Financial Planning – Meaning & Relevance in retail banking

Meaning:-

Financial planning is a process by which present financial resources and requirements are identified for planning optimum usage of money

for ensuring minimum outflow of money by way of expenditure and maximum inflow of money by way of prudent investment decisions.

Financial planning involves planning for entire financial requirement of an individual/non individual and it includes both investment as well

as expense management.

Financial planning is defined based on the time horizon as well as purpose/objective and level of surplus.

Let’s discuss in detail.

Types of financial planning based on investment purpose and time horizon:-

Necessary Investments

Surplus Investments

Necessary Investments (Must investments)

1. Cash on Hand - To be equal to present 1 month expenses * 6 , Out of this at least 20 % in SB accounts and remaining in various forms of

Tds or entire amount in TD linked SB products

2. Life Cover (Insurance) - Minimum cover should be Total Loans Outstanding + Present per month expenses budget * 144 months or 10

years.

3. General Insurance (Medical) – At least Rs.2 lac per member in the family.

4. Pension Plans - Sufficient to generate monthly income 3 times of present monthly expenses.

5. Children or Child investment Plans -Where aim should be to build a corpus with respect to Marriage / Higher studies etc, Corpus to

be decided by parents.

Surplus Investments (Excess money after making Necessary investments)

1. Short -term investments (1 year or less) - A combination between FMPs & FDs (70:30), logic is FMP offers better tax advantage and

Fds provides liquidity.

2. Medium-term investments (1 year to 3 years) - A combination between MFs (Balanced Funds) & FDs (70:30), logic is MF

(Balanced) provides better returns with lesser risks and Fds provides liquidity.

3. Long -term investments (3 years to 5 years) - A combination between Mfs (Equity) & Fds (70:30), logic is equity funds provide

higher returns on 3 year plus time horizon and Fds provides liquidity.

4. Long- term investments for Asset creation ( 5 years & above)- A combination of Real Estates / Gold / Fds ( 70: 20 :10 ) , logic is

Real-estates provides growth based on demand , gold grows again on demand and these are directly co related to demographic features and

Gold also provides liquidity by way of finance availability and FDs provides liquidity.

Financial profile and meaning:-

Financial Profile is a document which provides complete financial details from present resources to present utilization to future utilisation

requirements and it details the level of money customer is having as well as his/her present/future needs and wants. Further profile

highlights whether he/she is running a low level of surplus/deficits /no surplus no deficit or he/she is maintaining high level of surplus.

Based on the levels of money a customer is having financial planning can be done. Let's understand various levels of money.

Low level and Surplus profile customer meaning

Low level surplus customer means money available post expenses are not significant hence volume or ticket size of investments will be low

value and High level means higher income left post expenses and availability of high ticket size investment.

Deficit profile customer meaning

Deficit is a situation where a customer is running expenses more than the incomes or customer is borrowing for meeting his expenses as he is

not having enough revenues to meet expenditures.

Since we have discussed meaning of financial planning and various types of Investment management, let’s now discuss Expenses /Outflow

management, as financial planning is incomplete without expenses management.

Meaning of expenses (outflow) management

Expenses or outflow management means optimum use of available money for generating maximum savings which can be invested further for

money multiplication.

Thus outflow management aims at zero wastage of money and 100% or optimum usage of available money.

Let’s discuss various types’ outflows and application outflow management.

Outflow Types and application of outflow management:-

Basic living cost outflow

Basic living cost includes all the expenditure an individual /family incurs in a month on food /shelter/clothing along with expenses like

health care, children education fee, salary to house maids and other support staff, Vehicle maintenance expenses, Water and Electricity

expenses and all other regular sundry expenses.

Taxation outflow

Tax outflows may in the nature of TDS from salary or Income tax on income, Corporation /Municipal taxes or Panchayat taxes to be paid by

an individual/family.

Investments outflow

Investments can be on products like TDs, Insurance, Mfs, Shares, and Bonds and on products like General Insurance as well as term plans

where investment is done as a hedge against unknown/ contingency risk.

Leisure cost outflow

Leisure outflows may be in the nature of eating out, travelling, vacations and entertainment programs etc.

Major outflows (Higher education / Home / Marriage)

Major outflow means where outflow is in excess of Rs.10-15 lacs is incurred.

Outflow on fixed assets (Luxury as well as necessity items)

Fixed assets may be a Car, 2 Wheeler, Air Conditioner, Television sets, new furniture etc.

Outflow on maintenance of dependents

Expenses incurred on supporting parents or any other relatives who are dependent on the individual/ family.

Outflow on charity purposes

Expenses incurred on donations to place of worships / charity foundations or trusts etc follows.

Let’s now discuss and understand application of expenses/outflow management.

Application of outflow management

Identification of best option based on product and prices is the first step in outflow management enabling the individual to avail best

products and services at lowest possible prices.

It will mean taking advantage of price differentials amongst similar products and services as well as taking advantage of discounts, rebates,

various customer friendly schemes etc.

Let’s discuss an example:-

Saving on groceries bill for the month:-

If various prices and schemes on groceries purchase is known, it will enable the buyer to buy at best prices and best products and for this

what is required is availability of complete schemes and prices of groceries from various stores in the town like Reliance Fresh, More,

Spencers, Big Bazaar’s etc.

Similarly with respect to each and every outflow, if we are able to identify best options with respect to price and product, we can ensure

optimum usage of our money.

Even while doing charity, there are many trusts donating to whom will enable a tax deduction, hence according to preference one may choose

the trust where he gets tax deductions for the donations.

Relevance and importance in Retail Banking

Bank is where an individual’s money is parked and nobody knows the customer’s actual cash on hand better than his/her banker.

From Banker’s part if a Banker can profile the customer and understand his requirements with respect to both Investments and expenses,

Banker will be able to provide best options to the customer and based on various options, he/she will be able to take best decisions resulting

in optimum usage of money.

This process of profiling & providing options is financial planning.

Thus best entity to do a financial planning service is a banker and financial planning doesn’t mean just investments requirements but

expenses management requirements too.

Social Media enabler to publicise financial planning services:-

Social media is where nowadays one finds most of the people hanging out 24/7 via mobile, I pad etc, considering the growing popularity of

social media amongst metro, urban, semi-urban and expected penetration in rural centers, and it will be a winner idea to be available on

social media for a banker.

Even though many bankers are available on social media like Facebook/Twitter etc but most of the content is general and doesn’t have pull

value or doesn’t make it a need for customer’s visit to bank's pages every now and then.

Here is where the earlier discussed options on expense management or outflow management can play an important pull value for the

customer.

And frequent updates from banker will ensure frequent visit of bank's social media pages by customer for knowing and availing various

products and services.

Once a customer start using social media to know the bank products and services and if he/she can operate his/her account through these

medium, banker - customer engagement will be as good as 24/7 , providing greater relationship management opportunity for bankers.

Financial planning as a big differentiator:-

Today most of the banks provide similar product and services, resulting in hardly any difference between banks except the bankers

representing each bank.

Financial planning is a product based on advisory ability thus will differ from bank to bank and the bank’s with best advisory skills will be

having the best financial planning products or services.

Thus financial planning can be a big differentiator between banks, which will strengthen bank's ability to acquire and retain fresh and

existing customers respectively.

Conclusion:-

Thus we may conclude financial planning as a service involving both investments and expenses management with greater relevance in retail

banking customer acquisition and retention.

Challenge is in developing a detailed financial planning product and delivering it to the customers with the same ease and efficiency of any

other banking product.