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Components of financial planning
A good financial plan should include the following things
- Contingency planning - Risk Planning (insurance) - Retirement Planning - Tax Planning - Investments and Savings option
One should identify their wealth status prior to move with financial planning.
Contingency planning
Contingency means any unforeseen event which may or may not occur in future. Contingency planning is the basic and the very first step to financial planning. It was found that a large number of people have invested in financial planning instrument but have ignored their contingency planning. There are many possibilities that due to illness, injury or to care of family member a huge amount of money is required. Moreover ,its not assured that the next job will be available at the earliest. These are temporary situation and lasts for a short phase but cannot be ignored.
If person has not planned for contingencies, he will use his long term investment to fund such crises. It is possible that long term investment may not give enough returns if withdrawn early. There is also a possibility of capital erosion. In such a situation ,all the financial plans made are of waste. With long term planning ,person also needs to take care of present situation in order to truly achieve financial goals. It is a thumb rule that one should have three times money of monthly salary in liquid form to support contingency.
Risk planning
Every individual is exposed to certain type of risk whether it is due to loss or damage of personal property, loss of pay due to illness or disability; or even due to death. Such risk cannot be determined but on occurrence there may be a financial loss to the individual or their family. Proper personal financial planning should definitely include insurance. One main area of the role of personal financial planning is to make sure that one has the ability to carry on living in case of some unforeseen and unfortunate event. Basically, insurance provides a safety net to provide the necessary funds when one meets with events like accidents, disabilities or illnesses. One main contribution of insurance is that it helps provides peace of mind, knowing that enough funds are at hand in the event when things do not go the way it should be. This peace of mind leaves one with the energy and confidence to move forward.
Life risk
Every individual is prone to risk of losing life but what is not certain is the time of death. In this sense everyone is prone to life risk, but the degree of risk may vary. In terms of financial planning, covering life risk means insuring the life of the person through proper life insurance plan. It is extremely important that every person, especially the breadwinner, covers the risks to his life, so that his family's quality of life does not undergo any drastic change in case of an unfortunate eventuality. There are various plans offered by insurance companies that can suite various needs of an individual.
Health risk
Lifespan of an Indian is known to have increased nowadays, and senior citizens strive to stay healthy and active as they age. However, as the person gets older, extensive health care is needed. Health insurance is an insurance policy that insures against any medical expenses. Insured medical expenses will be taken care of by the insurance company provided person pays their premium regularly. Cover extends to pre-hospitalisation and post-hospitalisation for periods of 30 days and 60 days respectively. Domiciliary hospitalisation is also covered.
Property coverage
Property Coverage insures personal property from damage, destruction or theft. Dwelling coverage also known as Homeowners Insurance offers protection against direct physical damage caused to the dwelling, including rooms, fireplaces, carpeting, tile floors and elements of decor. Structures, which are attached to the insured dwelling on the same foundation, such as a garage, are also liable to coverage under this section of Homeowners Insurance. Besides, this section of policy covers materials and supplies necessary to rebuild or repair home.
Person Property Coverage can insure the contents of home.
Tax planning
Tax planning is what every income earner does without fail and this is what financial planning is all to them. A good plan is one which takes the maximum advantage of various incentives offered by the income tax laws of the country. Financial planning objective should be getting maximum advantage of various avenues. It is to be remembered that tax planning is a part and not financial planning itself. Primary objective of a good financial plan is to maximize the wealth, not to beat the taxmen.
With the knowledge of the Income Tax (IT) Act one can reduce income tax liability. It also helps to decide, where to invest and to claim deductions under various sections. The income earned is subject to income tax by the government. The rate of income tax is different for different income levels, and thus, the income tax payable depends on the total earnings in a given year.
Retirement planning
A retirement plan is an assurance that a person will continue to earn a satisfying income and enjoy a comfortable lifestyle, even when they are no longer working. Due to the improved living conditions and access to better medical facilities, the life expectancy of people is increasing. This has led to a situation where people will be spending approximately the same number of years in retirement as what they have spent in their active working life. Thus it has become imperative to ensure that the golden years of the life are not spent worrying about financial hardships. A proper retirement planning, to a very large extent, will ensure this.
Planning ahead will let us enjoy the retirement that we deserve. The retirement strategies decided upon, makes a fundamental difference to the degree of financial freedom one will experience when they do decide to take their pension. Planning for retirement and choosing a pension strategy to safeguard financial security can be a minefield.
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