial resources, to help you plan for achieving your financial goals and secure your financial life.

This simple definition would help you easily comprehend the concept of Financial Planning. For quick understanding, the definition could be broken down into two parts viz. Part A) assessing & managing your financial resources and Part B) plan for achieving your financial goals.

Part A: Assessing your financial resources includes evaluating your income from various sources like salary, professional fees, business income, pension (for retirees), rental income, interest & dividend income, etc. Whereas, Managing your financial resources includes tracking your EXPENSES and SURPLUS. A part of the money that you earn is spent on your day-to-day EXPENSES like food, clothing, rent, utility bills, travel, entertainment, hobbies, dining out, etc. and remaining part is your SURPLUS that you may save & invest for future financial needs. The expenses need to be planned so as to meet your lifestyle needs and the surplus need to be planned so as to meet your financial goals. We would discuss this in greater detail in the Monthly Financial Budgeting chapter, ahead in this book.

Part B: You may have financial goals like purchasing a new house, buying a new car, planning for a vacation, saving for children higher education fees, retirement planning, etc. Financial goals need to be well defined to include parameters like cost required and the time available to achieve the goals. An investment plan needs to be formulated basis your financial risk profile and the time available to accumulate the corpus of funds required to achieve the financial goals. Financial risk profile is nothing but your capacity & tolerance to take investment risk. This concept of Financial Risk Profile is explained in detail ahead in the book. Subsequently, the available SURPLUS needs to be invested according to the investment plan to accumulate the funds required to fulfill your financial goals. We would also discuss this in greater detail in the Financial Goal Planning chapter, ahead in this book.

From the definition, we could infer that, striking a correct balance between your expenses and surplus is the key to achieve your financial goals and secure your financial life!

A financial plan can be formulated based on two approaches viz. Goal Based Financial Planning and Comprehensive Financial Planning. These two approaches of financial planning are explained as follows.

Goal based financial planning, as the name suggests only focuses on planning and achieving your financial goals. It helps you ascertain the amount that you require to fulfill each of your financial goals and evaluates the financial resources required to accomplish the same. E.g. it will help you to evaluate the savings required to be done annually to achieve the required corpus of funds to fulfill your goals like upgrading your car, purchase of a new house, etc.

Comprehensive financial planning, along with your financial goals, also focuses on multiple aspects of your personal finance like your income & expenditure, assets & liabilities, budgeting, insurance planning, retirement planning, etc. thus giving you a complete and holistic view of your financial health and planning for more stable and longer term financial security. The multiple financial aspects stated above are interdependent on each other and addressing concerns of each of these aspects is required to ensure fulfillment of your financial goals. Hence, it is wise to follow the comprehensive financial planning approach to plan for your secured financial life.

Following are the key steps involved in the comprehensive financial planning process:

1. Organizing Financial Data

2. Monthly Financial Budgeting

3. Assessing your Financial Risk Profile

4. Assessing your Income and Expenses

5. Assessing your Assets and Liabilities

6. Assessing your Insurance Needs

7. Financial Goal Planning

8. Retirement Planning

9. Asset Allocation and Rebalancing

10. Periodic review of Financial Plan

This book details out all the above mentioned steps involved in the process of comprehensive financial planning in a structured and simplified manner. As you understand each of these steps, you will easily be able to prepare a detailed financial plan for yourself with the help of Ultimate Financial Planning application. However, it is important to note that simply preparing a financial plan is not enough. You need to also execute the financial plan. Execution of financial plan involves following key steps:

1. Insurance: Financial Plan would let you know the amount of insurance cover you need to avail. However, you need to consult your insurance advisor / broker to avail a suitable life & general (non – life) insurance policy to help protect you against untoward incidents.

2. Investments: Financial Plan would let you know the amount you need to invest annually / monthly to achieve your financial goals. However, you need to consult your investment advisor / broker and invest your surplus in suitable investment avenues to achieve your financial goals.

3. Track Performance: You need to track the performance of your investments with the help of your investment advisor / broker to check your progress towards achieving your financial goals.

Remember, your Financial Plan is like a nautical chart which will help you to navigate properly through the sea of financial markets and help avoid drifting away.

Ultimate Financial Planner application has the capabilities of effectively carrying out all the above mentioned steps of comprehensive financial planning.

II - Data Gathering

It is a very common experience of us that we need some financial information urgently but are not able to access it easily. This is because many of us do not maintain a proper record of our financial data. To assess your individual position on the financial data gathering and organizing, it may be useful to answer the following questions:

  • Which insurance covers/policies have I availed?

  • When are my insurance premium payments due?

  • What is the total value of all the loans that I have availed?

  • What is the total value of my financial savings and investments?

  • What are the maturity dates of my investments?

  • What are my life goals and are my savings & investments enough to achieve all these goals?

Most of us may find it difficult to answer the above questions but such questions have got a lot of financial implications. One might not renew his deposits / investments on time if he does not know the maturity dates. A health or vehicle insurance policy might lapse if the premium is not paid before the due date. The financial impact will be more adverse if one had to file an insurance claim but cannot do so since the policy is lapsed. Keeping a close track of loan installments and credit card payment due dates is also important to avoid penalty charges. To avoid such financial mistakes, it is very important to maintain a systematic record of your financial data.

Data collection for financial planning involves gathering quantitative (financial) information and qualitative (non-financial) information. Quantitative information includes details of your assets, liabilities, income, expenditure, insurance, investments, financial goals, etc. whereas qualitative information include details of your financial risk preference, standard of living, family health condition and history, work environment, etc. We would understand the importance of these data points in detail ahead in this book.

Data gathering is the basis of financial planning. A famous quote by Aristotle, the ancient Greek Philosopher states that “Well begun is half done”. The financial planning activity begins with collecting and systematically organizing your financial data. This data is further analyzed, computed and presented systematically to formulate your financial plan. It is very important to note that the accuracy of your financial plan would depend upon the accuracy of your financial data. Hence, it is essential to gather and input the required financial data properly in the data collection form when you carry out the financial planning activity using the Ultimate Financial Planner application.

Asset List: Prepare a list of all the assets that you own and also mention their current valuations. E.g. of assets: House, Car, Ornaments, Shares, Bonds, Mutual Funds, Bank Deposits, Insurance, etc. You may be able to identify the current valuation of your investments like Share, Bonds, Mutual Funds, etc. with relative ease and with fair degree of accuracy by referring Statement of your Investments or by consulting your Investment advisor / broker. However, you need to make your best estimates and judge the current valuation of your house, car, ornaments and other personal assets.

Liability List: Prepare a list of all the loans & liabilities that you owe and also mention the current amount of money (principal amount) yet to be repaid. This could be easily done by referring to your Loan Account Statement. E.g. of loans: Housing loan, Car loan, Education loan, Business loan, Personal loan, Credit Card dues, etc.

This list of assets and liabilities would be useful to fill-up the details in Ultimate Financial Planner application while preparing your financial plan.

Ultimate Financial Planner application will help you organize your quantitative as well as qualitative data; analyze, compute and present this data systematically in your financial planning report for proper understanding and quick access.

III - Monthly Financial Budgeting

"The number one problem in today's generation and economy is the lack of financial literacy."

- Alan Greenspan

As defined earlier, financial planning involves managing your expenses and surplus. In this chapter, let us see how you can plan and manage your expenses in a systematic manner. To manage your expenses, you need to have a spending plan in place, which can be achieved by formulating a monthly budget.

For most, a budget might sound boring but sticking to it pays rich dividends in the long run. Formulating and adhering to monthly budget will help you to keep control on your expenses and generate the surplus required to achieve your financial goals. Once you start maintain the budget regularly, it would not be a cumbersome task but rather would become an enjoyable activity which you would look forward to perform on a monthly basis. You will have a sense of accomplishment once you realize that you are able to stick to your budget and are in control of your expenses!

Formulation of a budget involves the following key steps:

1. Note down your monthly income from various sources like salary, profession, business, investments, etc.

2. Note down your monthly expenses under various heads like Household, Food, Personal, Rent, Taxes, Entertainment, etc.

3. Estimate the expenses that you may incur under each expense head based on your past experience

4. Track the actual expenses incurred under each head

5. Analyze the deviation between estimated and actual expenses and take corrective actions

While preparing your monthly budget, you need to note down, estimates of monthly income from various sources and monthly expenses under various heads of self and family. If your family has other earning member(s) (E.g. spouse) include income of these earning members while preparing your monthly budget. Since income and expenses are not constant but dynamic in nature, basis your past experience, you may estimate the amount of monthly income and expenses for the purpose of preparing the budget. Some professionals may have variable income levels; in this case, consider your best estimates of average monthly income based on your past experience.

Monthly Budget will help you estimate your monthly income and expenses and also track the deviation between the estimated and actual expenses. With this, you may be able to track excess amount spent and would be able to take measures to control expenses in future. You would also be able to review the surplus available (Surplus = Your Income minus Your Expenses) to invest for achieving your financial goals.

The truth of life is that we have limited financial resources i.e. income level but virtually unlimited aspirations. You need to classify your aspirations into Needs and Wants. Needs signify something which you and your family cannot do without; these include non-discretionary expenses like food, clothing, rent, utility bills, etc. Wants consist of discretionary expenses like entertainment, dining out, etc. which usually are not very pressing.

As you plan for your various financial goals, you may be able to assess the amount of surplus you may require to save and invest for achieving your financial goals. If the required surplus is more than the available surplus, then you may plan to temporarily reduce / sacrifice some of your discretionary and non-pressing expenses to elevate the level of surplus which will help you achieve your important financial goals. In this process, you may have to let go on some of the short term gratifications to achieve your long term & important financial goals. Upon achieve your financial goals, you would realize the importance of budget and would be glad that you maintained one!

In this world it is not what we take up, but what we give up, that makes us rich.”

Henry Ward Beecher

Do’s and Don’ts

  • Do set realistic estimates of your expenses. It is important to keep some extra cushioning for unforeseen expenses and to stay motivated to track your monthly budget.

  • Do pay your utility bills, loan installments, credit card dues and taxes on time and avoid paying penalties.

  • Do subscribe to mobile, internet and television plans that match your needs and avoid paying for any extra and value added services that you may not require.

  • Do consider downloading EBooks if you like reading as they may cost lesser than the paperback versions.

  • Do invest in your health and stay fit by following a good diet and exercise routine. Not only would you save a lot on medical costs but also be able to enjoy a longer and healthier life!

  • Do evaluate periodically if your job is paying you as per the industry standards. If not, you may negotiate with your employer for a pay hike or search for a better paying job.

  • Do keep your knowledge and work skills updated. If required take refresher courses. This will help you to secure and also progress in your job / profession.

  • Do try to make extra money leveraging your knowledge and expertise. You may start a part time consultancy services or even write a book if you have the expertise in your work domain.

  • Do start investing the surplus regularly. Keeping the surplus into your bank account will not yield much returns and you might tend to spend the same on not so important things.

  • Do not over-use your credit card and do pay the dues on time. Avoid having multiple and higher limit credit cards.

  • Do not get carried away by new electronic gadgets like mobile, laptop, home appliances, etc. Evaluate if you really need to get the latest upgrade available. Your existing product might be enough to satisfy your needs.

  • Do not buy stuff impulsively just because there is a discount offer available. Buy things only if you require those.

  • Do things which you can easily do it yourself (DIY) instead of engaging someone else. Like maintain your garden, fixing-up a leaking tap, etc. This will help you save some money in order to generate additional surplus.

  • Do keep a check on your discretionary expenses like entertainment, dining out, etc. However, do not completely eliminate discretionary expenses as these things are required by us to rejuvenate and stay focused on our work. You may reduce the frequency of such discretionary expenses if required. E.g. reduce the frequency of attending concerts, events or fine dining; take more economic mode of transport like bus or train to travel instead of using your own vehicle; use a car that is more economical and low on maintenance.

Budgeting is the basis of generating the surplus required to fund your financial goals. Think carefully about what you spend your money on – do you really need it? You may be surprised to know but even if you try out even a few Do’s and Don’ts listed above, you could easily save and fund for a few of your important financial goals!

A detailed Monthly Budgeting tool is available in Ultimate Financial Planner application to help you plan, track and analyze your monthly income and expenses.

IV - Assessing your Financial Risk Profile

Risk in financial context refers to the uncertainty of returns your investments would fetch. Risk and return are directly proportional to each other i.e. the risk associated increases with increase in returns and vice versa. The risk associated varies from product to product. Low risk indicates lower but stable returns (E.g. Bank Deposits, Bonds, Debt Mutual Funds, etc.) whereas high risk indicates higher but unstable / volatile returns (E.g. Equity shares, Equity Mutual Funds, etc.).

You may be familiar with people making following statements:

Stock Market is down and the valuation of my stocks has come down significantly, I need to switch my investments to Bonds!”

Investment in Bonds give me very low returns, I need to switch my investments to Stocks!”

The sole purpose of financial risk profile assessment is to determine your risk profile category so that you may choose the investments that are best suitable to you and that are aligned with your financial risk profile.

If you are risk averse investor, you may feel uncomfortable if the stock market goes downward and you are holding a significant portion of your investment portfolio in equity investments. Conversely, if you can withstand short term volatility in Stock Markets, you may earn higher returns in the long term by investing in equity investments. Hence it is very essential to understand your financial risk profile before making any investment decisions.

Financial risk profile assessment is done with the help of a psychometric questionnaire which determines your Risk Capacity and Risk Tolerance. Some of the questions help determine your risk taking capacity which is your ability to take risk while other questions help determine your risk tolerance which is your aptitude to take risk. The overall financial risk profile is the outcome of your risk capacity and risk tolerance scores.

Risk profiles in simple terms may be classified as Conservative, Moderate and Aggressive. Depending upon the risk profile, suitable Asset Allocation needs to be formulated. Asset allocation simply means how much you should invest into Equity investment products (Stocks/Shares, Equity Funds, etc.) and how much you should invest in Debt investment products (Bonds, Bank Deposits, Debt Mutual Funds, etc.). For conservative risk profile, higher allocation to Debt investment products and lower allocation to Equity products may be recommended and conversely for aggressive risk profile, lower allocation to Debt products and higher allocation to Equity products may be recommended.

A state-of-the-art risk profiling module is available in the Ultimate Financial Planner application. Asset allocation basis the risk profile determined is also provided for your reference.

V - Assessing your Income and Expenses

"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."

- Robert Kiyosaki

The activity of assessing income and expenses is similar to the monthly budgeting activity discussed earlier in this book. Assessing Income and Expenditure involves, understanding from where the money flows in and how the money flows out.

Typically, the sources of income are salary, professional fees, return on investments in the form of interest & dividend, pension, rental income, etc. The level of income from job mostly depends upon your educational qualification and the profession you are into. You may not have much control on this source of income, unless you enhance your skills or find better paying jobs which often takes time.

However, you do have control on how you spend the money that is earned. Recording and analyzing your expenses with the help of monthly financial budgeting is a key step to take control of your finances. Expenses influence your investible surplus or deficit which ultimately leads to an increase or decrease in your Net Worth.

Explanation of key Concepts:

Net Worth = Your Assets Minus Your Liabilities

Surplus = Your Income Minus Your Expenses

Note: If income is more than the expenses, you have a Surplus and if the income is less than the expenses then you have a Deficit.

Ideally, your expenses should be less than your income. The easy availability of loans through Credit Cards, Personal Loans, etc. often leads to a situation wherein you spend all the income and additionally avail loans to meet your expenses. This situation leads to deficit which results in decrease in net worth. Remember our aim is to increase the net worth so as to achieve our important financial goals!

It is prudent to avail loans not for meeting your expenses (call it bad loan) but to buy assets (call it good loan). An example of bad loan can be excessive use of credit cards for shopping and converting the amount due into loan installments by paying higher interest rate. On the other hand, an example of good loan can be availing a Housing loan which would be one of your biggest assets.

Below are a few quotes from the legendary investor Warren Buffett:

  • Stay away from credit cards and invest in yourself.

  • Live your life as simply as you can.

  • Don't buy brand names; instead just wear those things that make you feel comfortable.

  • Don't waste your money on unnecessary things; rather spend it on those who are really in need.

One of the key activities involved in assessing income and expenditure is to check your financial health by calculating ratios like Debt Service Ratio, Savings Ratio, etc.

Debt Service ratio represents your percentage of monthly income being allocated to debt (loan) repayment while savings ratio indicates the percentage of monthly income you save. If the ratios are not favorable i.e. if you have higher debt (loan) or lower savings, corrective actions may be required to reduce debt (loan) and increase surplus respectively.

For reducing your debt (loan) you may need to check the types of loans you have in your liabilities section. Credit card loans and personal loans are some of the worst types of loans. They have high interest rates and erode your savings. Loans like home loans and vehicle loan actually help you purchase and own the assets. You need to make efforts to pay off loans like credit card and personal loans as quickly as possible. Please refer the Do’s and Don’ts section from the Monthly Financial Budgeting chapter for tips on generating more surplus to pay off your loans quickly.

If your savings ratio is low, you need to reduce some of your discretionary expenses as explained earlier in the Monthly Financial Budgeting chapter in order to increase your surplus. This surplus could be utilized to achieve your important financial goals.

Detailed assessment of Income and Expenses can be done with the help of Ultimate Financial Planner application.

VI - Assessing your Assets and Liabilities

This activity involves listing down all the assets you own and all the liabilities you owe. The assets are broadly classified into Personal Assets and Investment Assets. Personal assets like Home and Home Contents (Goods, Furniture, Home Appliances, etc.), your business property, Vehicles, Ornaments, etc. are assets which you may not sell / liquidate to raise funds to fulfill your financial goals. The valuation of some of these personal assets may appreciate (E.g. House) or even depreciate (E.g. Vehicles) with passage of time.

Investment assets like Stocks/Shares, Bonds, Funds, Bank Deposits, Real Estate/Properties, etc. are assets which you may sell / liquidate if required to raise funds to fulfill your financial goals. Investment assets are bought with the motive to benefit from their appreciation in value so that they can be sold / liquidated at a profit as and when required. Further, investment assets are sub-classified into Debt, Equity, Gold, Real Estate and Alternative (Art, Antiques, Collectables, etc.) for better understanding of the type & nature of the investment assets.

The purpose of this activity is also to check your financial health by calculating ratios like Liquidity Ratio, Asset to Debt Ratio, etc. The Liquidity ratio compares the value of your liquid assets with your monthly expenses. It represents your ability to meet your monthly expenses in case of a financial emergency (E.g. loss of job). Liquid assets are assets which can be easily sold to raise money. For E.g. You may not be able to easily sell real estate assets that you own but you could easily raise money from your bank account or redeem money from shares and mutual funds. Hence your investments in bank account, shares, mutual funds, etc. can be considered as liquid assets.

Asset to Debt ratio compares the total assets you own against the total outstanding liabilities. Ideally, the valuation of your assets should be more than that of your outstanding loans. Then only will you have a positive Net Worth!

If the ratios are not favorable i.e. if you have less liquid assets (cash and cash equivalent investments) or higher liabilities than the assets you own, then corrective actions may be required to increase liquidity to avoid being cash strapped and also reducing debt and increasing assets.

It may be advisable to maintain reserve funds equivalent to at least 3 to 6 months of your expenses. This reserve is known as Contingency Fund. These reserve funds can be parked in a bank account or money market mutual funds so that they may be accessed immediately whenever required. The contingency fund is maintained to support the living expenses of a family in case of an emergency situation like job loss, accident, etc. when the active source of income may be temporarily disrupted.

If you have higher liabilities than the assets, then as discussed in the Income and Expenses chapter, you need to assess your loans and make consistent efforts to reduce your loans and invest your surplus in productive assets.

Detailed assessment of Assets and Liabilities can be done with the help of Ultimate Financial Planner application.

VII - Assessing your Insurance Needs

A – Life Insurance

Life insurance is essentially required to provide support to your dependents in case of an unforeseen eventuality. The purpose of a life insurance is to help a family to maintain its standard of living and also to provide financial stability in the event of untimely death of its earning member. Insurance is critical to make up for the income gap created due to death of the earning member of the family. However, it is very important to note that, just being insured is not enough; one also needs to be adequately insured.

There is rule of thumb which states that, you need to have life insurance cover equal to 7 to 10 times your annual salary. However, each individual depending upon his financial commitments would have different life insurance requirements. Hence it is important to assess the life insurance requirements in a more structured manner rather than depending upon the rule of thumb.

Life Insurance cover requirement is assessed by estimating your family's future financial needs and subtracting the available funds from these needs. However, in this process of calculating and estimating the correct values of future financial needs, it is very important to consider the impact of inflation. So also one needs to consider the expected rate of return on investment and project the value of funds available for fulfilling future financial need. The activity of assessing life insurance requirement is very critical and needs to be completed before availing the life insurance.

The gap between required life insurance cover and existing life insurance cover available if any needs to be bridged by availing additional cover. Life insurance cover may be broadly classified into two categories; a) Pure Insurance and b) Investment cum Insurance. Pure Insurance cover provides money (death benefit / sum assured) to the policy holder’s family in the event of death of the policy holder whereas investment cum insurance cover provides the death benefit in the event of death of the policy holder OR provides insurance maturity benefit upon survival of the policy holder until the maturity of the insurance policy.

You may avail pure insurance cover of a higher death benefit / sum assured at a very economical premium as compared with that of the insurance premium charged for investment cum insurance covers. The reason being, for an investment cum insurance cover, part of the premium is charged to provide life insurance cover and remaining portion of the premium is invested to provide insurance policy maturity benefit to the policy holder.

It may be prudent to keep your investment and insurance separate and choose pure insurance cover of required value i.e. death benefit / sum assured and invest your money into pure investment products like bonds, bank deposits, shares, mutual funds, etc.

The types of insurance policies may vary from country to country hence any particular type of insurance product is not suggested in this book. You need to consult your insurance advisor/broker for availing appropriate type of life insurance cover.

B - General (Non Life) Insurance

Apart from the life insurance cover, you need to also check if you have availed appropriate General (Non-Life) insurance cover to protect yourself from major financial losses. Individuals typically require following types of General Insurance policies.

  • Health insurance Policy:

In case of any health issues requiring hospitalization / medical expenditure, the Health insurance policy provides you and your family, coverage against such hospitalization / medical costs. It is critical to have a health insurance policy in place. Medical treatment is costly and can cause lot of financial strain in case if you are uninsured or underinsured. You need to consider your family’s medical history and get a suitable health insurance cover of adequate value after due consultation with your doctor and the insurance advisor / broker respectively. Having health insurance policy in place could help you get the required medical facilities without much worry of the costly medical procedures.

  • Motor Insurance Policy:

Motor insurance provides financial coverage against physical damages to the vehicle resulting from traffic collision and against liabilities that could arise there from. Motor insurance may additionally offer financial protection against theft of the vehicle and possibly damage to the vehicle due to riot, strike, earthquake, flood, storm, etc.

Apart from the financial cost of such damage to the vehicle, one of the most significant features of the motor insurance policy is the Third Party Insurance coverage. It covers the vehicle owner / driver against claims for liability in respect of the death or injury to other people caused by the fault of the owner / driver. It covers the cost of all reasonable medical treatment for injuries received in the accident, loss of wages and also in some cases compensation for pain and suffering. In many countries motor insurance is mandatory by law. Hence you need to avail and also periodically renew the motor insurance policy so as to avoid it getting lapsed.

  • Home Insurance Policy:

Home insurance typically covers the risk of your home and its contents being damaged due to fire, earthquake, theft, flood, etc. Home would certainly be one of your biggest assets and in case of any incident, home insurance policy would provide significant relief to make up for the financial loss.

If you are not insured, it would be prudent to get the appropriate insurance cover since the financial losses in case of an incident could be significant and could erode lot of your hard earned money.

A comprehensive module for calculation of life insurance needs is available in Ultimate Financial Planner application. This module would help you determine your life insurance needs considering your financial needs, existing financial resources and available life insurance cover.

VIII - Financial Goal Planning

Plan for the future because that is where you are going to spend the rest of your life.”

Mark Twain

A - Introduction to Financial Goals

Goals are by definition long-term descriptions of a future condition. Goal is like a ‘dream with a deadline’. Whether big or small dream, each goal needs to be planned for and achieved. Financial goal planning is one of the most critical steps and must be done thoughtfully and carefully. It is important to understand that the entire activity of financial planning is carried out solely for fulfillment of your financial goals and objectives.

It is recommended that the process of goal setting should be carried out along with all family members to ensure you have listed down a complete list of desires, aspirations, needs and wants of all family members.

With reference to the involvement of family members in goal planning, I would like to emphasis importance of sharing financial details with your family members. Many a times it is observed that the individuals do not share financial details with their family members. As an example, a working couple would have their individual investments, insurance and loans which they could have missed to inform each other. A homemaker might not have any knowledge about the financials of her working spouse. Imagine a scenario wherein a person meets with an accident and his partner is not aware about the insurance policy details OR If there is any financial emergency and family members are not aware how they could access the emergency fund. Hence, it is important to keep all the financial documents & details properly organized in a folder or a file. Furthermore, the family members need to be informed about the features and benefits of various investments, insurance and loans that you have availed along with their maturity / renewal dates. They also need to have access to these financial documents & details just in case if it is required in your absence.

Moving back to the financial goals, each goal should have following key specifics: Present value of goal, Time period to achieve the goal, Inflation Rate and Rate of Return on Investment. These key specifications are explained below:

  • Present Value of the goal – The amount required to fulfill a goal in today’s cost i.e. the amount required if you were to fulfill the goal today

  • Time period to achieve the goal – Number of years after which you plan to achieve the goal

  • Inflation Rate (Assumption) – Inflation is the rate at which the price of goods and services increases. E.g. If the cost of a product is 100 and it increases to 105 in a year, then the inflation is 5%.

Different goals may require different rate of inflation to be assumed. E.g. Rate of inflation to be assumed for purchasing a car would be different from the rate of inflation to be assumed for purchasing a house or for children education, etc. You may choose to assume inflation rate based on your own past experience. Alternatively, a standard inflation level is calculated for each country, considering the average price increase in various goods and services. It is best to assume this inflation level while planning for your goal if you are unsure about the specific level of inflation to be assumed for your financial goals.

For your convenience, the estimate of future inflation rate specific to each country is provided in the Ultimate Financial Planner application!

  • Rate of Return on Investment (Assumption)–A probable rate of return needs to be estimated, basis the asset allocation planned to be done, for achieving the corpus required to fulfill the financial goal. You may choose the asset allocation considering the following parameters.

  1. Your financial risk profile

  2. Time period to achieve the goal

  3. Rate of return required to achieve the goal

The asset allocation strategies are explained in detail further in the Asset Allocation and Rebalancing chapter of this book. However, it is important to note that each asset class and investment products tend to provide different rate of returns in various countries. Hence, it is highly recommended that you consult with your Investment Advisor / Broker for finalizing the asset allocation and identifying the suitable investment products.

For your convenience, the historical rate of return on equity and debt asset classes specific to all major countries is provided in the Ultimate Financial Planner application. To estimate the rate of return easily, a return estimator tool in also provided in Ultimate Financial Planner application.

Using the historical returns and basis the percentage of equity and debt asset classes chosen in your asset allocation, you may estimate the probable rate of returns your investments could earn!

B - Creating Time Buckets

After you have completed listing your goals, this list needs to be divided into three different time buckets viz. Short Term Goals, Medium Term Goals and Long Term Goals. As an example, Short Term Goals could be for a period of up to 5 years, Medium Term Goals could be for periods between 5 to 15 years and Long Term Goals could be for a period above 15 years. A few examples of financial goals in each of the time buckets are given below:

Short Term Goals (within the next 5 years)

1. A family vacation

2. Purchase or upgrade of a car

3. Purchase of a new television set or a music system

Medium Term Goals (within the next 5-15 years)

1. Buying of a new residential property as the family size grows

2. Higher education fees of your children

3. Marriage expenses of your children

Long Term Goals

1. Buying a vacation/retirement home

2. Planning your own retirement

C - Goal Feasibility and Prioritization

Post listing of all goals and placing them in each of the time buckets, we need to evaluate if it is feasible to achieve all the stated financial goals. Feasibility check could be done as follows:

  • Calculate the future value of each of your goals (actual amount required to achieve your goal) on the basis of assumed inflation rate

  • Calculate monthly/yearly amount required to be invested for achieving your goal on the basis of assumed rate of return on investments

  • If the amount required to be invested to achieve all your financial goals is more than your surplus, then this indicates that a few of your goals may not feasible as of now. Hence you need to prioritize your goals (explained ahead in this chapter)

  • Post goal prioritization, you need to start saving and investing systematically to accumulate the required corpus to achieve your goal


If you have a goal to purchase an asset which costs (Present Value) 100,000 now and the expected annual increase in its cost (Inflation) is 5%. The expected rate of return on the investment you may do to accumulate the required corpus to achieve this goal is 7% and the goal is scheduled to be achieved after 5 years from now. In this case, the cost of asset (Future Value) after 5 years from now will increase to 127,628 and you will need to do an annual investment of 22,193 or a monthly investment of 1,783 to accumulate the corpus of 127,628 in 5 years.

The amount required to be saved annually for achieving your financial goals will be given in the detailed financial planning report as you plan for your financial goals with the help of Ultimate Financial Planner application.

If the sum total required to be saved each year to achieve all your financial goals is more than your annual surplus, then you need to do the following:

Relook at your monthly financial budget. Check if it is possible to reduce some of your discretionary expenses to elevate your surplus. Try out a few Do’s and Don’ts listed in the Monthly Financial Budgeting chapter. Even after performing these activities, you may find a shortfall in the required surplus. In this case you need to prioritize your goals which can be explained as follows.

As you plan for your financial goals, you may realize that your surplus may not be sufficient to achieve some of your financial goals. In this case you need to priorities them. Goal prioritization involves ranking the goals as per their importance and giving priority to the important goals. The lesser important goals could be postponed or modified or even cancelled. E.g. Funding for children education is an important goal but purchasing a vehicle or vacation planning is relatively a lesser important goal. Hence you may need to postpone or modify or cancel some of the lesser important goals.


1. You may consider purchasing vehicle of different make / brand which may cost you lesser and the money that is saved may be utilized for important goals.

2. You may consider going on vacations alternate year instead of every year to save funds for important goals.

3. You may consider postponing lesser important goals like buying ornaments / vehicle, etc. and allocate funds for more important goals like children education, retirement planning, etc.

You may find it difficult to make alterations and prioritize your financial goals, but this is the reality of life. You have a finite amount of financial resources and within those resources, you have to plan to achieve the maximum amount of goals. You and your family should together understand this critical aspect of financial goal planning. To make goal prioritization simpler, you may classify your goals into needs and wants. As stated in the Monthly Financial Budgeting chapter, needs signify something which you and your family cannot do without. Hence you may choose to give priority to your goals classified under needs and keep your goals classified under wants on hold until you have more financial resources available to achieve these goals. As your progress in your professional life, you will definitely have more financial resources to fulfill such goals.

After completing the goal planning process, you would have a relatively clearer picture of what you want to achieve as a family and how is it realistically possible to achieve most of your goals. Some goals may get scaled down or postponed in the process however; there is no reason to be disheartened. You need to make consistent efforts to manage your expenses so that you are able to generate good amount of surplus for investing and funding for your financial goals. As you progress in your professional life and get higher increments and incentives, you would be in a position to achieve some of the goals that were not feasible earlier.

This entire process is a journey of a lifetime and while you may have some punctures along the way, you and your family will be prepared for them well in advance and have a thoroughly wonderful and enjoyable trip.

After you prioritize your goals, you need to do the relevant edition / deletion of goals in the Ultimate Financial Planner application and regenerate the financial planning report. It should be noted that you may require performing multiple iterations before you finalize your goal planning activity.

D - Goal Financing

A financial goal can either be financed by drawing from your savings and investments or by taking a loan. Smaller financial goals like vacation planning, purchase of ornaments, kids school education, etc. can be financed with the help of your own savings and investments whereas a few of your bigger financial goals like purchase of a car or house may require your own funds as well as financing from loans. Hence if required you may opt for loan to finance for the shortage of funds required to achieve your bigger goals. However, it needs to be noted that this will add cost of loan repayment and will reduce your monthly surplus to the extent of your monthly loan installment until the loan tenure of the said loan is over.

Things to watch out for while taking a loan:

  • Interest rate: Enquire with a few banks / financial institutions and check for the rate of interest charged for your requirements. Negotiate with them and ensure that you are getting lowest interest rate.

  • Repayment flexibility: In addition to the regular loan installments, check if your lender allows additional lump-sum repayments without any prepayment penalties. This flexibility would help you in repaying the loan ahead of time and thus help you save on the interest cost. You may use your performance bonus / incentives to repay the loan quickly.

  • Processing fees: Check for the processing fees charged by the lender. The processing fee may be a) Fixed fee amount or b) Percentage of approved loan amount or c) No processing fee. Ensure that you do not end up paying higher processing fees.

  • Customer support: Check if your lender provides you with an online access to your loan details. This will help you to easily keep a track of your loan account. Also check for dedicated service team to support you on phone and email should you have any queries of service requests related to your loan.

  • Know your budget: Once you take a loan, you need to pay the monthly loan repayment installments. Hence it is important to formulate a monthly budget so as to have a clear understanding of your monthly cash flows (cash inflow and outflow) and understand if you could comfortably repay the loan installments.

  • Ascertain your need for loan: As discussed earlier, you should take a loan which will help you build assets like a house loan rather than taking a personal loan to fund your expenses.

  • Debt-Income Ratio: The standard rule of thumb states that your Debt to Income ratio should be less than 36 percent i.e. your monthly loan repayment amount needs to be less than 36 percent of your monthly income.

  • Pay off the debt with the high interest rate first: You need to make efforts to pay off the loans like Credit Card on priority since these charge a high interest rate. This will help you save significant amount on interest repayment.

  • Answer the "What if" question: Loan insurance plan is the best way to secure your family from any kind of loan liabilities in case of an unfortunate event. It is highly recommended to get loan insurance plan while opting for a loan amount of higher value as in case of a house loan.

A detailed financial goal planning module is available in the Ultimate Financial Planner application to plan for your goals. You may try as much iteration as required to plan and finalise your goals.

IX - Retirement Planning

Retirement planning is one of the most critical goals that you may have and you certainly could not afford to miss out on achieving this goal. Retirement planning involves ensuring a regular flow of income from your investments during your golden years of retirement when the income from active sources like your job / profession ceases.

To enjoy these golden years, you need to systematically plan and save funds to achieve your retirement corpus, which will be the source of your regular income during the retirement. Below are the key steps involved in the process of retirement planning:

1. Estimate the amount of regular flow of income required during retirement. In order to estimate this, you may consider your current expenses as a starting point. Reduce some of the expenses like office commutation / business travelling, entertainment and other discretionary expenses if you feel that these expenses would be lesser post retirement. You may want to add additional medical / health care expenses, any expenses related to hobbies you would like to pursue, etc.

2. Estimate rate of inflation and expected rate of return on your investments.

3. Calculate the future value of regular flow of income required during retirement, considering the impact of inflation.

4. Calculate the corpus required to be accumulated at the time of your retirement to fund the regular income needs.

5. Calculate or assume the amount of pension / social security (if applicable) benefits that you are likely to receive at the time of retirement.

6. Calculate the monthly / annual savings required to achieve the shortfall in retirement corpus. Here shortfall in retirement corpus is calculated by reducing the amount of pension (step 5 above) from the total Retirement Corpus required (step 4 above).

The earlier you start your retirement planning process, the better are your chances of enjoying a comfortable retirement and perhaps even enjoy an early retirement! Given below are illustrations which demonstrate how starting the retirement planning process earlier, could help you comfortably achieve your goal of retirement planning.

Case 1 - Consider your current age as 40 years, you plan to retire at the age of 60 years and you assume your life expectancy to be 85 years. You estimate that your annual income requirement post retirement in today's cost i.e. without considering the impact of inflation is 100,000. You estimate inflation to be 5% and rate of return on investment to be 6%. The value of annual income requirement of 100,000 at the time of retirement will increase to 265,330 due to the impact of inflation and to fulfill this, you will need to accumulate a retirement corpus of 5,933,914 at the time of your retirement. For achieving this retirement corpus, you need to invest 161,311 annually or 12,843 monthly from now on.

Case 2 - Consider your current age as 50 years, you plan to retire at the age of 60 years and you assume your life expectancy to be 85 years. You estimate that your annual income requirement post retirement in today's cost i.e. without considering the impact of inflation is 100,000. You estimate inflation to be 5% and rate of return on investment to be 6%. The value of annual income requirement of 100,000 at the time of retirement will increase to 162,889 due to the impact of inflation and to fulfill this, you will need to accumulate a retirement corpus of 3,642,908 at the time of your retirement. For achieving this retirement corpus, you need to invest 276,380 annually or 22,229 monthly from now on.

Thus it can be seen that starting retirement planning at the age of 50 instead of 40 could increase the savings required to accumulate the retirement corpus significantly, making it difficult to achieve your retirement planning goal.

Financial pointers

  • Start saving and investing regularly for your retirement on high priority if you have not yet started this activity.

  • If you still have long time for retirement (more than 15 years), you may consider allocating higher proportion of investments in equity asset class to boost your long term rate of return.

  • As you near your retirement, you may gradually shift your investments from riskier investment assets like stocks / shares to safer and less volatile investments like bonds to avoid any capital erosion.

Worst Case Scenario

  • In a situation wherein you fall short of retirement corpus and in case if you have a big house, you may consider renting out some space from your house to generate additional cash inflow.

  • You may also consider selling the big house and moving into a smaller house. Small house could also be easy to manage and would also incur lower maintenance costs. You may use the additional funds gained from shifting the house to fund your retirement.

  • If you live in a big city, post your retirement, you might consider shifting to a smaller town wherein the housing and cost of living could be more affordable. E.g. In my case, I would love to move to my native town post my retirement to avoid big city rush and enjoy calm & peaceful retirement!

  • If you are not able to accumulate the required retirement corpus, then as a last option, you may consider reverse mortgaging your house to a bank / financial institution and earn a fixed amount of periodic income on this deal.