Question

A successful business owner, Sam along with his wife and three children have the following in assets and liabilities:

$250,000 RRSPs for Sam and Sam's wife has $100,000 in RRSPs;

Corporate account jointly held worth $1,000,000;

They are 43 years old and there children are 10, 8 and 6 years old;

They own their home worth $450,000 and have a mortgage of $250,000.

Use the six essential components of financial planning to provide sound financial advice to the clients.

Answer 1

Answer:

Financial Planning and its essential elements:

Financial Planning is a step by step process to achieve an individual life’s goal. In terms of Business it is task to determine a business objectives, strategies and goals. For individuals; it has a separate meaning since people needs are different from each other but few things are common among them such as Insurance, estate, retirement. A sound financial planning can be denoted as a plan to decide what to do with money. The components on which the financial planning depends are:

· Estate Planning

· Tax Planning

· Investment Planning

· Insurance Management

· Retirement Planning

· Cash Management

· Estate Planning: For an individual owning an asset is something very considerable in terms of monetary benefits. So it’s important to plan your estate because when you own a property you also held responsible for its transfer of ownership. Your financial plan should include a review of your lifetime gifts and final transfer of assets to reduce or eliminate your gifts and estate tax exposure for future. No matter your age, estate planning is an integral component of long-term financial planning. You can control the distribution of your assets, both during life and upon death, with the right estate plan structures in place for your unique circumstances and wishes.

· Tax Planning: In order to maximize and preserve your investment returns, an eye toward tax management and planning is important. There are number of tax-deduction strategies and methods for generating tax-free income and wealth transfer considerations; which can be achieved by way of tax planning. Tax planning is way to check whether you are eligible for deductions under Act if you have an effective plan then you can save your returns from tax.

· Investment Planning: An analysis of your investments should be completed to determine if the portfolio’s earnings, growth, and diversification are consistent you’re your objectives and risk tolerance. It helps to know whether you hold a profitable portfolio or not. A strong and strategic investment plan can generate more returns in future with minimizing the risk factor.

· Insurance Management: Every Individual depends upon insurance policy due to uncertainty. An important and often overlooked component of financial planning is to evaluate the kind of insurance you need to protect yourself and your assets with and your loved ones. The insurance policies differ on the basis of what kind of insurance you are opting also it varies for individual needs and ages.

· Retirement Planning: Retirement planning helps you set a goal for, when you want to retire and your income and lifestyle objectives during retirement. Your advisor can determine, if your current savings are on track and provide guidance on strategies to help achieve those goals. Retirement Planning also helps you answer questions, such as –

1. How to manage my retirement RRSP?

2. Is my retirement corpus enough?

3. Can I retire early?

4. Should I invest in risky assets after retirement?

5. How to increase my pension?

· Cash Management: To truly understand your current assets, liabilities, and net worth; it is important to identify in writing the status of your personal and professional income and expense balance sheet. A balance sheet or “Statement of Financial Position” should be created, showing your net worth by listing all assets and liabilities. This should be periodically updated to track progress towards overall goals and to identify changes in your financial situation that need attention. This will helps to identify your personal/professional income and expenses and the amount held with you in cash in terms of both in hand and with the bank.