Financial Planning and Wealth Management

Financial Planning and
Wealth Management
Set - 2
Bibliography
• There has been reproduction of the exerts and text from the below mentioned
sources for the purpose of academic clarification and easy explanation. The
material is for strictly for internal circulation and not meant for any re‐publication
and for distribution.
Websites
• http://en.wikipedia.org
• www.investopedia.com/terms/n/npv.asp
• http://www.frickcpa.com/tvom/tvom_annuity_due.asp
• CFP Materials by IMS Proschool
• CFP Materials by Mandar Professional Excellence
2
Cash Flow Planning
Cash Flow Planning
Introduction
• Cash flow refers to the inflow and outflow of money. All transections that lead
to an increase in cash flow are classified as inflows of cash and all those
transections that lead to a decrease in cash are classified as outflows of cash.
• The cash flow statement is a statement that shows the flow of cash during a
period. It does not include amounts spent or earned on credit.
• Cash flow planning refers to the process of identifying the major expenditure
in future (both short term and long term) and making planned investment so
that the required amount is accumulated within the required time frame.
• It is the first thing to be done before stating the investment to know how the
finances look like. It also enables to understand whether a investment
matches with the flow requirement.
• The purpose of cash flow planning is to ensure cash surplus.
Additional Source: Mandar Professional Excellence 3

Cash Flow Planning
Cash Flow Planning
Need for Cash Flow Planning

• The idea behind cash flow planning is to match expenses on life goals with the
available income. Cash flow planning begins with identifying the sources and the
amount of income and expenditure.
• The principals that apply to corporate finance and to out personal lives are largely
the same.
• The need for cash flow planning has increased for both individuals and families.
Without proper cash flow planning one can easily get caught in the debt trap.
• The planning needs to be followed by implementing the plan and monitoring and
reviewing it.
• Also there is a need to bring about a change in the spending habits.

Cash Flow Planning
Cash Flow Planning
Statement of Cash Flow
• The statement of cash flow must cover a reasonable period of time. A one year
period is normally optimal.
Statement of Cash Flow - Steps

• Step -1: List All Sources of Income
• List all sources of income for the period of the income statement. Include all
sources in order to make the income statement complete and accurate.
• Income that is regular counts the most which includes money rom a job, a
pension, or other regular source.
• Put other incomes (less regular) and income from other sources under serrate
income categories.
• Use the average method by dividing the annual estimates by 12 for finding out
monthly figures where accurate estimate on a monthly basis is not possible.
• Prepare customized cash flow/budget from for different clients.

Cash Flow Planning
Cash Flow Planning

• Step -1: List All Sources of Income
The main source of income includes:
• Salaries, wages, bonus
• Net-self employed income
• Rents
• Interest (taxable and tax-exempt) and dividends
• Other sources of fixed or regular income (trusts, installment sale, etc)
• Other sources of variable income (price, gifts etc.)

Cash Flow Planning
Cash Flow Planning
• Step -2: List All Expenditures
• Expenditure shows where money is spent.
• Include major categories of expenditures. By adding the payments made in
each category, one would have a fairly accurate account of where one’s money
has gone. It is not necessary to account for every penny spent. On some case,
just like income, average rule need to be applied.
Types of Expenditure
• Fixed Expense: It includes the expenses which one must in same amount every
month for something (installments, insurance, rent, etc.)
• Variable Expense: These are expenses which are also paid monthly (regular)
but amounts are usually different every month (food, transportations,
electricity charges, mobile bills, medicals, etc.)
• Discretionary Expenses: These expenses do not have consistent payments
(hotel bills, entertainment expenses, gifts, vacations, investments, repairs, etc.)

Cash Flow Planning
Cash Flow Planning

• Step -3: Determine Whether There is a Surplus of Deficit
• When income exceeds expenditure, there is a surplus. When expenditures
exceed income, there is a deficit. Funds to cover a deficit can come from
withdrawal from savings or by taking a loan, both of which decreases net
worth. So a careful approach is required.
• A surplus represents an increase to net worth of the amount is used to increase
savings, invest is wisely to acquire Additional assets, and/or pay off debt.

Cash Flow Planning
Cash Flow Planning
Some Important Points to Remember (while preparing expenditure budget)
• Separate needs from wants:

• After making list if expenses check for items that can curb costs or can be
eliminated entirely. This is especially important to successfully budgeting to
eliminate debt or saving money towards a specific goal.
• Make sure that the expectations are realistic:
• The expenses should not be unrealistic (underestimating). There is need to
keep all expenses realistic and fair when planning for cash flows.
• Get family on the board :
• For the most successful budgeting possible, everyone in the family needs to
know and understand the budget.

Cash Flow Planning
Cash Flow Planning
Short Tem Cash Flow Planning
• The purpose of cash flow planning is to match expenses on life goals with the
available income. Cash flow planning start with identifying the sources and the
amount of income and expenditure. And money needs to be available to meet all
short-term needs (both regular and one time).
Cash Budgeting
• The cash flow is one of the primary tools used in short-term cash flow planning. It
is often developed on a month-by-month basis. A good cash budget allows an
individual to see short-term financial needs.
• The surplus generated in some months can be used in the months of deficits.
Preparing Monthly Household Budgets
• In preparing a monthly budget, both fixed and variable expensed need to be
considered. Evaluate cash flows if they cover all current expenses. In case outflows
are greater than inflows, then some of the variable expenses need to be reduced
or alternatively cash inflows need to be increased.

Cash Flow Planning & Budgeting
Budgeting
Introduction
• Budget, in context of a financial plan, is a process for tracking, planning and
controlling the inflow and outflow of income.
• A budget is a summary of projected income and expenditures over a set period of
time.
• As a financial planner, it is his/her responsibility to help the client in preparing the
budget, if the client so wishes as one can be over-realistic in preparing budget.
A budget is important as
• It determine whether one is living within income limits and spending patterns are
satisfactory.
• It helps in saving and investing sufficient amounts to satisfy financial goals.
• One can figure out what adjustments needs to be make in spending habits.
• One can be more confident and secure about proper usage of money.

Budgeting
A budget can be drawn up in following steps:

• Estimate future net income for the period of the budget.
• Determine expected expenditures during the period of the budget.
• Determine what one expects to spend to fund one’s personal goals.
• Determine whether there is surplus or deficit.
• Record actual income and expenditure.
• Evaluate whether changes in spending and saving are necessary.
Alternatively, the process can be put graphically :
Define Create
Calculate Determine Check Make
Financial Spending
Cash flow Net Worth Progress Adjustments
Objectives Plan

Budgeting
Forecasting
• We have seen that a budget is a summary of projected income and expenditures
over a set period of time. A forecasting means predicting the future.
• So while preparing a budget it is important to estimate future income and
expenses as accurately as possible.
• The historical data should be properly analyzed and should be used to predict
patterns of income and expenses in future.
• However, the changes in the factors that influences the income and expenses in
the future should be properly considered. Some of theses factors are –
professional growth resulting in increased income, inflation, interest rates,
economic growth, life expectancy, other macro and micro factors.

Budgeting
Cash Management
• For most individual and families, money is a limited resource and so it is crucial to
list out financial objectives and priorities them. Cash flow should be allocated
accordingly.
• Cash flows shortages on a regular basis would result in existing assets getting
depleted which may lead to failure in achieving future financial goals. Also without
positive cash flows, money cannot be allocated towards investing.
• Making a budget would help to understand beforehand approximately how much
money is needed and when (regular outflows and special outflows). This would
help in planning cash inflows and outflows effectively.
• Once planning is done for managing all expenses, a right investment strategy can
be worked out to invest surplus funds so that it can help in realizing future
financial goals.

Budgeting
Emergency Fund Planning
• Since future is unpredictable and we are unable to foresee any hurdles. These
moments of possible crises include temporary unemployment, unexpected
home/auto repairs, medical emergency, disability, etc.
• These occasions cost money and so this makes building an emergency fund a
financial priority.
• Building an emergency fund is healthy for financial well being and also it is a safety
net that can save one from severe financial hardships in the event of unexpected
adverse change.
• Without emergency fund, we may be forced to incur into debt which would take
many years to pay off and end up costing much more in long term.
• For these unexpected emergencies we need to maintain cash reserves and
equivalents are money market mutual funds, savings accounts, bank FDs etc., i.e.
low-risk and liquid funds. These funds should be keep in separate from general
savings to stop the tempting to use it.

Budgeting
Emergency Fund Planning

• Success at building emergency fund depends on consistency of saving money on a
regular basis, and resisting the urge to deep into rainy day fund for non-
emergencies.
• The amount needed in the emergency cash reserves depends on several factors:
the size of the family, the level of family income, the number of wage earners, the
level of normal expenses, income stability, special occupational hazards, etc. a
common rule of thumb for cash reserve is three-six months of monthly expense.
• Single wage earner or couple (but only one working): six months
• Couple (both working): three months
• Single wage earner or couple (one/both working) with dependents: six months
• Single wage earner or couple with substantial investment assets or substantial
second source of income: three months

Budgeting
Debt Management / Uses of Debt
• The needs and wants along with aspirations are never ending but the resources
are limited. Improved life styles, social competition, higher aspirations leads to
increased spending even if the required cash is missing. This is achieved through
credit card and easy availability of persona/ and/or consumer loans.
• Leveraging current income and resources beyond the capacity and spending more
than afford results in increased debt to be repaid over time. This further results in
reduction in surplus to save/invest for future financial goals.
• So it is extremely important for a financial planner to educate the client about the
implication of debt trap.
• Though, debt can not be fully avoidable, especially in case of buying a home, debt
has almost become necessary. However, can be planned in such a way so as to
manage effectively with optimum results.
• However, when it comes to credit card debt and personal loans, one must be very
careful, as the interest rates charged are very steep.

Budgeting
Debt Management / Uses of Debt

• Following ratios and guidelines are helpful:
• Consumer Debt : Add up all the debts (credit cards, car loans, personal loan,
student's loan, child support, excluding mortgage or rent etc). The monthly
installments should not exceed 10% of take-home pay.
• Housing Debt: the EMI paid on primacy home should not exceed 28% of gross
income.
• Total Debt: The total EMI should not exceed 36% of gross total income.

Budgeting
Liquidity
• With we being in modern age with no barter system, everything is traded in
money terms.
• It is said that “Cash is King”: so here are numerous advantage of liquidity.
• Peace of mind
• Cash discounts
• With liquidly in hand, a person can be in a position to bargain the price to
his/her advantage.

Budgeting
Monitoring and Evaluating Budget
• Budget involves analysis of the historical and present data and then projecting the
income and expenditure through analysis and forecasting of the factors that affect
the income and out expenditure.
• However, the actual and forecasted income and expenditures are not always same.
So by comparing the actual and forecasted figures, the financial planner can
observe the differences, the variances.
• Hence it is necessary to monitor and evaluate the budget regularly and to take
necessary actions if any variance is observed. Consider following:
• Control excessive expenses not planned under budget.
• Check if the variance was due to any one-off item (either in income/expenses)
• Reduce the discretionary expense to fit the necessary expenses not planned
for or try to find out alternative source of income.
• Check or any changes in the factors that were considered for forecasting.

Budgeting
Compliance
• Compliance of the budget is extremely important for achievement of financial
objectives.
• If the required investments are not being made due to mismatch in budgeted
figures, it will impact the accumulation plans, thereby affecting the financial plans.
• The purpose of the budget is to help one to plan the resources so that one can
fund his/her goals and set aside more of the money to savings.
• Following the budget will help one to achieve what one wants from one’s
resources.

Budget Calculators
Some Points
• There are various Domestic Budget Calculators are available on line offering
different solutions and services.
• Some are available free online and some can be downloaded. Some are not freely
available and one needs to pay to avail the same.
• The advantages of these calculators are, they free of cost, there is ease of
computation, no need of preparing separate budget etc.
• Disadvantage are - they are not customized, different opinion on maximum
allocation of expenses, insurance ratios, etc., no analysis of past records etc.
• One can take cues from these calculators and prepare the one which is suitable,
ideally with the help of financial planner.
22
Personal Use Asset Management
Introduction – Personal Use Asset Management / Personal Financial Leveraging
• The knowledge of personal asset management assumes prime importance for any
financial planner. Every client is in a unique position and therefore a tailor-made
solution approach would be in the best interest of a client.
• Leveraging is the use of techniques that permits investors to control or benefit from an
investment with a given rupee value while using less than given rupee value of the
investor’s own money.
Personal Asset Management Tools
• Home Equity
• Mortgages of different types
• Buy vs Lease
• Refinancing
• Hire Purchases vs Buy etc
• Consumer Loans
• Credit Cards

Home Equity
• Home Equity is the market value of a homeowner’s unencumbered interest in
their property. Home equity is essentially the amount of ownership that has been
built up by the holder of the mortgage through payments and appreciation.
• For suppose a person bought a house for Rs. 15 lac, 3 years ago by paying Rs. 2 lac
as a down payment and till date he has paid Rs. 2 lac towards principal payment.
The current value of the house is Rs. 16 lac. The equity value of the house is
Rs. 2 lac + Rs. 2 lac + Rs. 1 lac = Rs. 5 lac.
• A simple formula for determining home equity is to subtract the amount of the
mortgage balance and all liens on the home from the current fair market value of
the home.
• So if the home has been appraised Rs. 30 lac and the outstanding balance of the
mortgage is Rs. 12.5 lac, the equity in the home is Rs. 17.5.
• Home equity loans is a one-time lump sum loan, often with a fixed interest rate. It
creates a lien against the borrower’s house and reduces the actual home equity.

Home Equity
• Home Equity Line of Credit (HELOC) is a line of revolving credit with an

adjustable interest rate. Here the borrower can chose when and how often to
borrow against the equity in the property, with the lender setting an initial
limit to the credit line.
• Interest rate on a HELOC is variable and is linked to an index like the prime
rate. Due to this, the interest rate on a HELOC can change over time.
• Home equity loans are secured loans where the loan acts as the collateral. In
the event that the borrowed defaults, the creditor can take possession of the
asset used as collateral and sells it to satisfy the debt by regaining the amount
originally lent to the borrower.

Mortgage
• Mortgage is a transaction where a mortgagor (borrower) takes a loan from a

mortgagee, against a security from the mortgagee (lender). The security provided
is an immovable property.
Types of Mortgages
• Simple Mortgage
• Mortgage by conditional sale
• Usufructuary Mortgage
• English Mortgage
• Reverse Mortgage
• Mortgage by deposit of title-deeds / equitable mortgage
• Anomalous Mortgage

Mortgage
• Simple Mortgage
In this case the mortgagor (M) would assign the property to the lender /
Mortgagee (L). There is no transfer of possession of the property to lender. It is
under mutual agreement that in case of non-payment by Mr. M to the mortgagee
within the specified time, the mortgagor can cause the mortgagee property to be
sold in accordance with law and have the sale proceeds adjusted towards the
payment of the mortgage money.
• Mortgage by deposit of title-deeds / equitable mortgage
In this type, the mortgagor delivers the title of the property to the mortgagee with
an intention to create a security thereon. This mortgage can be entered into only
in the towns of Chennai, Kolkatta, Mumbai or any other town, as notified by the
state government in the official gazette.

Mortgage
• Mortgage by conditional sale

In here the mortgagor (M) apparently sells the property to the mortgagee (L)
subject to certain conditions. Suppose Mr. M borrows money from Mr. L by
mortgaging his property under mortgage by conditional sale, then the possession
of the property is transferred to the lender. The conditions can be -
– On failure to repay the mortgage money before a certain date, the sale shall
become absolute,
– On such repayment of mortgage money the sale shall become invalid or void
– On such repayment the mortgage shall retransfer the property, i.e. the
ownership is transferred to the mortgagor

Mortgage
• Usufructuary Mortgage
In this type of mortgage, by an express or in implied term, the mortgagor gives
possession to the lender and gives him rights to accrue the rents or income coming
from that property towards payment for interest and mortgage money till the time
repayment is complete. There is no limit for payment of the mortgage money. The
title deed remains with the owner.
• English Mortgage
The mortgagor transfers the property absolutely to the mortgagee. The mortgagor
binds himself to repay the borrowed money before a certain date. Such transfer is
subject to the condition that the mortgagee will transfer the property on
repayment before the agreed date. So the property is sold to the mortgagee, and
on repayment of all the installment, the mortgagee sells back the property to the
mortgagor. It is different from conditional sale mortgagor, as in later, the sale of
property becomes void, whereas in former the property is sold back to mortgagee.

Mortgage
• Reverse Mortgage
In some case, the retirees find that the money they have is not enough to led their
retired life. They have an option in the form of reverse mortgage, which helps them get
some income from a property that they may own while staying in it.
A “reverse” mortgage is a loan against the home which is not required to be paid back
as long as the person lives there. With a reverse mortgage, a person can turn the value
of his home into cash without having to move or to repay the loan each month.
Reverse mortgage involves lending money only to senior citizens against mortgage of
their own property (house). The loan is awarded as a lump sum amount or as monthly
installments or as “credit line” account that lets the person decide when and how much
of his available cash is paid to him; or as a combination of these payment methods.
The borrower typically don’t have to pay anything till he dies, (the property goes into
the possession of the mortgagee), sell his home, or permanently move out of his home.

Mortgage
• Reverse Mortgage – how it works

The loans typically require no repayment for as long as the person live in his home.
But they must be repaid in full, including all interest and other charges, when the
last living borrower dies, sells the home or permanently moves away.
Because the borrower makes no monthly payments, the amount he owe grows
larger over time, as his debt grows larger, the amount of cash he would have left
after selling and paying off the loan (your equity) generally grows smaller. But he
can never owe more than his home’s value at the time the loan is repaid.
Reverse mortgage borrower continue to own their homes. So they are still
responsible for property taxes, insurance, and repairs. If he fails to carry these
responsibilities the loan could become due and pay in full.
• Anomalous Mortgage
This is the combination of different forms of mortgage.

Mortgage
When the mortgagee can sell the property

• Only when the mortgagor has failed to repay the loan. The permission of court is
necessary except
• English mortgage
• Where the power of the sale has already been conferred by deed
• Where the power of the sale has already been conferred by deed and the
property is situated in Kolkata, Mumbai, Chennai or any notified town or area
Rights of the mortgagor on property

• The mortgagor do not lose right in the mortgage property. Since the property is
given only as a security for the loan he has taken, it will be returned to him on
repayment of the loan in time.

Mortgage
Rights of a mortgagor
• The mortgaged property must be retuned in good condition after repayment of
the loan.
• The mortgagee should make good any damages to the property if it is in his
possession. There should be a written and registered acknowledgement to this
effect.
• The mortgagor will receive all income form the property, except in case of
usufructuary mortgage.
• The mortgagor can lease or rent out the mortgaged property, if it is in his
possession.

Mortgage
Rights of a mortgagee
• To sell the mortgaged property if the loan amount is not repaid within stipulated
time.
• To sue the mortgagor for the non-repayment of the loan.
Who can sue the mortgagee

• A mortgagor who has repaid the loan.
• A person other than a mortgagor having interest on the property mortgaged.
• A person who has guaranteed for the repayment of mortgaged debt.
• A creditor of the mortgagor who has obtained permission for the sale of the
mortgaged property.

Mortgage
• Equity of Redemption
The right to redeem the mortgaged property is always with the mortgagor
irrespective of the fact that he fails to pay the debt in accordance with the
provision for redemption. This is known as “Equity of Redemption”
• Additional Mortgage of the same property

The mortgagor can create a second mortgage for the same property if the first
mortgagee has no objection to it.
• Difference between Mortgage and a pledge

The security in a mortgage is an immovable property while in a pledge it is
movable property.

Mortgage
• Foreclosure of a loan
• Foreclosure is process by which a mortgagor is deprived of his interest in the
mortgaged property. The mortgagor loses his right to equity of redemption. The
mortgagee will take the mortgaged property. The right of foreclosure can be
claimed by a mortgagee in mortgage by conditional sale and in English
mortgage.
• If the mortgaged property is not returned even after the repayment of the loan,
the mortgagor can approach a court and initiate legal action for its recovery.
This can be done within thirty years from the date of repayment of the loan. The
suit must be initiated in a court which has jurisdiction over the area where the
property is situated.

Leasing
• A lease is a long-term agreement to rent equipment, land buildings or any other

asset. In return for most-but not all-of the benefits of ownership, the user (lessee)
makes the periodic payments to the owner of the asset (lessor). The lease
payment covers the original cost and provides the lessor a profit.
• Under the lease agreement, the owner of an asset grants the lessee for a specific
period in return for regular interest payments. The asset does not become the
property of the lessee at the end of the specified period. However, the lessee is
still responsible for maintaining the asset as specified by the terms of the lease.
• It offers potential tax benefits depending on how the lease is constructed.

Leasing
Advantages
• One of the reasons for the popularity of leasing, especially in case of equipments,
is the steady stream of new and improved technology.
• The cost of continually buying new equipment to meet changing and growing
business needs can be difficult for most small businesses.
Disadvantages
• One of the major disadvantages of leasing is that the lessees has an obligation to
continue making payments.
• Typically, lease may not be terminated before the original term is completed.
Therefore, the lessees is responsible for paying off the lease. This can pose a major
financial problem which the owners of a business experiences.

Leasing
Major Types of Lease
• Financial Lease
The are most common by far. A financial lease is usually written for a term not to
exceed the economic life of the equipment. It would usually consist of:
• Periodic payments need to be made.
• Ownership of the equipment reverts to the lessor at the end of lease term
• The lease is no-cancellable and the lessee has a legal obligation to continue
payments to the end of the term
• The lessee agrees to maintain the equipment.
In case of a financial lease, the lessee must record the leased item as an asset on
his/her balance sheet and record the present value of the lease payments as debt.
The lessor must record the lease as a sale on his/her balance sheet.

Leasing
Major Types of Lease
• Operating Lease
The Operating Lease or maintenance lease, can usually be cancelled under
conditions spelled out un the lease agreement. The maintenance of the asset is
usually the responsibility of the owner (lessor). Computer equipment is often
leased under this kind of ease.
• Sale and Leaseback
It is similar to the financial lease. The owner of an asset sells it to another party
and simultaneously leases it back to use it for a specified term. This arrangement
lets one frees the money tied up in an asset for use elsewhere. The buildings are
often leased this way.

Leasing and Buying
• Once you buy the asset, the ownership of the product is with buyer. Depreciation
benefit is allowed to the buyer.
• In case of lease the depreciation is not allowed to the lessee.
• Further, one must carefully evaluate the net present value of the cash flows to
decide whether to buy the asset or lease it.
Example
ABC Pvt. Ltd. Is considering the possibility of purchasing a multipurpose machine
which cost Rs. 20 lakhs. The machine has an expected life of 5 years. The machine
generates EBITDA of Rs. 12 lakhs p.y., and the management wishes to dispose the
machine at the end of 5 years which will fetch Rs. 2 lakhs. The depreciation
allowable is 25% on written down value and the company's tax rate is 50%. The
company approaches NBFC for a 5 year lease for financing the asset which quoted
a rate of Rs. 56/- per thousand per month. The cost of capital for the company is
12% and for lease option the discount rate is 16%. Evaluate the options.

Refinancing
• In refinancing, an existing loan is paid off with the proceeds from a new loan,
usually of the same size, and using the same property as collateral.
Why Consider refinancing
• Lowering the interest rate
• Adjust the length mortgage
• Switching between fixed and floating rates
Points to consider before refinancing
• Closing fees / pre payment penalty
• Processing charge of a new loan
• Lower initial payments against larger interest cost over life of the loan
• Inspection fees for property and Appraisal fees for valuation report
• Legal cost to get the title search report of the property and documentation cost for
the closer of old loan

Hire Purchase
• Under this, payment for goods is made in installments over a period of time and in
which the ownership of the goods supplied does not transfer to the buyer unless
all such payments (principals + interests) have been made. The hirer is the buyer
and the hiree is the seller.
• The hirer can use the asset before the payment is completed but is not the owner
till the time the final installment has been paid. The hirer does not legally own the
goods until he had paid back all money he owe. This means that the hirer cannot
modify or sell them without lender's permission.
• Many hire purchases agreements work in a similar way to a fixed rate loan. The
hirer pay back a set amount of money at a fixed rate of interest however, the
difference is that the hirer is not the owner of the goods. The lender of the finance
is the owner of the goods.

Hire Purchase
Key Points
• The hirer gives the possession of the goods to the hirer.
• The hirer pays periodic rentals over a specified period of time.
• The hirer has the option of terminating the agreement at any time before the
transfer of ownership of goods.
Difference between Hire-Purchase and Lease Financing

• Depreciation
• Taxation
• Ownership

Hire Purchase
Difference between Hire-Purchase and Lease Financing

• Depreciation
Under HO, the hirer is eligible to claim depreciation on the goods / assets hired. In
LF, Lessee is not eligible to claim depreciation on the goods / assets.
• Taxation
Under HP, the hirer is allowed to deduct interest paid by him as an expense for tax
purpose. Under LF, the entire rental is deductible as expenses for tax purpose.
• Ownership
Under HP, the hirer becomes owner of the goods once he pays all the installments.
Under LF, lessee does not become the owner of the assets. The asset is transferred
to the lessor at the end of the term.

Consumer / Personal Loan

• It is primarily a loan used for needs of personal nature (medical, education etc) or
to buy household items (computer, refrigerators, etc). Such loans are normally
unsecure and based on the borrower’s integrity and ability to pay. In case, if the
loan is to buy consumer durables, they are secured by the assets purchased.
• Norms of availing the loan:

The ability to repay must be justified in loan package. Since this loan doesn’t
require any collateral, banks need to sees sources of repayment. For this, proof of
income is needed to be given while applying for the loan. Currently banks look at
the credit history of the borrower which is maintained by CIBIL. Past track record
plays a important role whether a loan is approved and the rate of interest
applicable on the loans approved.

Consumer / Personal Loan

• Processing and other fees:
While applying for a loan, one has to pay a certain charge as loan processing fees
along with the loan application. The charge is calculated on the loan applied for
and not on the amount actually sanctioned. This charge varies with the lender and
may be a fixed amount irrespective of the amount applied for or may be a
percentage of the loan applied for. This amount, paid upfront, effectively reduces
the money one gets.
• Pre-payment penalty:
Most banks generally offer the option of pre-payment of loan; however, they do
not give flexibility of part payment.

Credit Card
• A credit card entitles its holder to buy goods and services based on the card
holder’s promise to pay for these goods and services. The issuer of the card grants
a line of credit to the consumer (or the user) from which the user can borrow
money for payment to a merchant or as a cash advance to the user. Hence a credit
card debt is an unsecured debt such that no asset has been pledged as collateral
for the loan.
• Each credit card comes with a credit limit which is based on the creditworthiness
of the customer. Credit limit means the limit up to which the card holder is
authorized to spend on his credit card.
• Cash limit means the maximum amount of cash that the card holder can withdraw
on his/her card amount. Cash limit forms a subset of the card holder’s overall
credit limit.

Credit Card
Fees and Charges
• Joining fees and annual fees: most banks currently offer credit cards for free and
there are no annual charges levied on them.
• Finance Charges on extended credit (interest rates): Here the rates vary
depending on the type of credit card. It may vary between 2.5% and 3.% monthly
interest translating to 30% to 42% annual interest rate. Finance charges become
applicable in case the cardholder does not pay all his dues within the due date.
• Transaction fees on cash advance: This is charged on withdrawal of cash which is
generally around 2-2.5% on advance amount, subject to some fixed amount.
• Finance charges on cash advances: Here the interest rates is generally charged on
the higher side and is applicable from the day the cash is withdrawn.
• Late payment charges: This is charged as a percentage of outstanding amounts.
However, this charge is subject to certain minimum and maximum amount.

Credit Card
Billing Cycle
25 25

Others - Overdraft
• Banks provide overdraft facility where its customers can withdraw an amount
which exceeds their deposits against securities given as collateral. This is very
common among small and medium sized business houses.
• Sometimes overdraft is allowed against deposits of customers. While availing
overdraft facility, the deposits remains intact and earns the designated rate of
interest. Only the amount lended by the bank will a certain rate of interest be
charged. This is generally 2% more than the earning rate.

Others – Margin Money
• In this kind of a scheme, the financer finances upto 75-90% of the cost of the
product. Consumers has to pay it back in EMIs.
Others – Advance EMIs
• In this scheme, the financer provides upto 10% of the cost of the product but the
consumer would have to pay anywhere between 2-7 EMIs in advance. Indirectly,
the consumer is paying the financer margin money as the EMIs paid in advance
which is deducted from the loan amount.

Financial Planning and Wealth Management

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Financial Planning and Wealth Management

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Financial Planning and

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Need for Cash Flow Planning

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Statement of Cash Flow - Steps

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Statement of Cash Flow - Steps

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Statement of Cash Flow - Steps

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Some Important Points to Remember (while preparing expenditure budget)

• Separate needs from wants:

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A budget can be drawn up in following steps:

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Emergency Fund Planning

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Debt Management / Uses of Debt

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Personal Asset Management Tools

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• Home Equity Line of Credit (HELOC) is a line of revolving credit with an

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• Mortgage is a transaction where a mortgagor (borrower) takes a loan from a

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• Mortgage by conditional sale

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• Reverse Mortgage – how it works

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When the mortgagee can sell the property

Rights of the mortgagor on property

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Who can sue the mortgagee

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• Additional Mortgage of the same property

• Difference between Mortgage and a pledge

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• A lease is a long-term agreement to rent equipment, land buildings or any other

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Major Types of Lease

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Major Types of Lease

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