What are the Types of Financial Planning?

Financial planning is not just a one-off activity. It is a summation of several different types of plans, which constitute the sub-plans of the overall financial plan. Here we look at the various types of financial planning and how then combine to create a comprehensive financial plan. Let's start by answering the question, “what are the types of financial planning?

Types of Financial Planning

Let us break up the types of financial planning into 6 key buckets and look at each of these in detail.

Planning your cash flows

You can look at this type of financial planning as your income statement. The idea is to ensure that you have enough money to meet your needs and work the budget in such a way that you can stretch your savings each month to the maximum.

Planning your insurance needs

Insurance planning is the total of planning the quantum of life cover, the quantum and mix of health cover, deciding on corporate versus personal health covers, making a choice between individual plans and family floater plans, ensuring your assets to prevent diminution in value, insuring your liabilities with insurance for an exigency, etc.

Planning for your retirement

One of the important types of financial planning is the plan for your safe, secure, and happy retirement. After all, when you worked all your life, you deserve to rest on your laurels. For example, your retirement plan must focus on rising inflation and rising standard of living.

Planning your investments

It starts with asset allocation, selection of the right investment instruments, checking on the diversification of your plan, assessing the risks, rewards, and liquidity of your investment plan, etc. Normally, the individual works out the savings, the financial adviser helps in laying out the investment opportunities like bonds, stocks gold, mutual funds REITs, etc, and helps to choose them in the right mix. This is the actionable part of the plan.

The truth about Tax Planning

Among the various types of financial planning, tax planning is very important because it also ensures that your tax investments fit into your overall plan. The idea is to focus on post-tax returns rather than pre-tax returns. Plan your investment, withdrawal, asset mix, and administration in the most tax-efficient manner.

Layout a real estate plan

Among the various types of financial planning, this is the last type of planning which entails the creation of real property investments. You cannot have a portfolio of just financial assets and need real assets too. This is normally considered peripheral, but in terms of the need to do it structurally, it is key among the different types of financial planning.

How to create a financial plan

You create a financial plan for the future. Having seen the various types of financial planning, let us look at the key steps involved in creating a financial plan.

  1. Set your financial goals. The goals help you to crystallize where you want to reach in terms of specifics, deliverables, and actionable. This is the guiding document for your financial plan.

  2. The second step is to create a budget to look at the flows on the income and expenditure side. Look at your monthly inflows, outflows, how you can cut corners, how to cut costs without compromising on lifestyle, savings surplus, etc. This is a base document to get more value out of your savings.

  3. Plan your taxes early. For example, capital gains are more tax-efficient than dividends. Similarly, equity can be more tax-efficient than debt. The long term is always more tax-efficient than the short term. It is about being tax-smart.

  4. It is now time to build an emergency fund. The thumb rule is to build an emergency fund that is 5-6 months of average earnings. Invest this in liquid funds and only fall back on this in an emergency. Above all, this will ensure that you don’t have to do a fire sale.

  5. Get smart about how you manage debt. Paying 35% interest annually on huge credit card bills means you can forget about creating wealth. Cut down on high-cost debt and consolidate multiple loans.

  6. Ensure your life, the health of your entire family, insure your assets to avoid impairment losses, and finally also insure your liabilities to avoid nasty surprises in an exigency. This step also looks at the apt insurance policies.

  7. Create a corpus for your retirement and the education of your children. Start early and let the power of compounding works best for you.

  8. Finally, create a will for smooth succession planning. Let your dependents enjoy the benefits after you in a hassle-free and structured manner.

Basic Concepts you Need to Understand for Financial Planning

Some of the important concepts to understand in financial planning are Goals, financial goals, investment, asset class, asset allocation, review, restructuring, long-term goals, short-term goals, risk assessment, etc.

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Frequently Asked Questions Expand All

There are no hard and fast rules. Normally short term goals are up 3 years, medium term goals up to 5 years and long term goals beyond 5 years. However, such definitions can be fairly fluid.

Investing is the enabler of financial planning. Investing is what makes the financial plan actionable and catalytic in meeting your financial goals.