Throughout different phases of life, your priorities and goals change. As a teenager, your focus is on studies and preparing for college. As a young adult, you start your career and begin to manage your own finances. After marriage, your responsibilities grow to include caring for your family, which means supporting your spouse, children, and even your parents. These changes also bring shifts in your financial habits and goals.
Understanding how to adjust your financial plan during these transitions is the key to managing your finances effectively and ensuring your family’s long-term well-being. So let’s take a look at what family financial planning means, why it’s important, and understand the different elements of a financial plan.
What is Financial Planning for Family?
Family financial planning is the process of defining your family’s long-term and short-term financial goals and making a plan to achieve them effectively. It takes into account the various stages of life, such as marriage and having kids, and also the responsibilities these stages bring, like owning a home, saving for the wedding, and funding your children’s education.
It includes various elements such as budgeting and saving, investments, insurance coverage, emergency funds, retirement, and estate planning. These elements help you make a roadmap for achieving your financial goals and securing your family’s future.
Why Is Family Financial Planning Important?
Family financial planning ensures that your family is prepared for any financial challenges that life may throw your way. It helps you manage both expected and unexpected expenses and gives you a clear strategy for realising your financial dreams and securing your family’s future. Through budgeting, you can instil financial discipline in your life, and control any impulsive urges to spend.
By investing, you can protect the value of your money from inflation, and grow your wealth. Insurance and emergency planning allow you to be prepared for unexpected expenses and situations, which can otherwise disrupt your financial stability. Just having a clear and well-defined plan of action will help you make more informed decisions, and give you confidence and peace of mind.
Creating a Family Financial Planning Budget
Family financial planning involves setting goals as a family, such as planning vacations, building emergency funds, saving for children’s college, and retirement planning. It also involves budgeting, and ensuring the family remains protected from various financial risks such as the untimely death of the breadwinner or expensive hospital bills. It focuses on investments, tax-saving strategies, and succession plans for family wealth planning. Let’s take a detailed look at the important areas every family financial plan must cover:
1. Set Goals
Financial planning starts by setting goals as a family. These goals will give direction to your family’s financial journey, so they must be carefully and clearly defined. For example, you may have a long-term financial goal, such as building a fund for your child’s college education.
For such a goal to be clearly defined, you’d need to take into account many factors like the estimated cost of education, the time horizon for when the funds will be needed, the education inflation rate which tends to grow at a much higher pace than regular inflation, and the expected returns on your investments.
On top of that you might also need to consider whether your child may qualify for scholarships, the type of college you would want them to attend, and whether the education will be within the country or abroad. Once you have considered such factors, you can set a monthly savings goal, which you can invest at the risk/return level that matches your investment horizon and risk tolerance.
This is an example of SMART goal setting, where you set goals in a Specific, Measurable, Attainable, Relevant, and Time-bound manner. Such goals not only give you a clear direction and motivation but are also easy to track.
2. Assess Finances
Knowing about your current financial situation is essential. Evaluate your income from all sources, total expenses, any loans or liabilities, assets, and savings. You can estimate your net worth by subtracting your total liabilities from your total assets. This net worth will give you a clear picture of your financial health and help you in setting realistic financial goals.
You can also calculate it regularly to make sure that you are on track and make informed decisions about spending, saving, and investing. Once you get a clear picture about where you stand financially you can create a realistic and achievable financial plan.
3. Budgeting
Budgeting is the process of tracking and evaluating your income and expenses over a period, like a month. The most important function of a budget is to make sure that you live within your means, that is, you are not spending more than you earn. Secondly, a budget allows you to save money regularly, which promotes discipline and understanding how you spend – both essential qualities for financial success. A budget also allows you to identify areas where you may be overspending, so you can cut unnecessary expenses and save more.
One of the most popular budgeting structures is the 50/30/20 rule. According to this rule, you should allocate 50% of your income to necessities like rent, groceries, and essential bills, 30% to non-essential expenses such as hobbies, entertainment and streaming services, and aim to save at least 20%. This rule allows you to spend a big chunk of your income on things that make your lifestyle more comfortable and life more fun.
This is important because a common mistake people make while budgeting is making too many sacrifices, which can lead to frustration and burnout, and ultimately the budget is abandoned. With the 50/30/20 rule, you can easily stick to your budget in the long run.
Remember that this rule is a general guideline. It may not be possible for individuals, especially younger individuals to save as much as 20% of their income. The key here is to adapt the rule to fit your circumstances, that’s why a thorough assessment of one’s current financial situation is so important.
4. Emergency Fund
Uncertainty is a part of life. Unforeseen situations pop up from time to time and bring along unexpected expenses. An emergency fund is a reserve of cash, separate from your savings, that is used to deal with such expenses. This fund is used as a safety net during situations such as the loss of a job, medical emergencies, or expensive car repairs.
Generally, you should aim to save at least six months’ worth of living expenses and only use it during emergencies. Also, because emergencies demand swift action, this fund should be easily accessible, such as in a high-interest savings account or a liquid fund.
But why should you plan for emergencies? Well, an emergency fund prevents you from dipping into your savings and prematurely liquidating your assets. In case an expense is too big it might even force you to take debt. Taking loans on short notice means you are going to have to pay high interest. An emergency fund also helps prevent this and will give you peace of mind, knowing that you are financially prepared to handle unexpected situations without having to compromise your long-term financial goals.
5. Insurance
While an emergency fund is important for handling immediate and unexpected expenses, insurance gives you a more comprehensive financial safety net against risks to health and life. As far as family financial planning goes, the importance of having adequate insurance coverage cannot be overstated.
Health Insurance
Medical costs have skyrocketed in recent years, and the trend is expected to continue. The need for comprehensive health coverage has never been felt more. By buying a policy for your entire family, you can cover the hefty medical expenses, including hospitalisation, surgeries, and medications. This ensures that healthcare costs do not derail your financial plans or burden your family.
Life Insurance
In the unfortunate event of your untimely death, a life insurance policy will provide financial support to your family by helping them maintain their standard of living and meet future financial needs. If you happen to be the main earner of your family, this support becomes even more crucial. Life insurance can cover various expenses such as mortgage payments, daily living costs, and education expenses for your children so that your loved ones don’t have to deal with financial distress in your absence.
The benefits of having insurance extend far beyond financial protection. One of the biggest advantages is the amount of taxes you can save. According to the Income Tax Act, many types of insurance premiums are eligible for tax deductions. For example, Section 80D states that health insurance premiums paid for yourself, your spouse, children, and parents are eligible for tax deductions.
Up to Rs. 25,000 per year can be deducted from the net income of individuals and an additional Rs. 25,000 for premiums paid for parents. If the parents are senior citizens, the deduction limit rises to Rs. 50,000. Similarly, the premiums paid for life insurance policies for yourself, your spouse, and your children also qualify for deductions, but under Section 80C. The max limit for this deduction is Rs. 1.5 lakh per year.
6. Investments
Inflation eats into the value of your savings, so simply keeping money in a savings account is not sufficient to grow your wealth over time. This is where investment planning comes into play. The process begins by assessing your risk tolerance, that is, how much risk you are comfortable taking with your investments, and how much risk your current financial situation allows you to take.
Based on your risk profile, you must invest in a variety of asset classes such as stocks, bonds, mutual funds, gold, and real estate to create a diversified portfolio. If you select the right mix of assets, you can earn returns that outpace inflation, which not only preserves the value of your money but also allows you to grow wealth.
Another benefit of investments is tax savings. Under the old tax regime, there are various deductions and exemptions you can take advantage of to minimise your taxable income and maximise tax savings. For example, Section 80C allows you to deduct a maximum of Rs. 1.5 lakh for investing in instruments such as Equity Linked Savings Schemes (ELSS), the Public Provident Fund (PPF), and the National Savings Certificate (NSC).
7. Estate Planning
Also known as succession planning, the process of estate planning involves organising and managing your assets to make sure they are distributed according to your wishes after your death. This is done by creating wills and trusts and assigning people you trust as the power of attorney. If you have children, estate planning becomes even more important, as it allows you to name a legal guardian for your children and also make sure that your assets are allocated in a manner that supports their future needs and security.
Without a proper estate plan in place, your heirs may have to fight in prolonged legal battles, pay extra taxes, and face financial hardship till things are settled.
8. Education Savings
During the last few years, the general inflation rate has hovered around 5% to 6%, while education inflation has doubled at 11% to 12%. To make sure that you can cover future college expenses without any financial strain, it’s important to start saving as early as possible and plan effectively.
If your children are young, you can take more risk by investing in high-growth options like equity mutual fund SIPs to maximise your returns. As your children grow nearer to college age, you should start shifting your investments to lower-risk options such as hybrid or liquid funds to preserve the capital you have accumulated over the years.
9. Financial Education
As Benjamin Franklin once famously said, “An investment in knowledge pays the best interest.” Broadening your financial awareness equips you with the knowledge and tools necessary to make informed decisions about your family’s financial future. The more you know, the better decision you’ll be able to make, so it’s equally important to talk to your family about finances and money management.
Younger kids are very impressionable and can benefit greatly from early financial education. You can teach them about savings by giving them a piggy bank, and about spending and budgeting by giving them a weekly allowance. You can also demonstrate responsible financial behaviour, such as sticking to a budget or controlling impulse spending and setting a good example. You can tell them a bit about why you invest and what things you consider before investing in simple words and introduce them to more advanced concepts.
Remember, your actions speak louder than words. As for yourself, you can extend your knowledge by reading financial articles, listening to finance-related podcasts, and keeping up with market-related news.
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Conclusion
As you transition through different stages of life, you’ll need to make sure that your family’s financial plan evolves to meet your changing needs and goals. That’s why a regular review of your financial plan is important – so that you can effectively readjust your strategies and adapt to new circumstances.
You can also hire a certified financial planner to make your plan more comprehensive and personalised, and there are many benefits to doing so. A financial planner can accurately understand your current financial situation and assess your risk tolerance. They can also help you set clearer and more achievable goals, and create strategies to realise your financial dreams. This ensures your plan stays tailored to your unique circumstances.
These experts offer tips on investments and suggest different options that can not only help you grow your wealth but also save taxes. Their comprehensive service also includes emergency planning, risk protection, retirement planning, and estate planning, and by taking advantage of their expertise, you can make financial decisions with confidence and improve your family’s financial stability and future.
Hire a financial planner for your family today!
