Personal Financial Planning (PFP).

Personal Financial Planning (PFP) is to apply the principles of finance to monetary decisions relating to one’s self or family unit. PFP shows the way the individuals or families obtain, budget, save and spend their money or resources over a time period, taking into account the various financial risks and future events in their life.  Personal finance includes checking, savings accounts, credit cards and personal and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies and income-tax.

Personal finance needs financial planning which means constant monitoring and re-evaluation.  How to do this?  There are five steps involved to take care of this:-

Assessment: A simplified financial balance sheet and income statement must be drawn to assess one’s personal financial situation.  The balance sheet must list the values of personal assets (house, car, stocks, bank account etc.) along with personal liability (loan, credit card, debt, mortgage, etc.)  A personal income statement shows personal income and expenses.

Setting goals:  List out the short term and long term goals.  Financial goals help financial planning.  Some examples are – acquisition of a house in a five-year time with a monthly mortgage cost; retirement plan at age 60 or 65 with a personal net worth of $ 2,000,000.

Creating a Plan:  The PFP sets means of how to achieve the goals.  This could be through avoidance or reducing unnecessary expenses, improving one’s income or by investment in stock market, etc.

Execution: Implementation of one’s PFP requires perseverance and discipline.  Guidance and advice can be obtained through experts and consultants in financial planning.

Monitoring and Reassessment: PFP needs constant monitoring and readjustment as time passes to suit the changing circumstances.

Generally, the major expenses an adult has to handle are typically home loans, credit card payments, student loans, college tuition fees for children, medical insurance, etc. 

The Financial Planning Standards Board advises the following six steps in PFP:-

• Financial Position: - Individuals net worth.
• Adequate Protection: Protection from unforeseen risks on all fronts – liability, payments, death, disability, health, etc.
• Tax Planning: Planning the tax burden and taking advantage of many schemes for reduction in the tax commitment.
• Investment and accumulation of goals: Saving and accumulation of sufficient money for high end purchases like house, car, education and income generating avenues to maintain a standard life style on retirement.
• Retirement planning: Plan the cost of retirement living and how to distribute assets to meet any short fall.
• Estate planning: Planning disposition of assets at death; to avoid tax burden on death by proper planning, so that the assets go to the heirs, family etc, and not for tax.

Questions:

• What are the five steps involved in Personal Financial Planning? Explain.
• What are the six steps recommended by Financial Planning Standards Boardand describe them briefly?