What are the Different Tools can I use for my Financial Planning? 

Having understood the concept of financial planning and the process flow, let us come to the tools for financial planning. There are several financial planning tools online but most of them are generic and cannot give you a customized solution. One of the ideas of these financial planning tools is to give a quick idea of how you need to go about your plan and the indicative corpus you need to work towards.

In this section, we look at some key tools for financial planning and understand how these financial planning tools in India can add value. Many of the financial planning tools online are simple to understand and easy to use, but you must at best use these as a starting point for your financial planning journey.

Different Tools for Financial Planning

The tools for financial planning are the instruments used to meet current and future financial goals through a structured and sound financial plan. Broadly, the financial planning tools fall under 4 categories. Here is a quick look at them.

  1. Wealth-creation tools for financial planning
  2. Protection tools for financial planning
  3. Capital drawdown tools for financial planning
  4. Perpetuating wealth tools for financial planning

Let us look at each of these tools in detail.

Wealth-creation tools for financial planning

The wealth-growing or wealth creation financial planning tools catalyze you in building wealth over a longer period by leveraging on the principle of compounding of interest. The wealth creation tools for financial planning are ideally suited to meet financial goals that require big cash outlays in the future and include such goals as planning for retirement, planning for a luxury car, planning for the education of your child, Planning for a nest egg, etc.

Here are some of the examples of wealth creation tools for financial planning…

  • Mutual Funds wealth compounder
  • Mutual Funds SIP calculator
  • Direct Equity wealth compounder
  • Direct Equity SIP calculator
  • Retirement Calculator etc.

To make your money grow substantially over some time and to understand these wealth-growing tools, is often a trade-off between risk and returns. Normally, high risk is needed for higher returns but high risk by itself does not guarantee higher returns. It is this dilemma that these wealth creation tools capture to perfection.

These wealth creation tools are extremely important in the early stages of your financial planning journey as they do most of the value creation needed to meet your long-term goals. Normally, these tools leverage high-risk / high-return asset classes like equities, mutual funds, hybrid debt, REITs, etc.

Protection Tools for financial planning

Returns alone are not sufficient. You also need to protect against contingencies and risks to your plan. For example, you could have a robust portfolio that multiplies over time. However, if the portfolio is likely to be impacted negatively by a slowdown in the economy or in the event of you losing your job, or in the event of your unfortunate death, then you need to have a backup plan to manage such risks. This risk is managed through protection tools.

The Protection tools of financial planning have their main objectives to serve as a robust cushion of support to you and your family. Risk to your financial plan emanates from several sources including untimely death, devastation due to acts of God, accidents, illness or disability that happens to the person who is the breadwinner of the family, loss of job, business downturns, etc.

What exactly do these protection tools provide? These protection tools can either provide either a lump sum or partial cash infusion to you and your family in exigencies. Alternatively, such protection tools can also help reduce your risk through measures like beta hedging and option-based hedging. Remember that protection tools are not an alternative to wealth creation tools but they are an adjunct and must be used in conjunction with one another.

Here are some examples of how protection tools work…

  • Life cover calculator
  • Health insurance calculator
  • Pension plan calculator
  • Beta portfolio hedge estimator
  • Education plans with insurance
  • Property insurance calculator
  • Liability insurance calculator tools

Drawdown Tools for financial planning

A very important tool in financial planning is the drawdown calculator. When you retire with a corpus, you should ideally structure in such a way that you regularly withdraw part principal and part returns in such a way that over a time frame of 25 years you fully draw down your corpus. This can be done through a traditional drawdown calculator or SWP calculator. The SWP or Systematic Withdrawal Plan calculator has been the best analytical tool for a person to estimate how to draw down the corpus.

In a drawdown calculator tool, the person just needs to define the amount needed per month, the likely yield, and the corpus. The tool will immediately tell you how long the corpus will last. You can also simulate different options of time frame and withdrawals using the SWP calculator tool.

Perpetuation Tools for financial planning

This tool is about a smooth transition of your wealth to your family members. Such calculators include will-making, legacy planning, tax implication simulation, etc.

How to assess your current situation?

Financial planning begins where you stand now and tries to guide you to where you need to get in terms of your goals. You assess your current situation based on the following 3 parameters.

Assessment of current situation on Financial Goals

This is where you stand today vis-à-vis your long-term goals. Your financial objectives might include content and comfortable retirement, increased income for current spending, or college education for your children. During your assessment, you should be in a position to document all of your goals and the time frame in years. Once that is done, the most important thing to do is to prioritize your goals and assign resources accordingly.

Assessment of current situation on Financial Resources

This is more financial or monetary. A smart investment program considers the current financial situation as well as future circumstances. The idea at this stage is to categorize your financial assets as taxable, tax-free, high risk, low risk, high yield, low yield, etc. This exercise has to be done for each asset class so you arrive at risk-adjusted net worth.

Assessment of current situation on Risk Tolerance

Risk tolerance is the amount of risk you are willing and also capable of taking. This is considered the most actionable kind of risk. Each investor differs in the amount of risk he or she is willing to accept in an investment. Investors can generally be classified like conservative, moderate, aggressive and you can also have compromise positions between each of these extremes. Risk tolerance is normally defined by your comfort level with volatility. But risk tolerance also goes a step ahead and assesses how much risk you should be taking. Too much risk and too little risk can be equally bad.

What are the objectives of financial planning?

Financial planning has some clear objectives laid out. Here is an enumeration of some of the key objectives of financial planning.

  • Financial planning helps to estimate the total capital needed right away and over some time to achieve the goals as laid out. You can also call it the fund's requirement. Financial planning is never done with lump sum investments. It is normally a small lump sum and a large portion of systematic investing over the years. The process starts with classifying goals into capital needs of short-term and long-term nature.

  • To meet your goals, you need funds. These funds can either come in the form of their own lump sum money or regular money. The financial planning objective is to estimate the quantum of money and the timing of capital contribution to be made. This is more so in goal fruition wherein the funds must be in sync with your financial needs.

  • Financial planning is about a trade-off between funds and returns. Having too many funds uninvested is not a great idea. The converse is also true. Financial planning can help to avoid either too many funds or too little funds; both of which can be sub-optimal

  • One of the most important objectives of financial planning is to prepare a defense mechanism against risks through insurance, risk management, diversification, etc. These defense mechanisms protect your plan in tough circumstances.

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Frequently Asked Questions Expand All

Retirement planning can be done by determining time horizons, estimating expenses, calculating required post-tax returns, assessing risk tolerance and having a clear plan for bequeathing funds and also for drawing down your corpus. Here are some of the key rules.

  • The earlier you start retirement planning, the better it is.

  • Younger investors can take more risk with their investments and at this stage you must take more risk so wealth creation is facilitated.

  • Retirement plans evolve over the years so regular review and restructuring is a must.

Here is a quick take on some of the tools and their usage.

  • Retirement calculator helps investors determine the investment needed to make their long term goals of content and worry-free retirement real. Some calculators allow you to select inflation rate and the rate of return and these are more realistic.

  • The EMI calculator gives users an idea of their EMI for a particular loan amount, by entering details like loan amount, duration interest rate etc.

  • Tax calculator helps to calculate taxes in an authentic way.

  • SIP calculator allows to simulate how you can accumulate a target amount by doing a regular SIP.

Most of these tools are free of cost and some may require registration. But use these as only tools and don’t make it a decision support system.