FINE1005 Financial Planning Report

1. Introduction
In this report, we will discuss our personal financial planning and how we will optimize
our financial situation by planning our spending, financing, and investing. To achieve
financial success, we must consider our financial situation, budget, and risk tolerance, as
well as building a financial goal, plan, and investment strategy. Making financial plans is
conducive to increasing savings or being prepared for emergencies. Most importantly,
this financial planning report can help us to save money for pursuing higher education
abroad successfully. Now, assume that we would like to pursue a postgraduate degree --
Master of Science in Finance in National University of Singapore, and details can be
found below.

2. Financial Situation
Regarding our savings, we have already accumulated wealth of HKD$70,000 through
doing part-time jobs. As a fresh graduate, we are working in a conglomerate with a
monthly salary of HKD$ 15,000 currently.

3. Financial Budget
In order to achieve our goal of pursuing higher education abroad in three years, a
financial budgeting is required since it can forecast our cash flows, including the
estimation of revenues and expenses, for a future time period (i.e. three years). The
following is the detailed specification:

Regarding the “Income” part, according to our own financial situation, firstly, we have
accumulated wealth of HKD$70,000, however, it cannot be counted as revenue in
budgeting since this cash flow is just an accumulation without any growth opportunities
in the future period. Secondly, we are currently working in a company with a monthly
salary of HKD$15,000. It can be counted as one main income in our financial budget, and
after careful calculations, our total income (without any investment) in these three years
should be HKD$15,000 × 12 months ×3 years = HKD$540,000 in total.

Regarding the “Expense” part, as we are fresh graduates, it is assumed that we will
mainly spend money in three categories, including Transportation, Leisure and
Entertainment, and Clothing. Thus, by approximation, our total expenses (without any
financial plan) in these three years should be HKD$72,000 in total.

So, we can approximate that our contribution to savings in these three years should be
HKD$540,000 - HKD$72,000 = HKD$468,000
4. Financial Goal
A financial goal is a target to aim for when managing money. Making a list of financial
goals is essential to making a budget plan. The financial goal should be measurable,
specific and time oriented.

As we assume that applying for a master degree of science in finance in National

University of Singapore. The total fee for the first academic year would be application
fee (S$100) + acceptance fee (S$10,000) + tuition fee (S$50,000) + miscellaneous
student fee (S$230) + accommodation fee (S$1300 × 10months = S$13,000) +living
expense (S$18,000) + fare of flight tickets (HKD$2300 × 2 = HKD$4600) =
HKD$524,268 (S$1 = HKD$5.69). The total fee of the second academic year would be
the same as the first year excluding the application fee and acceptance fee and it would be
HKD$466,799. Thus, by approximation, the total expenses to pursue the postgraduate
degree would be 524,268 + 466,799 = HKD$991,067.

5. Risk Tolerance
There are certain types of risk associated with financial planning, in which the inflation
risk is of the utmost significance. In any financial budget, inflation rates are always
estimated from the historical Consumer Price Index. The situation applies here as well.
Moreover, the interest rate, which is identical to the rate of return, is also based on
estimation. Overestimation of the above two types of risk can result in a sheer invalidity
of the financial planning.

Additionally, horizon risk should be also considered. With the horizon risk, our
investment horizon can be shortened due to unexpected happenings. In other words, we
may not be able to meet our financial goals because of the “rainy days”, such as being
laid off by the company. As these events are usually unexpected and the amount of
emergency fund can be personal, we can hardly entail them in our financial budget; yet,
this should keep noticeable when the plan is being executed.

The currency risk is also worth mentioning. In this report, the currency unit is regarded as
HKD. However, if we plan to study in Singapore, the currency of tuition fees payment is
very likely to be SGD. As HKD is linked to USD, a depreciation in USD can lead to a
depreciation in HKD. Under this circumstance, HKD can be vulnerable to appreciation of
SGD if it greatly appreciates, or if USD greatly depreciates.

6. Basic Financial Plan

Basic financial planning can be classified into short-term and long-term planning. In
terms of short-term planning, we aim to achieve a 3% growth in income annually. The
 assumption is based on the Wage Trend in Hong Kong in 2010-20201 generated by the
Hong Kong Census and Statistics Department, in which the annual growth rate in income
is recorded to be 4.4%. Considering the fact that we are fresh graduates, it is prudent to
assume our income growth rate per annum to be slightly lower than the mean. Since we
are not allowed to access the data of Hong Kong citizens, 3% is a mere estimation to
catch up with the inflation rate in Hong Kong.

Having HKD$15,000 as the base income, savings of the first year would be income
minus all expenses. The expenses incurred are: 1. Rent (HKD$0 as we are living with our
parents); 2. Food (HKD$180 per day, HKD$180 × 365 ÷ 12 = HKD$5475 per month); 3.
Transportation (HKD$587 per month for KMB monthly pass); 4. Utilities (HKD$0 as our
parents are generous); 5. Other expenses include leisure, entertainment, clothes or
activities like purchasing birthday gifts for others (HKD$1000 per month); 6.
Housekeeping money (HKD$0 since our parents are extremely considerate). Our savings
per month would then be HKD$7938, and HKD$95256 per year.

As announced, the inflation rate in Hong Kong is most likely to fall between 2% to 3%,
except for that of 2020, which shows an inflation rate of 0.33% due to the pandemic.
Once again, we are assuming the inflation rate to be 3% annually, which offsets our
annual income growth, resulting in an unchanged amount of savings.

While for long-term planning, we wish to keep all expenses in control to retain the
amount of the annual savings for investment, and achieve our financial goal.

7. Why this basic financial plan?

First of all, this basic financial plan can help us to set and reach our goals. This plan
considered three aspects from annual income growth, savings per year and the Hong
Kong inflation rate. It provides a clear picture of our current financial situation for us.
This plan helps us to make the best use of our money and achieve our long-term financial
goals.

Second, this financial plan can guide us for action and decision-making. Financial plans
can direct actions toward desired outcomes. Taking action with financial decisions can
be hard for a multitude of reasons such as entertainment, transportation, and buying
necessities or luxury. This plan can help us identify clear actions to take in order to put
ourselves in the best financial position.

Lastly, creating this financial plan can act as motivation and commitment to make our
financial goals easier to achieve. As we mentioned before, making a financial plan
1 Hong Kong Census and Statistics Department. (2021). Wage Trend in Hong Kong in 2010 - 2020.
https://www.censtatd.gov.hk/en/data/stat_report/product/FA100260/att/B72011FA2020XXXXB0100.pdf
 provides us a clear call to action. This plan can reduce uncertainty around finances by
providing clarity and indicating what we are expected to accomplish.

8. How to achieve this basic financial plan?

After mapping the financial goals, we need to follow up on it regularly. Reminding
ourselves to track our progress is an effective way to stay on top of our saving goals. It
will be good for us to look over our financial activity periodically. Just like reviewing our
income, expenses and how much we have saved so far.

Moreover, we may need to refine our spending habits. What many fail to understand is
that the money spent daily on small things adds up to a huge amount over time. Having a
saving plan does not mean that we should stop socialising or enjoying life. It only means
that we should smartly cut down on unnecessary spending while saving for our future
financial goals.

The most important thing is to select the right tools to keep the savings and earn interest.
For short-term savings, a savings account and certificate of deposit are always safe to
earn interest. For long-term savings, it should generally include investments that offer
higher returns such as stocks or funds. These can increase savings faster, but we will
need to bear a higher risk of losing money. Risk assessments need to be conducted to see
which kind of plan suits the needs.

9. Investment Plan
In order to achieve the financial goal stated above in this financial planning report, an
investment plan is required since assets purchased in the market can help us to provide
additional income for increasing our net worth over time (i.e. three years). In this day and
age, we have numerous investment options and tools in the financial market, which can
help us grow wealth successfully and efficiently. We can invest in stocks, bonds, mutual
funds, and so on, in order to maximize our financial wealth. The following is the detailed
explanation of our investment plan:

First to go, we would like to invest in a Hong Kong Government Bond -- iBond. To be
specific, the inflation-linked retail bond, known as iBond, is launched by the HKSAR
Government under the retail bond issuance programme. The iBond has a minimum
denomination of HKD$10,000 and a term of three years. And the semi-annual interest
payments are linked to the average annual inflation in Hong Kong, which is about a
minimum interest rate of 2.0%. And most importantly, the principal amount (say
HKD$10,000) will be repaid to us by the Government at maturity. So, regarding the
benefits of iBond investment, first, it has very low risk compared to other investments in
the market, since this bond is launched by the Government, which means the principal
 and interest must be paid in these three years. Second, periodic interests will be paid by
this bond, which can provide stable income for us. Thus, iBond investment can achieve
the safety purpose in financial planning.

Second, we would like to invest in the Hang Seng American Index Fund Class A. To be
specific, the investment objective of the index fund is to match the total return
performance of the S&P 500 index. This fund’s recent price is USD$35.39. And the risk
level is about 4 (i.e medium to high risk). Also the investment tenor is more than or equal
to 1 year. Regarding the fund portfolio, it includes nearly 98.99% USA stock in the
equity holding. Regarding the Fee information, with the recent price USD$35.39, there is
also a management fee, which is about 1% per year. Regarding the performance history,
1 month performance has about 3.06% return, and 1 year performance has about 31.03%
return. Thus, this index fund investment can help us to maximize our financial wealth
because of a higher rate of return. But due to higher risk investment, smaller principal
investment should be considered.

Third, we would like to invest in the Schroder ISF - Global Multi-Asset Income Class A.
To be specific, this mutual fund can provide an income distribution of 5% per annum and
capital growth over a market cycle by investing different assets in the financial market.
Regarding the key information, the annualised volatility is about 4.5% within 3 recent
years, which means this fund has lower investment risk. Regarding the cumulative
performance, 1 year performance has about 7.56% return, and 3 year performance has
about 6.6% return, which means this fund can provide a stable return to us. Regarding the
top holding of this mutual fund, there are Microsoft Corporation, Johnson & Johnson,
Apple Inc, and so on, which can push up the value of this fund successfully. Thus, a
medium amount of investment on this fund should be considered.

10. Conclusion
In the report, we have listed the possible areas for us to invest to reach our financial goal
of HKD$991,067. However, as noted at the beginning of this report, all financial budgets
or plans involve estimations. Rates such as the inflation rates and the expected savings
are all assumptions although they are determined through analysis on the historical
numbers. Once we begin to follow the financial plan, we are already taking risks. In our
investment plan, we are considering investments on common shares, which can turn out
to be an extremely risky act as we are speculating. Hence, one should also consider
backup strategies to finance oneself when financial goals can not be achieved due to
underestimations. In this case, particularly, our backup plan is to borrow money from our
parents or to extend the money saving period for a year.