Personal Finance Objectives

Chapter 3: Personal - Explain personal financial statements, and

personal budgeting methods (CLO2)
Financial Statement
and Spending - Evaluate and select appropriate budget planning
methods, tools, and financial strategies to achieve
Action Plan financial goals (CLO5)

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Chapter’s content
Think about.....
Personal Financial
Statement: Personal Balance
1 Sheet & Income Statement 2 Budget Planning
(Cashflow statement) &
Ratios

1 Assume you are going to retire at the age of 35

build an asset portfolio worth $10 billion.
Financial Peace of Mind 4 Financial Peace of Mind Matrix
3 Matrix & Personal Finance and Financial Calendar
Calendar

What is the foundation for you Is this asset portfolio

5 Spending Action Plan
6 Saving Plan & The power of to construct the aforesaid allowing you to live the
Compound Interest asset portfolio? life you want?

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Spending Tracking Record - Ex

1. Personal financial statements
Definition

Financial statements are compilations of personal

financial data that describe an individual’s or
family’s current financial condition

Blalance sheet Cash flow statement

(Net worth (Income & Expense
statement) statement)

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 Your mistakes
Personal financial statements
Ø Chưa rõ chi: Không rõ mong muốn cuộc sống ra
sao. Và phải làm gì để đạt được cuộc sống đó.
Balance sheet Cash flow statement
Ø Tập trung chia theo tỉ lệ % hoặc phân chia theo ü Snapshot of assets, liabilities,
ü Summary of all income and expense
cách thiết yếu/ ưu tiên; hoặc đơn giản chỉ cố gắng and net worth on a particular
over a specific period
ghi ra tất cả các chi tiêu theo ngày mà không date.
ü Where did your money come from
phân loại ü Where are you financially right
and go?
now?
ü 3 components:
ü 3 components:
Ø Tập trung vào con số 100L nước nên tự giới hạn • Assets: What you own
ü Cash coming in (Income)
ü Cash going out (Living expenses)
các khả năng và nguồn lực • Liabilities: What you owe
ü Cash Surplus (Cash Deficit or Income
• Net worth = Assets - Liabilities
available for savings and investment)
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Example 1 of Personal Balance sheet: 3 components of BS

ASSETS ($) LIABILITIES ($)
Monetary Assets (Liquid Asset) Short-term liabilities
- Cash on hand 1,200 - Dentist bill due 20
Fair market value: The amount a willing buyer would pay a
BS for a - Savings account 4,200 - Credit card debt 1,600 willing seller for an item
- Checking account 6,000
couple with - Tax refund due
- Rent receivable
700
650
2 kids at Total monetary assets 12,750 Total short-term liabilities 1,820 Assets
1/1/2018 Tangible Assets (Household
Liabilities Networth
Long-term liabilities
assets)
- Home 192,000 - Vehicle loan 7,700 - Monetary assets: Assets
- Personal property 9,000 - Home mortgage loan 92,000 - Short-term What is left is
that can be easily
- Automobiles 9,500 liability: “A measure of
Total tangible assets 210,500 Total long-term liabilities 99,700 converted to cash
Investment assets Total liabilities 101,520 - Tangible assets: Personal
Obligation paid off your financial
- Mutual funds 9,500
property provide
within 1 year worth”:
- Stock 2,800
maintenance of one’s
- Long-term A – L = NW
- Bonds (2038) 4,000
everyday lifestyle
liability: Debt that If NW <0:
- Life insurance cash value 5,400
- Investment assets: acquired
comes due in > 1 insolvent
- IRA accounts 34,300
for their monetary benefits
year
- Real estate investment 114,000

Total investment assets 170,000 Networth 291,730

Total Assets 393,250

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Total liabilities & Networth 393,250 9
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Example 2 of Personal Balance sheet:

ASSETS
Q&A 1: How do I determine my wealth?
thousand VND LIABILITIES
Monetary Assets (Liquid
Short-term liabilities
Asset)
BS for a - Cash on hand 6,000 - Tuition fee due 26,000 (1)Create your own balance sheet at present by using
- Checking account 80,000 - Rent fee due 24,000
UEL - Savings account 0 - Credit card debt 20,000 any resource, including websites to value your
student, - Borrow from friends 10,000
30/9/2023 assets.
Unit: USD Total monetary assets 86,000 Total short-term liabilities 80,000
Tangible Assets
(Household assets)
Long-term liabilities (2)Create your expected balance sheet when you are
- Home 0 - Vehicle loan 0
- Personal property 25,000 - Home mortgage loan 0 25 years old
- Motorbike 20,000
Total tangible assets 45,000 Total long-term liabilities 0
(3) Sorting Game:
Investment assets Total liabilities 80,000
- Stock 0
- Bitcoin 0 https://www.flippity.net/ma.php?k=173M65RDHwEK2
Total investment assets 0Networth 51,000
Total Assets
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131,000 Total liabilities & Networth 131,000
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wortRgUxFI93U8f0fMt8y-am4UGg7Xg Personal Finance
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 How to increase your Net Worth? Personal Cash Flow Statement

Basic Principle
01 02 03
of Personal Paying
Finance: off debt
Inncrease Cut Cash Coming In: Whre Cash going out: Where your
Diversifying income spending your money comes money goes. Cash Surplus (Cash
Deficit): the amount
income streams from • Fixed expenses: inflexible, of cash remaining or
and clarifying • Salary/ Wages contractual. Ex: rent net cash flow
• Bonuses / payments, installment Suplus (deficit) =
expense Commissions loans
Total income – total
• Scholarships • Variable (flexible)
expenses
• Pension income expenses: Food,
“People do not get wealthy by earning an income. Real wealth comes • Interest & dividends transportation, utilities,
from increases in the value of assets over time received credit card payments....
• ....
Financial success by comparing with others does not
make you feel better Personal
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Example 1 of Personal Cash Flow Statement (1/2) Example 1 of Personal Cash Flow Statement (2/2)
INCOME Dollars Percent
Gross salary 85,000 88.8% Variable Expenses Dollars Percent
Interest and dividends 1,800 1.9% Food 7,000 7.3%
Bonus 1,000 1.0%
Tax refunds 200 0.2% Utilities 3,600 3.8%
CF Net rental income 7,720 8.1% CF Gasoline and maintenance 4,200 4.4%
Total income 95,720 100.0% Medical expenses 3,400 3.6%
Statement EXPENDITURES Statement
Medicines 1,750 1.8%
for a Fixed Expenses
Mortgage loan payments 14,400 15.0%
for a Clothing and upkeep 1,950 2.0%
couple with Real estate taxes 4,800 5.0% couple with Church 2,400 2.5%
Homeowner's insurance 1,200 1.3%
2 kids, 2 kids, Gifts 1,400 1.5%
Automobile loan payments 6,000 6.3%
from 1/1 to Automobile insurance and from 1/1 to Personal allowances 3,000 3.1%
31/12/18 registration 2,100 2.2% 31/12/18 Children's allowances 3,200 3.3%
Life insurance premiums 1,200 1.3% Miscellaneous 400 0.4%
Unit: USD Medical insurance 2,800 2.9% Unit: USD Total variable expenses 32,300 33.7%
Emergency fund savings 2,400 2.5%
Revolving savings fund 1,800 1.9% Total Expenses 95,720 100.0%
Income taxes 13,200 13.8% SURPLUS (DEFICIT) 0 0%
Other taxes 7,520 7.9%
Retirement IRAs 6,000 6.3%
Total fixed expenses
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63,420 66.3% 15
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Example 2 of Personal Cash Flow Statement Example 3 of Personal Cash Flow Statement
INCOME thousand VNĐ Percent
Parent's allowance 48,000 50.1% Cash inflow (Income)
Part time job salary 12,000 12.5%
Scholarship 13,000 13.6% - Disposable income (after tax) 10,000,000
CF Lucky money
Rewards & others
4,000
5,000
4.2%
5.2%
- Interest income -
Statement for Total income
EXPENDITURES
82,000 85.7% - Dividend -
a UEL Fixed Expenses Total income 10,000,000
Installment loan payment 10,000 10.4% Cash outflow (Expenses)
student House Rent
Other loan payments
24,000
6,000
25.1%
6.3% - House rent 1,500,000
(2022), unit: Utilities (internet, water, electric) 3,360 3.5%
- Utilities (electricity, water, internet, phone) 300,000
Medical insurance 2,500 2.6%
Needs (50%)
thousand Emergency fund savings 0 0.0% - Food 3,000,000
Total fixed expenses 45,860 47.9%
VND Variable Expenses DollarsPercent - Transportation 400,000
Food 25,200 26.3%
Transportation (gasoline, parking) 6,000 6.3% - Insurance/ For parents 1,000,000
Clothing 3,000 3.1% - Personal care (cosmetic, clothes...) 500,000
Personal care 2,000 2.1% Wants (30%)
Gifts 2,000 2.1% - Miscellaneous 300,000
Education (book, online courses) 3,000 3.1%
Miscellaneous / Other 1,000 1.0% - Other / Recreation 1,000,000
Charity
Total variable expenses 42,200
0 0.0%
44.1%
Total expense 8,000,000
Total Expenses 88,060 92.0% Savings (20%) Surplus or Net cash flow 2,000,000
SURPLUS (DEFICIT) (6,060) 0%
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 Determinants of personal cash flow statement Các yếu tố ảnh hưởng đến dòng tiền
Cash in Cash out Dòng tiền vào Dòng tiền ra

- Life cycle stages - Family size (large, - Các giai đoạn của sự - Quy mô gia đình (lớn,
- Job type (skills, small) nghiệp – life cycle nhỏ)
demands of labor market) - Age - Loại công việc (kỹ năng, - Độ tuổi
- The number of primary nhu cầu)
- Personal consumption - Hành vi tiêu dùng cá
workers in the household - Số lao động chính trong
behavior nhân
gia đình

Using Ratios: Financial Thermometers Question 1: Do I Have Enough Liquidity

to Meet Emergencies?
• Financial ratios allow you analyze raw data in the balance
sheet or income statement then compare it to targets.
–Should be greater than 1.0
• Ratios help you understand how you are managing financial –Aim for above 2.0
resources.

–Should aim for 3 to 6 months of liquid assets

–Less if enough credit and insurance

Question 2: Can I Meet My Debt Obligations? Question 3: Am I Saving as Much as I Think I Am?

–Should decrease as you get older

–Effective saving is by paying yourself first

–The 80/20 or 50/30/20 rule: 20% of your income should

–Less than 2.5 is a red flag go towards savings
• Solvency ratio = Net worth/ Asset
Reaching your goals through Budgeting: What is Budget?
Your spending/ savings action plan
- A budget is a paper or electronic document used
to record both planned and actual income and
expenditures over a period of time. Your budget
represents the major mechanism through which
your financial plans are carried out and goals are
achieved.

- Your budget is your plan for spending and saving.

Budgeting forces you to consider what is
important in your life, what things you want to
own, how you want to live, what it will take to do
that, and, more generally, what you want to
achieve in life.
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Sample Monthly Budgets for various family units (1/3) Sample Monthly Budgets for various family units (2/3)

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Sample Monthly Budgets for various family units (3/3) Bugeting: Spending/Saving plan

Set Goals
Set ü Long-term, Intermediate-
term, short-term goals
financial ü SMART vs HARD Goals
goals

Plan CF Make and Budget estimates:

ü Cash Flow or Financial Plan Cash Reconcile Projected dollar amounts to receive or
spend in a budgeting period.
Calendar Flow Budget Revise Budget estimates à identify your
ü Revolving savings fund
Estimates priorities

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 Poplular Budgeting Strategies or Methods (i) Traditional Budget Method

The 50/30/20 or 80/20 How Pros Cons

Traditional
Budget - Know well
Budget Method - List your income
- Consume too
- List your expenses where your
- Find the difference money went; much time and
- Try to track the identify wasteful management
expenses and set spending, focus resources
Pay yourself first Envelope Budget or saving goals on value-added - No motivation
zero-based method activities to start

àfor people who are detail-oriented and who have more time. It's not so great
for people who are "big-picture" thinkers, creative types, and busy people.

(ii) Pay yourself first/ Reverse budget (iii) The 50/30/20 or 80/20
How
Pros Cons Allocating income into three categories: 50%
How for needs, 30% for wants, and 20% for
- Encourage savings and debt repayment.
- Easy to maintain, no
- Savings are prioritised
need to track every undisciplined Pros
- the first “bill” you pay spending when you
every month is to your single expense - implicity, flexibility, and a focus on balanced
can spend the
savings account. - Build saving balance however financial priorities
- Use the rest to pay discipline. you like
other bills Cons
- difficulty in distinguishing and
à Suitable for those who want to prioritise savings first, may not be suitable for those controlling between needs and wants
- May not be suitable for those who have
who have too much debt to pay off.
too much debt to pay off.

(iv)The (Cash) Envelope Budget method Which budget method to select?

How
create different spending categories and allot
a fixed amount of money to each one. Once It depends. Many methods can be combined:
you reach the limit, you can't spend more
until the next month. -The first stage of practicing financial discipline
Pros
- prevents you from overspending à financial discipline and tracking expenses: traditional methods.
- It forces you to pay with cash, and studies show that
consumers spend less this way compared to paying -Once you get used to it, the pay yourself first
with a debit or credit card.
Cons and 50/30/20 methods may be suitable

Paying by cash may be inconvenient and unsafe

Required to predict expenses correctly
à best for people with predictable spending who lack financial discipline.
 Budgeting and Financial Calendar – Irregular Expenses

Budget-
ing and
Financial
Calendar

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Revolving saving fund for

Budget controls: Wants and Needs
The classification of human wants and needs is not a rigid concept.
irregular expenses What is comfort for one person can be a necessity for another

Definition Example
Irregular Expenses
Ex: twice-a-year auto insurance bill, vacations, travel, tuition and fees,
property taxes, back-to-school supplies, vet grooming and checkups, dental essential expenses
cleanings, magazine subscriptions, special haircuts, one-time tickets for required for a person's Basic food, shelter, clothing,
whatever, birthdays, and Christmas (travel, decorations, gifts). NEEDS basic survival and well- Healthcare, basic transportation
being (must have)
Revolving saving fund non-essential items and
services that can enhance Entertainment, dining out,
This is a variable expense classification budgeting tool into one's quality of life but are vacations, luxury items, hobbies
which funds are allocated in an effort to create savings WANTS and leisure activities
not necessary for survival
that can be used to pay irregular expenses and to meet or basic well-being (wish
occasional deficits due to income fluctuations. to have

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Budget controls: Behavioral economics and Budget controls: Some tips to control spending
Overspending
Techniques of planned spending to maintain control over personal spending so that
planned amounts are not exceeded.

Behavioral Overspending
Track what you spend & credit transactions
Economics & Undersaving Use the Envelope System for
the Strongest Control
Budget for shopping trips
- Behavioral economics looks at - overspend with credit cards
how financial decisions are and debit cards in particular
Control
affected by emotional, because they’re disconnected Choose to postpone buying
psychological, cognitive, and from the actual money they’re Spending
anything expensive for two
social factors. spending Be goal-oriented
months to see if the “need” about savings and
- Loss Aversion, Mental is still strong
investments
Accounting...

Shop purposefully (by asking “Do I

really need it?”)
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 What will you do with net income (surplus): What will you do with net income (surplus): TVM
Time value of money • Factors affecting Time Value of Money

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What will you do with net income (surplus): Interest Compound Interest: Definition

• Interest rate is a way to calculate the time value of money • Simple interest: only the original money invested or borrowed
• Present value (PV) and future value (FV) measure how much (called the principal) generates interest over time
the value of money has changed over time. • Compound interest: the principal generates interest, then the
• The future value (FV) measures the nominal future sum of principal plus the interest generate more interest, and so on.
money that a given sum of money is "worth" at a specified time • Interest may be compounded:
in the future assuming a certain interest rate, or more generally, annually - once a year
rate of return. semi-annually - twice a year
• Interest and Interest rate quarterly - four times a year
monthly - twelve times a year

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Compound Interest: The Formula Compound Interest: Examples

FV= PV.(1+i)n Find the compound amount if 23,000 is invested for 4

years at the rate of 12% compounded:
PV: The principle (t=0)
FV: compound amount or accumulated value of PV at the end of n a. annually
periods (include the principle and interest) b. semi – annually
i: interest rate for the compounding period
n: total number of compounding periods in the investment term
c. quarterly
Use Excel:
• FV(rate,nper,pmt,[pv],[type])
• PV(rate, nper, pmt, [fv], [type])
 Getting Rich is..... hard Getting Rich is..... hard

Save 1m/ month & invest 12m per year( unit: million dong) Save 5m/ month & invest 60m per year( unit: million dong)

RoR 5y 10y 15y 25y 30y RoR 5y 10 y 15 y 25 y 30 y

0% 60.00 120.00 180.00 300.00 360.00 0% 300.00 600.00 900.00 1,500.00 1,800.00
5% 66.31 150.93 258.94 572.73 797.27 5% 331.54 754.67 1,294.71 2,863.63 3,986.33
10% 73.26 191.25 381.27 1,180.16 1,973.93 10% 366.31 956.25 1,906.35 5,900.82 9,869.64
15% 80.91 243.64 570.96 2,553.52 5,216.94 15% 404.54 1,218.22 2,854.82 12,767.58 26,084.71
20% 89.30 311.50 864.42 5,663.77 14,182.58 20% 446.50 1,557.52 4,322.11 28,318.86 70,912.89
25% 98.48 399.03 1,316.24 12,657.49 38,726.09 25% 492.42 1,995.17 6,581.21 63,287.47 193,630.46
30% 108.52 511.43 2,007.44 28,185.64 104,759.83 30% 542.59 2,557.17 10,037.18 140,928.20 523,799.13

THE POWER OF COMPOUND INTEREST

• When Albert Einstein was once asked

what mankind's greatest invention was,
Look he replied: "Compound interest."
how There's even one claim that Einstein
called compound interest the "8th
compounding Wonder of the World.”
works!
• Money makes money. And the money
that money makes, makes
money.”( Benjamin Franklin)

Recognize (Effective) Interest Rate in Real Life!

• 1 khoản vay 100tr trả nợ trong 12 tháng, lãi suất 12%

theo dư nợ ban đầu

I=?
 Rate of Return – IRR - Ex1 Rate of Return – IRR - Ex1

• Cuối năm 2014, bạn mua nhà 4 tỷ sau đó cho thuê Cash outflow Cash inflow Total
mỗi năm được 240 triệu. Cho thuê đến hết năm 2017, 2014 -4000 -4000
bạn đầu tư nâng cấp nội thất hết 500 triệu. Sau đó 2015 240 240
tiền cho thuê tăng lên thành 300 triệu. Đến cuối năm 2016 240 240
2021, bạn bán căn nhà đi được 7 tỷ. Hỏi TSLN của 2017 -500 240 -260
khoản đầu tư này? 2018 300 300
2019 300 300
2020 300 300
2021 7000 7000
11.55%

Cash Inflow Cash Outflow Total

Rate of Return – IRR - Ex2 Tháng 0 (16,995,000) (16,995,000)
Tháng 1 1,856,000 1,856,000
• Điện thoại iphone 14 Pro max 128Gb có Tháng 2 1,856,000 1,856,000
giá là 33,990,000đ. Khách hàng trả Tháng 3 1,856,000 1,856,000
trước 50% tức 16,995,000đ. Số còn lại Tháng 4 1,856,000 1,856,000
khách hàng vay của công ty Home Tháng 5 1,856,000 1,856,000
Tháng 6 1,856,000 1,856,000
Credit và trả góp mỗi tháng là 1,856,000 Tháng 7 1,856,000 1,856,000
trong 12 tháng. Hãy tính tỷ suất sinh lợi Tháng 8 1,856,000 1,856,000
của Home Credit Tháng 9 1,856,000 1,856,000
Tháng 10 1,856,000 1,856,000
Tháng 11 1,856,000 1,856,000
Tháng 12 1,856,000 1,856,000
4.43%

Summary Time value of money Exercises

• Use balance sheets and cash-flow statements to measure your
financial health and progress.
• Collect and organize the financial records necessary for
managing your personal finances.
• Achieve your financial goals through budgeting.
• Don’t forget to identify your irregular expenses and compute
revolving saving funds for them by using financial calendar.
• Control spending is important to achieve your goals!
• Utilize the power of compounding interest to reach your
financial success and be careful with interest rate trap in the
real life

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 1. SAVE FOR GRAD SCHOOL
2. SAVE FOR APARTMENT
You want to go to grad school 3 years from now,
You want to buy a condo 5 years from now, and you
and you can save $5,000 per year, beginning
plan to save $3,000 per year, beginning one year
immediately. You plan to deposit the funds in a from today. You will deposit the money in an account
mutual fund which you expect to return 9% per that pays 6% interest. How much will you have just
year. Under these conditions, how much will you after you make the 5th deposit, 5 years from now?
have just after you make the 3rd deposit, 3 years
from now?

3.SAVE TO START A BUSINESS

After graduation, you plan to work for mega corporation
for 10 years and then start your own business. You expect
to save $5,000 a year for the first 5 years and $10,000
annually for the following 5 years, with the first deposit
being made a year from today. In addition, your
grandfather just gave you a $20,000 graduation gift which
you will deposit immediately. If the account earns 8%
compounded annually, what how much will you have
when you start your business 10 years from now?
4. INVEST FOR RETIREMENT
Your father is about to retire, and he wants to
buy an annuity that will provide him with
$50,000 of income per year for 20 years,
beginning a year from today. The going rate
on such annuities is 6%. How much would it
cost him to buy such an annuity today?

THANK
YOU
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