| tdlinad (BCOM HONS FINANCIAL LITERACY Cake _ Credit distribution, Eligibility and Pre-requisites of the Course Course | Credits | Credit distribution of the course | Eligibility prenenete title & Lecture | Tutorial | Practical/ criteria of the cour! Practice i iE 1 0 1 Pass in| NIL = Class 12” Learning Objectives The Learning Objectives of this course are as follows: © Familiarity with different aspects of financial literacy such as savings, investment, taxation, and insurance © Understand the relevance and process of financial planning : © Promote financial well-being Learning outcomes The Learning Outcomes of this course are as follows © Develop proficiency for personal and family finan © Apply the concept of investment planning Ability to analyse banking and insurance products © Personal tax planning S, planning SYLLABUS OF FINANCIAL LITERACY UNIT ~1. Financial Planning and Financial Products (3 Weeks) * Introduction to Saving # Time value of money ‘© Management of spending and financial discipline UNIT—I1 Banking and Digital Payment .. (4 Weeks) ¢ Banking products and services 26or eS ® Digitisation of financial transactions: Debit Cards (ATM Cards) and Credit Cards., Net banking and UPI, digital wallets © Security and precautions against Ponzi schemes and online frauds UNIT=IIl_ Investment Planning and Management (4 Weeks) # Investment opportunity and financial products # Insurance Planning: Life and non-life including medical insurance schemes UNIT=IV_ Personal Tax (4 Weeks) * Introduction to basic Tax Structure in India for persdnal taxation * Aspects of Personal tax planning © Exemptions and deductions for individuals - * efiling : Note: Some of the theoretical concepts would be dealt with during practice hours. Practical component (if any) - (15 Weeks). ‘© Regular class activities to enhance students’ understanding of topics and the application of concepts. The case study method may be followed as a teaching pedagogy. * Numerical questions pertaining to each unit wherever applicable should be practiced. * For the second unit, students may be assigned a project wherein they can log on to the website of various banks and conduct an in-depth analysis and comparison of various financial products offered. © For Unit Ill, a Project related to building a dummy portfolio of stocks and tracking their returns may be given. : © An investment budget may be given to the students to select investment options that maximize the return and minimize the tax implications. # For the last unit, students may also file a dummy IT return to get hands-on experience with e-filing. * Students may conduct a financial literacy survey among at least 25 respondents to measure the level of financial literacy and share the findings in the awareness in the form of a report. # Any other Practical/Practice as decided from time to time Essential/recommended readings ¢ Introduction to Financial Planning (4th Edition 2017) ~ Indian Institute of Banking 2\O QiNO) , t —+—— 10 (practeal » tat + C art tnd \ AS \o Seat CONTENTS wrk Ute - Tra 1, FINANCIAL LITERACY 11 trodection ae 12 Benes of Paani Leracy 13 Key Concepts in Penal ance vinciMi Financial Lieracy 38 nancial Discipline... : oe (Case Study 39 Sar Tyo nee bt of nc pie Revie Question nnn IE VALUE OF MONEY aa 4 troduction un Se 42 Howth Te Value of Money Woks. a2 4.3 Reason for Time Value of Mot nn x. 44 Importance of Time Valve of Money 3 “greg 5 Component of Tne Vale of Money. : aes NWT 5746 Techniques of Time Valu of Money. eee 43 oP 47 Discounting... = 48 Sore Appleton of Time Vibe Tein wna hia Practical Problems. 4s Practical Exercise. Review Questions, 5. FINANCIAL GOALS cs 5 5.1 Introduction = 5.2 Meaning of Financial Goal, 53 Why Financial Goal ae Needed? 54 Types of Financial Goals 5.5 Financial Goals You Must Achieve before You 40s 56 Develop Financial Goal Chatman 7 Stepsto Set Financial Gol = aes ‘8 How Financial Goals can be Achieve? 59 Significance of Financial Goals. Review Questions 6. FINANCIAL PLANNING 61 Introduction... 62 inant Pang. 163. Why should we do Financ Planing. 64 How odo Financial Panning... 65. Why to Matsaina Financial Diary? Contents || xiii 64 66 Steps the Financial Planning Proce a 67 Desiring Franc Pan — Practical Considerations. a Review Quest J un IT a BANKING AND DIGITAL PAYMENT | 7, SECURITY AND MODES OF DIGITAL PAYMENTS 2 2 0809 en 72 Reserve Bank of India ~ Role and Importance. 73, National Pments Corporation of India (NPCD Es 275, Digi Barking Products on 76 Digtal Payment... 7 Benfis f DiglPamens 762 Modes of Digit Payments. 27 inion hen eld i es 77. Poot fae P08) non VIR POS nnn 22.3 SORPOS nnn 224 E-commerce Payment 775, Autoruted Teer Machines (ATM). 79.6 Cash REY nn of Digi Payments - Biometric Based AA Unique dentition Authority of India (UIDAL) 7.82 Aadhaar Enabled Payment Sytem (AEP). 783 Micro ATMs. oes 29) Modes of Digital Payment. 79. teernet Baking 79.2 Branches Banking... 793 Mob Banking - Bann YoutPoce. 794 aiid Payments Inertce (UPD 795 Mobile Wales the Smart Wy to Make Payments 7.96 Unsiractred Supplementary Service Data (USSD). 7110 Others - Nationa Automated Clearing Hou. mt Mag Dain Facade Nor Dene: i Content : ee SS sr anil acy t 9.174 Portillo Ret mG '. SECURITY AND PRECAUTION AGAINSTFINANCIAL AND ONLINE FRAUDS. 8.1 at ekua —e eae 41 tmrodacion —____— ——____—__— 9.176 Pie Dvn 12 Fuad Fad 13 Types Frm Seams 16 Credit Card Cloning/ Steaming 83 ooking Fronds nd Scans ——— 18 Preventive Measure to Secure Online Payment and Avoid Cyber Fraud 19 Doran Data Pte Youn tom On Bn Fed. ——— 103 iferent Types of Murua Funds Scheme. 104 Systematic Investment Pla (SE). 10 Systematic Withdraal PLAN nn i 106 Refulr and Direct Mutual Fund Schemes... 107 Tax Impitions on Mutual ands. Ree Que nn INVESTMENT PLANNING AND MANAGEMENT 93 | 11, LIFEINSURANCE AND NON-LIFE INSURANCE SCHEME na 95 Introduction —_—____— 111 Introduction 92 levi Goals 93 Key Factors in vee 94 Objectives of Sound Investment 95 Concept of Return ————— 96 Meartemest of Rett ———— 97 Rea Rate of Return 98 tnpac of Teo ovement Dion ar 113 Need fo Life surance. 114 Principles of Life Insurance 11.5 Need for Insurance Panning. 1146 How t Decide onthe Bs Lie naranc lan Gt Sts YourNedst 117 Types of Life tsurance Policies 117. Tem Life lavutnce.. 1172 Whole Lie Insurance 11.73 Unit Linked Plans (ULI) 11.74 Endowment Pans... 11.75 Retremeat Plan. VL Other Types cf Life surance ARL Group Le bara 902 nn 1182 Life lsurance for Senior Cinns... 9.13 sa Dien Types of venest 916 Measareniet of Total Risk 915 Rik Return Trade-O8 9.36 loveseat Opportunites and Final Products in Indi 19 Clan Setlement Proce. 947 Ponfobo—_—_s__ | 1110 Life tsuance Companies inna 9171 Perl Managemen. | LAL None lasurace $172 ie abe Peta alge $173 Pra Por ape 1142 Dien Type of ik nce ia nsec. Review Questions OO OOO EET TEU E Eeesui Financial Literacy 12. HEALTH INSURANCE ma 121 tnodaction 122 Need of Heath sree. 123 Anporance of Buying Heth nsrace in india 124 Heabttasurane Plies — 125 Goverment Sponsored Scheme 126 Coverage of Hea insurance 127 Documents Required to Procest Chins 128 Clam Proc 129 Eada Reve Autheries 135 Vacous Heads Under income Tex 136 Income Tax Sab —_us 7 141 141 leon, +H peel Tar Pasig 145 Taxation 146 Ta oianee 147 Tar Masgemers > se 15. INCOME TAX ALLOWANCES AND ALLOWANCES: 6 15 Introduction, 152. Meaning of Allowances and Deduction. 153 Exemption. 153 Deductions... 154 Deduction and Exemption 185 Tax Planning by Avling Relief of Tax... 186 Income Tax Exemptions Claimed in Spciit Cases. 187 Deduction with *Macket-linked" Instruments... ee '188 Taxable, Non-Taxable and Partially Taxable Allowances AY 2021-2b.-u INCOME TAX RETURN 461 Ingodaton Eling 162 Whocn Efe. 163 3WyptodoE Flog. 164 Bene of Fling nome Tx Rew 165 Sept Reise for E Fig. 166 Sepst0doEFingin india.Chapter-1: Chapter-2: Chapter-3; Chapter-4; Chapter-5: Chapter-6; Unit-| Financial Planning and Financial Product i ae Financial Literacy Income, Expenses and Budgeting Saving and Management of Spending Time Value of Money Financial Goals’ Financial Planning1 Financial Literacy Learning Outcomes Aer studying this chaper, you shouldbe able No understend > the basic knowledge of financial literacy, > key concepts in personal finance; > benefits of financial literacy. 1.1 Introduction {n the modern society, financial literacy has a significant ro literacy as a life skill to handle their personal finances. The c le. Every person should be taught financial ‘omplexity of financial goods, the prevalence of fraud and Ponzi schemes, the need for money to attain a better quality of life after ret tirement, etc, are Just a few ofthe problems people dal with. These problems have creted a demand fey better personal financial management, including proper control of income and expenditure. Peo, financial education become more financially literate and adopt a responsible attitude toward managing their income, expenses, assets, and liabilities, incial well-being, For every household, financial planning is a necessity. Savings alone are not enough for financial Planning. It is @ financial commitment with a goal. Budgeting should be done properly since itis 2 Strategy to conserve and spend money from future income. With the help of this literature, teaders an gain a basic understanding of personal finance, including information on financial planning, key financial literacy concepts, different investment Opportunities, wealth creation components, insurance and pension products, retirement Planning, warnings.against Ponzi schemes, tax-saving strategies, investor protection measures, dos and don'ts of investi ¢tc, The student will havea better grasp of and"Cobo bbbdddbuaist® 1.4 Financia iteacy ito manage heir personal lance in order o improve hee nancial wel: being by understanding fancallercy Defnition of Financial Leroy ‘ina itera the cogative understanding of fran components nd skills suchas budgeting, “vesting, borrowing, tation, and personal ancl management. The absence of sch als ‘refered to as being nancial iterate. ancl Iercy mks individuals become sel sufi, that financial ably can be accomplished. Those who Understand finances shoud be able to ante estons concerning transactions, such as whether an em is egired, whether itis ace, and ete tis an ase aby. Managing your money isa personal sl hat beefs you throughou yourlfe~and not one hit everybody lars 1.2 Benefits of Financial Literacy Being financaly iterate can improve the standard of living fr individuals through an increase in financial stabi. Listed blow ae the assortment of benefits of being franc erate + Ability to make bette nancial dcisons + Eilectve management of money and debt + Greer equipped to each franc gal + Reduction of expenses through beter regulation. + Less nancial sree and any, * Increase in ethical decision-making when selecting insurance, loans, investment nd using 2 creditcard. + Effective creation df structured budget. [Making steps to becoming financially iterate san important component of Meta can ensure San wy cease nd imate chem offal pe 1.3 Key Concepts in Personal Finance ‘The flowing area few crucial personal nance ideas that a pers shouldbe ava of when managing ‘their finances (i Wht ore savings? The iienc been acme and expending, + Income Cah etd frm varity of ours eddg mich gs 1 pend: The aout of money set ont nent an ope pratt Mot people tse ei sags chive e-em cts Money Asin bk ing oun tars bt amount finter ands singe tact whenever pede People can save money in savings accounts at banks, post ofces et, Financia Literacy | 1.5, (i) What ore vestments? ? “The act of investing volves puting money from savings Int Bianca er non-financial products ih the hope of generating larger eturs overtime Investment ean be made i variety of emt ‘ocdng financial ones ike eda bank deposits, tock make purchases, mutal fund ivestments, ‘and non-sinancil ones ike the acqustion of el esate, precious metal, sucha gold and ser Investments can be made for short medium ot log term goals. One should constantly keepin mind ‘when investing tht returns on investments may changeover ne and tha very natu. Diferencebeween Savings and Investments is mentioned in the tbl below: pe Inve i Fd Depots ad Yeaning | A portion foe income wih not wed | Puig your money in vations investment or expenses producto make money gow Purpose [Saving re made to walt guy 1 veers ar made to make te money | net shartermarurentrequements| | gow by creating aes tat can genet Incomes the fsrefnerene ae a. Risk [Lower veggie Depends pon the nin which etmek indore eu] ghiy gue Compare eu {i Whats the impor of saving ond inesing? x ‘When ys ime money grows fo ou. Any en th ave aoe ing rising ‘income or ret tht Yo rere, ig ou Ona aching yo fancies Eatin ioe soul begin wives ands The eter ou pe startet he hgh or uc ae of hiring your cctv ke a wings hae, pying Br our nS ecaonSing ‘eer Ah hat ore ss nd aii? ‘Your ass are things you own and have economic vale, wheres your lable ar tings you owe orhave borrowed rom ther. is your ase for instance, if you save and then inven. aaa epost. On the ctherhandfyouorrow money or take out alou rom abankr anther peso, you ae ible fortheloan, (v) Whats Debit ony trond mest shat money whe expe ae moe thas he funds wail i hand isa debe144 Financial Literacy | 17 sal Lerma (vi) Whot isthe Time Value of Money? ‘Astime gos on, you'learn that i'you coud afford to buy a whole lunch fra certain amount of money 10 years ago, you could probably ford to buy only aration ofthe mea fo he same amount of money today. Tit indicates that «$00 Rupee note would be worth more now than t would in five ears. Even ++ ifthe note isthe same, if you have the money now, you can accomplish much more wih it because over time, you can make it grow by earning interest oni By investing the 7500 you receive now and earning, Interest ox capital growth overtime, you can enhance the amount of money you wll have inthe future ‘The time value of money proves that time truly is money at its most fundamental level, Le the value of your money today i different from what it wil be tomorrow and vice versa (x) Wt inflation an its Ee on nvestnen? Price ncresses or products an vere ae fered to ftion, The abt of unit of mone. such cae rpes to buy goods and services overtime dcece asthe pie of goods and series. In ster word the purchasing power of mone, or the dere to which ican bewsedtoprchse anything decines When making snc lan, terial consider how inflation may fet your invesen's Sine ston lowers the vale ofa investors investment investors are extremely fa ot How does Inflation Affect my Investment Decision? Five years ago Vaca Pav costing Rupees 2 would today cost Rupees 1. This pic increase is dv to inflation, which has an effect on the prices of he ingredients and ultimately the inal product, rather than higher yield or higher quality of ada Paw (ix) What ore the steps thot you can toke to avoid the adverse effects of inflation? Trytocaeuste your teal rateof return’ or the return you mayantkipte ate accountng for inftionary fects Youcan inves the money youave now at ate ati equaltoorhghe thn therstafinfation to essen the chance tha wl ose valve (x) Who js Power ef Compounding? Single ee simply allows you team interes on the rnc. or the amour you nay ives Compound itr, howeret is yout enn inteest on both he eine end pew erned ints a ‘ate ofretarn | Returneammed | Maturity valbe » EAL LJ ee 1409 40. B16 ” IIS igs bik dition ofthe return received *Attheend ofeach yet, the principal amounts adjusted 1 fle the x avin tht aro the pnp The retunearned on groring principal alo rieeach eo Princlp) does tn the example hove, an inital investment of 1,000 becomes €31,409 afer 40 years. YO return the rr tht was andy earned when oeavene, and sooth cots, wth Smpie Interest, the principal amount stays at $1,00 forthe whole 4-year period, and with annual ites 5 the amount only increases to €74,600 Note: Principal + Return from the Sst year collectively becomes the principal forthe second yea Principal + Return from the second yea collectively becomes the principal fo the third year and soon . 1 (id) The Rule of 72 ‘According to mathematicians, you can calculate how long it wil take to double your money by simply dividing 72 by the intrest rate. Let’ say that for your birthday, your parents gift you $200, and you intend to invest it How long wil it take for the money to iicrease to 400- if you deposit it in an account that generates 6 percent (6) interest annually? 721 Ointerest= 12 years Soin 12 year, your money wil have doubled to €400/- (ai) Rupe Cos Averaging Byung rupee ot evergigyoucan Invest ses of money at ela interal earls of markt ‘tly or ingance you prcase more unt tow unt prices and ewer unite at high ui prices. BY Ticking os timetable youtan ved ie df o etaps impose tsk attempting to determine the prc optimal ine to spend. By averging out the cots of your units, the rupee cst everging cect decreases the influence of short-term market swings on your investments. For example, look at the table below: Let us understand the magi of compounding with the help of an example. = senate ree Nembe cian host Anon Con Year Principal | Rete of return | Returnearned | Maturity value Fo. 2000 or a : 38) nee ag * 1080, Mar, 2000, cy a [2 om ry 168 1 eal a san a = (1.000 + itz cared $0) May 2000 Tae e [37 Taoen inert eaneto+ 90) | __ 8 Ls | i 200 «or Eya eee oe ela = ue " a = ce 2 = bersos $ - | [an | 7 al oo x a we row the above, can be seen that with atta veent of (24000- over a period of twelve ‘month, an iver received 466 uit of Mutual fund. The average pric pr unl eames to 751.5 (Ge 72400086 = 751507). ‘i Whyte keep money in banks? ‘Tre following ae drawback of toring cath tome + Loss of growth OPPORTUNITIES - Los of interes income + Unsale Money canbe Soles ot Last Due to Natural Cali. + NofLow Credit Eighty: Deposits i Banks Create Eighty for Borrowing ‘Ase reat it is advantageous wo hold cash in banks rather than st ome. (i) Banking + Since commercil banks deal wth public funds sind trust, they are reputed franc Inttons, “The Reserve Bank of India oversees commercial banks in Ini. At repute, banks must undergo ‘mandated andes and inspections. Te Reserve Bank of ld alto conducs an annual adit of banks. Investments with a reduced rk prof include bank evings. Depending on the demands ofthe tints, banks ofr 2 variety of deposits. The liglty and safety ofbank depois are valved more than the returns they afer. Additionally Sed depot loan rom banks are avalible upto 75 o 90 percent ofthe deposits alne All deposits are covered by the goverment under the Cetra Government Deposit Insurance ‘Scheme, up to & maximum of5 lakhs per cet in that specific bank. Depositors are therefore promised that even in the event ofa bank aur, the Goverment wilntervene and recover upto Slab ofthis funds in that bank. One mby occasionally go tothe Reserve Bank of India website fr detailed details the scheme. : (11) Know Your Client (KYC) Norms forthe Account Opening Process Customers must go through the KYC proces in ode to open any form of bank count "KYC" is an scronyn for “Know Your Customer” The goal of KYCisobeip bank beter know and understand ther ‘customers and ast them in managing heir ks responsibly The KYC documents that bank pill accep include a photo, a document for evidence of identifcation (uch as copy of PAN cad ora ‘Aadhaar card), anda document for adres veriaton (sch scopy ofan eetiy bl a vers license, «passport an Aadhaar card) Pe PCC CCIE Financial tracy \ 1.9 EEE (avi) Types of Bank Accounts ‘Type of Bank Deposit and thei Key Features \ oe nea area «+ Low itr, ower high «Facies payment mechani through Astomated Teer Machines (ATMS) {No Tax dedcted t Source (TDS) on interest on 8 coon alc, bt taxable inthe ands of depositor «+ Account can be opened in sage name or joint names. In the case of jl scout, the ‘operation ofthe account canbe doce by any oe court ld ory F “Minot of any ae can avo open 2 savings bak accoute though this earl ot lesiy appointed ‘Minors above ae of 10 years can also aril addition! barking faites Tie intemet banking, ATM/ debit card, cheque boc fcting. 2, Basic Savings Bank Depot Account (BSBDA) + Iirodeced to promote financial ichson. 4 Zero balance savings account witout ay element fa itil depot can be opened for Individual and also minors (through th guardian) + Related condidons or umber of pont vithdromals ins math, + ATM Car passbooks ae sued fre of charge “+ BSDBA account holders re at lige for opening ay oer avings bank Gepost scout that bank: 5, hued Deposit (FD) Acount «Involves placing funds wth he bank fo aie erm ta certain interest ae, “Interest accrued ot eared on FD is sbjct to Tax Dect a Source (TDS) beyond» stpulted moan. + Senior czen may get entra benefits on the interest ate, ‘Tenure an ate of interest on FDs varies from bank to ask 4, Recurring Depot (RD) Account ‘+ A fied amount is depo et monthly interals fo a predtermine term. + Barnehigheroterest than savings bank account = ‘TDS aplcble on intrest accrued reared beyond a tipunted amoui: «Senior cite may ge eta benefits onthe interes fale «Tenure an ate of interest on RDs varies fom bank bank, 5 Speclal Bank Term Deposit Scheme 4 Taxsaving scheme avaiable with banks, + Rel under Section 80C ofthe Income Tax Ac, 1961. + Team epost with $year lock in period. No premature widéstvaean allowedny a Digital Banking im the modern era transactions incu x poods, “een eh ma prs Conca ete ti it L _The various dgtal modes of tantering fund area flo Mode of Transfer and Key Fears EFT (National Flectronic Fund Tansle) + Transfer of funds from one Bank account wo mother | > Neressction on the minimum/maximam amount fr transfer * Tagen ep benecty account nba and FSC Code idan Func Spe de sige coe anignd teach bank ranch) + Chores fortran may ier frm bik bank | + Tense of fans can be inated any tie during the dy nd i aks few hours to fs —e ane ae | RTGS (Real Time Gross Settlement) Fingncil Literacy | LAL ce le Te Te Key Fears Feymot Bak | + Provides savy scooter wcnnt ies, = «+ Can accept demand depot bt nt tecuring ied depot, «Canine ATHDebit cad bot cd cards Small Finance Bank | aes Small Finance Bark | + Provide features le aking sal depots nd denaring sal amoaet + Insrument ose funds primary to unserved and underserved sections of Population oe + Ertend loans of small amount to small business ats, miso ‘enterprises, ral and arpa emer te eites nthe cepa cies aszes + Represetative oa bunk wo posto castors (asain remote locations! Correspondent ‘lps tol ther withthe bashing nerdalansactons 1 Can povidererices ke opening of bak accounts, pons, rear of Sand, the needs and wantsad asst betwen them: > eincimeand expenses > ‘bodgeing and how to prepare temple de. 2.1 Introduction Are you sometimes short of ah the en f the month? Dec seem to be able sve er he tangs you realy wan? You ca lear to balance your income with your expenses nd eves une some money leftover for savings and extras. Let how you bow o manage our incoming and tgs Seances 2.2 Setting Priorities: Needs ond Wonts In ivery important to kaow the dference between yor needs an yeur want and how they anaes ‘nancial decisions. This wil ep them to set your priorities so tat you know where spend your smocey. 1, Need: A neces someting reured omething enter A ned someting ght tobea necesito eset tems required frie. Examples ince foo wate and shes 2. Want A desire, something wished fx, something sonesestis] Dut dese or ems wich increase the quality of ving. Examples inclode a car serea, CDS, ag, and designer cote Depending upon what «pert donee at 4 ned or 4 ant wil nuance Masher Seanci! decisions, For example, person who deems a vehicle aed wl bn ge expenses hnvL 2.2 |) Financial Literacy acres he te on «cpl for transportation and sees vehicle at «wast. Using these Teena oof over my head isa ned So are doting, fod, olor werk and medton. eee owes in thea ia wart and 0 ae editions le chewing pat hing tnd aking Income, Expenses and Budgeting |) 2.3 You will usualy have two categories of expenses in your budget. Fir, you wil have your regular ‘monthly expenses These are expenses you know you wl have each month Second, you wil have your Imeglar expenes-thoe that come up every how ad then ot pehaps once a year For example ou ‘may have an annul car insurance bill you will need to pay - ors cib memberhip - or a new cal reves ‘Wen the oliowing item /actvity a need or wan ne youknow you are going to need soon. You wil want to plan for such expense in your budget and =a ee Sats toaas oan enya ppuer ae | Clething *3 - | cont money olive. You need to py for fod, clothing. housing, tanspertation, ommucication, aeeoae = st dam ob weary apa He a a lp esa eae dee Gong eaten = —< | education and marriage, gifs for telatives and so on. A piace tive ae Expenses (Used of Money) Ace we iv Food, shelter, clothes = : iiok, Ss > fea z | Owning & vacation home 4 24 Expenses Expenses ae cons for temo ears tht ed po osu nthe cou ay ig Espen ce hy hap oreo ops ec knd ye oe sea pons daly base [Nex before you sd p how mach you have pent on each. your money you think you spend on ahaa,CbOdddibvide’ ' SCE HOEEES 24 | Financial Literacy ‘Then add up how mach money you actually spent dn each cary. Se ifthe reus surpie you (Or seifthe results come cloe to what you expected This wil gve you one sgn sto whether you know where your money is going ~ and if you ae in contol. There sane other thing you can d 6 Look. ‘chow much you ae spending in each category Is thatthe way you want tobe using your money? Ate Yon spending more in some ares than you woud like ~ of hick ou should? Are you hving at much, ‘% you would ik —o need to? Going through this exercise = sein where our moneys going ~ and ‘hinkg about where you wan it ogo - shoud tl you prety cle ifyou need to budget you are Pleased with how things re, ad happy wth how you ae sing your money, ou may ot needa budget ~ at least not yet. It may be tat you are in contol of your money and manang it well However, at Youmake more money, ake on new expenses, and life becomes more complied, you may nd that a ‘having budge wil help you ty in contol Emergenes Unexpected, necessary expenses that could happen ante (ies nur. tanapottio, ete), This ‘ould significantly eft your months budget, imiting he discretionary and variable expenses well as ‘savings. Emergencies are, by nature, often cost and therefore demonstrates the importance of having 2 regoar contribution 10 savings. Having savings prevents omits ou fom going late db to py fot sudden emergency expenses 25 Budgeting A budget ia pln for how you se our money ona mowt1omonth bas th ou okt your expenses - both those you have ech month andthe that ae up nw ad then, Wp you ork cout ow you wil cove your eps fram you income Abu aloha you ae bud up yout saving ole time and achieve our ancl ol , ‘A budget helps you know where your money is going, As you work out your budget, you may find "ways to cut back or ways to save more. If you can, use your budget to pay yourself first. If you pay Yourea it oen end up that her oting Pa some our money sing whe oe setitand budget how you wl the es. Even iti sal amount yd aby peig yu ~ wth savings. And try nd ke ving habit fom yong age i peat bb dev en be an important yt achieve your gal Bay Budge notes cpg your ime wih yor expenses gives yo picture of your snc stain ~ wd whee you ay be dng, And it should give you avery deindkcatn of whether nt ou aon the od scomplshing your longer term goals Sone ere fier survey shows hit ont pope think that ving badging sang oo ig 600k ro ia i a OR Fp a Income, Expenses and Budgeting |) 2.5. ‘Wy nt Many people dont budget because they el hat they don erm enough mane 1 ced ‘wget Ince theless money youve, the more ily it that budget cin elp you. Yu wil want to get the mos cu of your money You wort ato waste ag Youll want 0 make a many “ond” money decor you ca, Budgeting can help - and ean belp moet peopl gud how much ont they hae. Thee ae aso many people who dont budget ecu they fer tht budge: lpr them in "ancl str jake” They thik budget wl eto mich contol ve wha they do. Act eon who fears that budget contol hem to machi ofl a person wha spending ‘soutf onl. you fear abudget you probably nee to budget A bodet hls you gain contort Jovi Deciding to bode isa sure ign you ave decided to tke conte f your mony Bt have you ‘nye how our mone being sed wheres ong "Rssigly conparion of income and experts the diference between your to ncome ad toa expenses postive ora negative gute + His poste, you be srl Congratulations! With the era money you mast py of ay borin youtave Otherwise you ca ince our moth seins nwt Bre. + IFAs neque, you have + dic. You need to make changes to baer your budget Reduce yur esensesby focaing on your ned the our mnt Tis can be ok in the ert termbut isnt susblein the og ems. Badpring it sonesime hing To make wrk ou need depuis thi wey once you aconforuble you cn doit monthly S [By i fina yn Bohs dt Dif} fe bp | [iy en ile at [Most fen this is done ona monthiy interval as this rordes a consent, yet accurate design * ‘aca income in comparison expenses. Income can ees be inthe form oF regular payor ‘spontaneous sources such as pfs or sales, Regular expense are abo best understood ona monthly bass tis eps you stayin ine with your budget ‘Te fist thing to wrk oti your momlyincame. That wil el you what you've goto wok with. The second step itis our monthly expenses. Seme expenses yu wil esl conta (or ‘example, entertainment). Others you ca contol s realy (etal, yout houng costes at east you cast con them ada) You can always take ore contol aoe rent ving tes ‘xpensive accommodation o geting roommate wo help sar the oat - but th wil ake ome ine ‘When roundup your total moathly income ang your al monthly expenses yo wil te whether ‘yoware able to save money ott You wil ind if you are spending more than you wou liken certain areas. You wil quik see you aren conrlof your mane -orheadng toward money pblems In ‘shart, you can ean ges del sbut you an your mone yeeting end wtng = budget 15iva = Ean YOURINCOME: 2 YOUR EXPENSES A. Your Regular Monthy come Sources] A, Regular Monthly Expenes | Wagaraovance Feed Y fest TFanpotation oa Pre! Inernet | wae Fecrealon/Exteriament |B Areguar Annes! ncome eos, | | came tx rend pa | | Gits Housing Costs (induding wits) | Bons Other | Other Tonal (2) | : | mane) 8B, Ivegular Annual Expenses | | Divide rm by 12= 0m) Medici cost 5 | ‘Total Average Monthly Income lames x (M+ 10 = 40 Gis Chartablecontbton FF “Tutin/ Schl Epeses Cloting z eatin Haley Oter Toul) Divide (1) by 12= (ED) “Total Averige Monthly Expeases (Exe H) = ME) 3. TOTAL MONTHLY INCOME (IM) - TOTAL MONTHLY EXPENSES (ME) = SAVINGS, BALANCE, OR SHORTFALL a ANT ee tether a budge igh wom, what do you think he res would 2 Spending al you mat Running Sat cach month 1. Whats the value of «budget In what ways cant help? 2. Why is saving ~ and paying yourself fist ~ so important? |. What kinds of things are usually in a budget? “4. What are the two kinds of expenses that re usualy ina budget? 5, How can a budget help you gun, and keep, control of your money? goo 3 Saving and Management of Spending Arsh de, oes > Desig ed i beni, > Understand the management of spending, | > Ela ely oe fle range pain > Bp blo edesond 3.1 Introduction Money lays an important role in ou lives. On one side it tol for wealth creation for future needs and on the ther it serves a} ansction instrument fr stfying present needs. While many people ‘speed most ofthe time ad energy on carning noe tis mportat to note that without Iearing the arof spending money wel long wih judicious saving and prudent investing, they may not beable to teat rosin fae for theses andthe fies. maybe observed tha aring to manage mone wily cou be the ist step towards the big golf nancial planning, In ths chp study abou the suings its benefits, managerent of pending and financial diipine 3.2 Savings Saving eo money you pt defor fe rer than pending it immediately Svigs ithe pon tno patent epee Bears fence eee a ea Stef mney alco Buspar cnegene hl MEPEOC OEMEMEGEEES 3:2 Pens Ley at : t ‘naj beakdows or medical emergency ould gear Without stings, unexpected events can become Tange ancl burdens. Therefore, savings hls an individual or family become fancy secure, Mane canals be seed to purchate expensive itemsthat are to cosy to buy with monthly income Buying new camer, porchasing an atomobile or paying fra vacation can all be accomplished by savings portion afincame Tnecomomics,svng ithe amount tht set ae pending In banking, ving eft savings accounts wich are short term, nteret bearing deposits wha bank or other nancial istwtion. So ‘ee can say that sving ithe money you want ee able to aces quickly. with itl no eik and with ‘he least amount of taxes Saving meas diferent things diferent people, fr sme it means puting ‘money i the bank whe for ches means buying tock or eBfbuting toa pension plan. Bu for ‘conamits, saving mean oly one thin: consuming less in the present in ode to consume moe in "he fture 43 Why should we Sove? We sve, basally because we cat predict the fue. Sing money can help you become nancial ecure and provide 3 safer et in ae on emergency Here ae few reason why me save money 1. Emergency Fund: One ofthe mot importa things to save fo is unexpected financial emergencies. These an include losing Your jb, unexpected heh issues ‘or your car or other home appliances breaking down, 40 you shoulé ave between thre and sx months worth ofving expences set aside. If you dat have an ergency fan, you may end up having to ake oot 2 short-term, high interest lan o cary» balance on creditcard at high interes ete A ommon ul of him st save tne to axmonthe worth of expences to have at th ed 2 Education: The ost for private and public edueation ae sing every year and is geting tougher to meet thee demands. Ar students ake on more debt. thee Rrancl burden rises “Aggressive saving ithe eases way to minimize deb. 3. Majo ile evens: Geting married, traveling the worl, purchasing a home, having acid. [None ftheve come cheap, Saving for such milestones eps reduce thir inherent stresses and allows yout focus on what realy matters. 4. Average life expectancy: Ax we age, ov ably to wok nd ean more money to suppor our Lifestyles wil naturally decree. And with todays health cre and technology advancements (ie expectancy has incensed, which egies moe funds to live securely Saving now wil sis you when work advancements are no longer realistic. ‘5. Retirement: Another important reson to save money your rerement. The pension scheme fs unltely o provide you with enough income to cover al your costs when you eventually tp work, particulary ste age at which youl beable to cai tis movng raul further aay. ‘The sooner you stat saving for etirement the es you wil have to save inthe utr. Saving and Menagenent of Spending || 33 6, Financial Seeutty: Suddenly finding yourself unemployed can be frightening, but its something many people wll experience at some point. Having «savings buffer in place to help cover you living expenses wile you find» new job can provide you with real peace of mind, 34 How to Save? ‘We can sve ether by cating expense o by increasing our income. Prewmning income is same, ie spend money fo puchaing ether ese or non essential tems Essential lems are those things sve realy cannot do without, uch at fod, clothing, house rep, seeds and farming toot, childrens ‘education and raltheare. We need thee things everyday for sir whereas, non esential ems are “eta in fe which we ned because we enjoy ther. Expenses on such ems canbe ether avoided or tedeced or postponed 4, spending money on drinks, drs, uta, gambling can be avoided wheres ‘eacesive expenses on matiag, festivals, pigrmage can be reduced and expenses on TV, scooter ct, Jewelery, et, cn possibly be portpaned. The les we spend on tom essential items, the more we willbe abe save fo eset things. Hon on we sve when we dt ave enough mney even me! ou regu exenses? “he common ein thaw natn enough owe cana sv The teh that veo ede tgs can We sd hep ude pron of ur xa sting res Ga tof mt Cang i The inp gitar weld at savage aed elt in ot evens ‘sll owt And we et sre espe prosaming we ald seal or mox Til reduce or were fee fia eed desing wt need expenses fw 108, wecan se 20a esa 10 we cn se 2 weep side at eH00 ‘ec ten Seating is, wel hve sre ns a exing I 10 esa as seal mean ving glen 20 xing dys sere ie ama Theane pera te Exp per ay Sing pe ay ‘Seg ina oath ‘Swingin year Inlet 8X pera | Seed amounts the end oh Thisaount egal 75 dye acon : 3.5 Where to Save? ‘Youknow you can save atleast ite every month. What shou you do th yer savings to keep them ‘Tree mary opts ame ein acon sean eo fixed deposits, or post office savings schemes, . 7gl C—O 3A If Financia tray serge Manat ofspiing 13S ‘Savings Account Pasa stun ar handy fo shorter ings You can dept money ina segs coun! any ‘ak Ths wl ep your sving fe and py ite interes, You can tke our money ou whenere yooneedit Recurring Deposits Recerring deposits populaty known as RD.ate bs if you. suchas buying «car These are stable ‘eadytosave small amount every me Fixed Deposit Commaly knoe 2s FD his is whee ‘fed depos rcpt which the Allowed, however, in ceo Paving pea. ExchypeofSevings vehicles costs andlimiations ‘he tert and whether they provide what you need. 3.6 Management of Spenting POSTE Tanet ut pendig so aco sarin babi. The bet oman spending stove money ‘Senate drawn from banks account tnd thw hig tht ate neces (oes insurance, ™ 50 on) ora most import. f you dict pt savings on easly and consistently sit could be done. Consistency and sieving fancalsaccess rich wo create fund fr «special ccasion fcr people who donot havea large mount of ving, but ae ont, No withdravals are alowed you can deposit sum for a fed period. The depositor depostor ba to prodce atthe tine of maturity, Wittrawal ae not need, the depositor can ak forthe xed depot acount o be lone by Check ther carefully tobe sure you understnd Theres no timelike the present when it zomes to spending and keeping op with your ‘anspor pending reach yor ancl snd impo your banc eS 3.7 ‘Steps Followed for Managing the Spending ‘Weare casing the np tobe olloed for managing te money ow whe peeping or there. Siep |: Toke Inventory of Your Finances Before you can tart mana ecg how to manage money betes Managing bodget can be dificult ak, bot there re way to make it ease Bing Your mone beter, you need to know how much oft you have The most eto understanding our cutentfrancial situation iso st down and recedal you reat ‘ontly income and expenses, fede, sve cepts fora month a determine whee maey let beyond major billie ret tlie and dee payments. or some people it canbe a wake-up cal to ‘realize how much is being spent on ites sch ss procerie or ining ut 4 basi Diese ee dics "linemen sytem re ee enc apsian amelie + Dope pet ein bas cl dc? Toone ose alloca oe ta re ‘Be honest wit yourelf about where your weaknesses lie. You might have made some missteps in the past, but yo doit have o continue on tai path, Step 2: Build Money Monogement Blueprint iow do you put your savings plan in action? Js ke gaining physical muscle, you have to tart with the igh equipment to gai nancial muse. v ‘se the steps below to build blueprint that works for your eances ‘ + Start with a budget: Pick a budgeting sytem tat youl tic with. We lke the $0020 bodget ‘Plan ~ whic allocates money for wants, needs and svigs and debt repayment — bat there are len oft badging options to coo frm. 1 “Turpin eal we ne or mnt pop et ei ‘nea sce ce foacendepee Rabo nese me + he deat wun gad tg pmo deat ri bgt pepe eo toayny fed ech se eee St ener ene Sgr sat cence tea ne eee asaya meer aici “heap pada ha feetahtec las sere ighestinterest rates ~ fit, whe making iim money's going, youcan more exsiy dentify potential 10%, your credit sore wl take hit "nea ail fet: Set meny ae nov fr een an and et cmc {nacre wok mal The imate oli longtrm ancl fender ct em PStep 3: Make Savings «Habit Money mastery goes beyond s beyond spending les than you make ‘naught live comfortably in the lng erm as well atthe shor Steps — Save, lves, Pay off debt, Repeat 1. Save Start socking ay extra m wort of living expenses at start small, sign of fini prowess is sving term, You ah achieve his in four 2. Invest 1 ! a mn i hi of tre ote en He your company fsa pendon ben cnn cwaghogt cea 2 nyonoae creditcard bil. you probably have some dct blgtions. Always make ly permet yo do behing Hyon entail how our res debt fest a 4. Repeat Keep building up that emergency fond investing for retitement and knocking down your det. ‘Step 4: Be Persistent Despite ther goodimentions, many peoplefal ofthe inal bandwagon. Sticking toabuds tatoo ‘estictive canbe sufocatng Navigating ivestment argon canbe confusing, But dot et courage’, Managing finances requires an ongoing efor. T be succesful, est your budget fen ad ry 10 analyseit. Compare your actual spending to your budget at least monthly oc mote frequent poste Make adjustments to your badge iit shabiuallyout f line wth your actual spending, Check your balances regularly on accounts, credit ards, and prepaid cards. You can check your alnces oie at 0 ATM, on your smartphone, or by cling your bunk Be aware tht these services may incu es— check rst with your financial sevice provider, Also signup for balance alert text mesa servic from your nancial institution. Give yours time to lar and gow. With ard work and ddan, you can ‘manage your moaey with confidence. 38 Financial Discipline Financial isin refers to how wel you arsbleto conform you spendingand saving othe plans that ‘you have set for yoursel Iti continuous proces and it evolves 8 your pire change overtime t fs also based on the understanding that mone is jst atol and that you contol yeur money, money should not control you ac dip men bing cool you mney You we aloo impulse spending des ikly to blow al of your money before paying your bil : It youhavefnancldciplie you wil save up for an em and can et aide sinking fonds without spending he money on something ee. rom Hern 50000 monty “MX ta 25s dnd hve bean ele fo aoa vo ada es now He iy 0hvtrhon nding Hee hee the eat ic ith hi ye writin babe in Kev ever enero whenever oon aa MO “ort hte ge He ot how tah below tit ila rote pea ese teat tle lan rtf Taise prem of frac indeigin | ‘Alot ofothes lo siugae with financial inducpine and tis good that you have elie this nd vant to changeit Many of us were taught howto make money pt how fo manage'it and at ome, ‘we didnot ak about beyond noticing that money does not grow on ees nancial dpe refer a how wel yous ale to conform your spending and saving the plans that youave set for youre Misa contiagou process nt voles 2s your pririties changeover ie. sal based on the understanding that money ius too nd tht you control your money, money should not ete you. a youbave fac isin? youre hing tis querin t ay be as you edo ete yor mone station your eval dquo ou ey eo height tc ibe pa ee tor at 4. Doyen money a trig 2. Are yousvig orteeme? 4. Doyoshave emergency fad? $5. Doyo cn aig fn lp sre ree ewe ap 6, Doyen below yor men el practic gaia? -Anvesin yess thes qos tig you bee aac iin ow oe disiined wih money? #1, tdcation Educating yourseion financial dcipine ste hey fo overcoming abstacles and leaning be succesful seth our mony 12, Mabie dep inp un pe Sl hi geeoz $3. Accountability : : - Hold yourself ac do ea secant dow oonabiy pane rs YOU Bas nd check In very to wes Futermor, ‘hat has sila financial gols. 3.9. Smart Tips to inculcate habit of financial discipline 1 Prepare «monthly spending budget and sick it loves with goal. Goals youcan 1% direction and help you in selecting right produc, ‘Avoid loans for your desire fr your dest, Bete dos financial planning check before going infra big Purchase consistency. Pate younaly ving he pan he nde whoa aig Pepe: youre Give youl a paryactin or wha ney cation or what ou fe ite when you see ur senglpending But pave mate etd i pang eee de Afterall our ere hulsbe oper resus Penis your you sop yo bet rents bee tage nto ped morta what have bee fx Your penal can be nol rig ay die outa pric ol Be accountable towne. Both utes an ep chon xh oe one peng Take hep of financial planner where ever you require. They can be god source of sopor. I your credit cards are bot 19 tering you and coming inthe way of being disciplined get id of Take review ofthe situations afer ast period. fortunately we did not learn in has to find it out. There are a number discipline. Overtime we havest School on how to bein fnancaldsiping, thus you yourself of obstacles that stand in your way when it comes to financial Draciced the basics and unfortunately that ha led many of us being in debt, unprepared for retirement, with lite to no emergency fund. Many of us aret even aware of ‘what our debt really costs us. We dont realy know what ou debt looks lke o think about how ital ‘our future. The financial discipline will help you in managing your spending and saving and make your financial future bright. 1. Define saving? What ae the benefits of seving? 2, What are the steps tobe fllowing forthe management of spending? 5, Define financial discipline? How tobe financial disciple wih the money? 4. What are the smart tips to inculeat habit offiancial dcipine? aoa 4 1 hers ts hp, deni be ol > now tedfniton nd importance ofthe tine vale of money > now he forma fo calsating present value and future value of money, > solea le question asin the formu mentioned above 44.1 Introduction “The time value of mony is bas nancial concep that olds that money in the presen is worth more than the same sum of money tobe received in the Future. This is true because money that you have right ‘ow canbe invested and ean return thus creating larger amount of money in the future (Also, with future money, there is the additonal risk thatthe money may never actaly be received for one reason. ‘or another) The time value of money concept els in arriving atthe comparable vale ofthe different Points oftime into equivalent valvesatpartcla points of te, present or ft. There re two ways By hich the cashflows arising at ferent points of time canbe made comparable: frst by compounding the present mony toa future dat, and second by discounting the future money eceips to present dal Infnancl decision-making, interest on funds play averycrucal role The TVM concep explains ato ‘wy the interest is paid on money borrowed. ‘Taetime vale of money can work for you or aginst you. For example ifyou re deciing between. ‘buying anew phone for £5000, o ines ina stock for example that yields 10% per year. Ifyou buy the phone, you have just incurted an opportunity cost of 108. In this chapter, we discussed about the time ‘alueof mony techniques adits application in ou fe.Yale of on them: ey. Assume that someone fe afer 0 ey, wil ther pay you 1,00 now orton ‘HOW. On the other the money, then Poa ate then you should ake the tu 4.3 Reason for Time Value of Money Suppose offer you the choice ofa ‘Services und goods than itcan inthe future. You have chosen theft option inthe pevons example because you understand tha € i yore ite evar ore Rc ica but when you approach me then, I dont have any money to give to yout ie 4.4. Importance of Time Value of Money worth of mone in The time valve of money (TVM) iss useful tol in helping you understand the relation to time. Iti a formula often used by investors to beter understand the vale of money ‘compares tots value in the future. Below well go over then and outs ofthe TV and how you ca we itt understand the ec time has on the value of your money. a The time vale of money imprint bcos low tut hat d wiht may Te TV an lyon sider vere inflation, rk nd retenen aa be oed t lp ou wera ‘vena account iyo have verti ola mid, ach 8 ri © ‘un 10 percent compound lneret each eat 45 Component of Tine Vole of Money 1 twerew/Dbcont Rte () = he rtf contig 6 2. Time Periods (n)-Itreerst the whole ube oft the present of fture vue of « sum. These time period which we wat to cakcsate ‘qurery. monty wel ee Present valu (PV) ~ The present ae known a the ve wl recive inthe ft, The amount of many that we ob rae on the ft vale of nc flow Furure ale (FV) = Te fture ves known asthe fate wale of sum of one Invested today. The amount of money tat we obtain by apphig 8 compound present au of any as ow 5. lsaliment/Annity (9) saline sepresent payments ro be pid periodical of redved during ech period. The vale is potive when payments have been received = Become negative when payments are rade 46 Techniques of Tne Vole of Honey Compound [Risa proes of computing the fture valu of an investment made today vera perid of time, Te proces of vesting money aswell as reivesting the interes earned thereon Iselled compounding. The ftuse value or compounded value of an investment after n years when the rent value of «sof ving « diacounting teres of avesiment made seret tei percents Fy=PV(4 Where FV= Future value, PV = Present vale, = Imerest ate, n= Tine 2144 | Financial Literacy Se Inths eqn (16) called the future value intrest ator or simpy the ture vale factor. <> Wecancalaie be vue del or we an we the compounded value factor abl to ind out the ‘Shes Tn cdeaton wel for inveterand business who want to ow the future vale of ther ovens to mah god iver econ, “hima eure athe hing ews fare ae — 1 What aout mone do we ae ight nw? (PV) 2 What teamed interest ee a which tl row? (hand 3. Aeron nny years wl we need the money) Example fe ae inverting 1.00000 now, Wht ithe fare value fier yeas, 10 yearand30 asf eof tre 6108? a ee ee Soltion: aig the frre ale armel: v=Pvxitee tye 3 FV = 1.00900 x (11/100 = 100400 (1.10) =81,10000 1 yeare FV = 100000 x (1400)= 10000 (288) «8289000 a 0 yars FV = 10,00» (14010) » 10000 x (175) = €17,50000 See able A to find out the vale of ‘Se we can exit find out the future amount value fhe interest rate and time period it own. saz: Find ot te fre alae eae inventing £600 fr 3. yas ah Ppt compounded annual, ; aioe ; Pewalteor = 6000 (1 + 0,09)" “ 600108 ie bea 600% 2903 i «tm 1). Non hue Company ‘fle oh cmpoundingM done move than once 8 ear canbe expreied by wing the dove form We PV a(S onImy are the numberof es pr yea compounding s made Jn ssn compounding # 2 ' 4 yas compounding ms «4 In monthsy composing m © Wh = inaee «1408 220 ss theconpoundng i dane uate mis WePvx(ten FV = 20,000 (24128 = TQM (LR 10000145 : =2Q8 Aine ont 812 FV = 1QOx (LTE 220000 (618 = 10000 « (0) bere ae AD 19000414881 tat " Sc rm thi example we ae tat he ive amount compounded es Dasa age angst he ‘tur ae We can ae that how ieresing the computing egwency Abe adone emp mae Arent othe earnings AW) Effective Rate of Interest "tv re ere the eet that acy ern ep anmet e am a Wher, Gare (us) Ah tafe ve rate of hrereat w ( ty hw are ae a ae ne fee ae A)~~ oéé ena eee été 46 Financia Literacy Ti ett of Maney 4.7 Example Mr h deposts £10.00 at 12% annul rat of intrest compounded monty Cale the FY = 1000(1+0.10)*+ 1000(1-+0.10)?+ 1000(1+0 10)*+ 1000(1+0.10)'+ 1000 eflecive rat of mere { = at 4641000133) +1002) #10810) «100 Solution: F i = 26105 e on | We wil also use the compounded value annuity factor tables (A2 table to cleulte the vale of Whee (212.02 | fame aie ‘a eee - | Ga) Pover of Cnpouding : Gio) Fate Vo of amy s | Mita paingcompondig dened ince ithe we fn inne deio A anny isthe seam of equal ei ows (permet oe) gccing esate fie eee principal aswell asthe accumulated jee” The premium for the ifeinsurace policy. for ample ae an sanity When th cash flow ocis tthe ‘end ofeach perio, the annuity is led an oriary anny or deferred annuity When the ash fw ‘cour atthe bepiing ofthe year its now a anny de Example: Soppose you deposit 1,00 annually in a bank for 5 year and your depots ara a 10% ‘compounded annual. What wil be the sees of epost tthe end ofS years. Atmming tht each — depos occurs atthe end ofthe year. The rz alt ofthe anny wilbe pec example thighs the power of compounding Ram and Shyam both ert %1.00000 ech inanioves tment venue that oferta annul niet ate 18 or 1 years While Rass 232 —— OO Ge Aemk vole au Table 3 For Prk cet Toile 4 48 6 Pneeatal heey Sous compo nes. Shyam op for spe ere teed of yur Ra wl ae» sol ares 259.376 On he ether hand Sy wos eae corps 200 Tu ease 1 Space hemes wa ese oly onthe il ipl ct 1508 at Rad the sere eared each er wand long wth rcp calle re fo est yeat Ted incre be ening gy ae op or iret big cle se comp re wil Shp oo ere ee aici mp tee f forcast Pci ened timon Ting aed aren 8 Der oie pa) 0 rm esas 3 trey 8) 9s want Dies Fl ae 8) 19s a wen Sct ble save todo 1 ps, an cps ih sage hn Sys opus Sco ety ewes an ea i Prot pete ctl el rasa s period, laze wai Clciaated on the ita 7 cece on of exe om Sala Dh lov. One pn is eto fs sac pags lary se dy to he rap ie cs 9 a Thema be iy she 50 ph ero pric como ew a saacy ASSIA TOSSA tas bays me Vboe of honey Ayovnat to ean eh pr ets a to i fo i ae et i PAOLA ee exon snk Or Te 1 8) Z tau dean te we _ | Tm |e | ; : | tsom_| tars | tosses | es | 66 | tem | Om tne | 075) | Ae asm | unm | 009 | neo the tgges benches ht ens can ppc othe oes oh compote rae hoe With ie, ou ar a tos snd lo thee tors nh Sorts pate ‘xa os oleate your ves mera ay, Tha ome ch compen OAs GO, (yor west eget, Wd oe yo extn vac So he yas ea ses ree Sot (oie et cere pce ex poe, Yost sac ove anc ete: 'o eet See the omer of cman Dery ven can ie wring conc ok 19 od A So, tort ay ej a hte. 47 Discounting 1 bps in deceiving te preserve oh» was oh mney ox veces h pment oe sectiok ‘a fc This pce i act the revere congo econiage i seen 0 acum, aches Sn ces erate the pth rae Ay cn, ae Soriba ha e e or ancient patra wh ese mane Pree re ere sarah Peay an RTD) i wv 1 stab one AL py HE Totten Eo rf EE in cp wee hes yest ria thes tt swirl et eo ye ela 19) UI. Xe Wy to seceve C00 thes 9 yeas tha ete te mayne hoe re vo ° ba Seaton: eae, AVE set Faw <0, sie MAP Tale 3, Z ° s ¢ 5 * - *4.10 | Financial Literacy = 4000x0751 = 8000 Sete Xie at became 0 3p _ Arle ad ae Pret of 1000 be ec 4 yea ra bak The scout sates 6. —— : PV=FV «PV, = 1000x0292 feeble Ad) -tm0 (i) Present Vole of Series of Unequl Cas Flow in nancial analysis we fen come across uneven cath fw streams For example, the cash ow steam, ‘sociated wth apa investment projects typically uneven. Likewie, the dividend stream associated TEs sey ema cane dps ov ati ce ei fod et he poet ‘soe ofeach indvidal payment sper abe A and then adding these present ales amp A fem nie 608i oj ve Syne pe il ws a (ia [onto = es jae dal a etic ees Sst = aa a = [=e = fea 15000 ons pa = a fa "5000 0 vos 15; 4 oa oar 12400 t. 864493 a TimeValue of Money || 4.11 (i) Pret Vl oii ie ant (reat) Aamo pot aed pope Tt oo pny on Liege Example: X receives a dividend of 82.500 per year atthe dividend rate of 10% on his redeemable preference shares. Calculate the present value of perpetual preference share ifthe discount cate 12%. Solution: ‘Anal cash fow = 22,500, ners rate = 12% PY = 2300/1285 = 0053333 (ii) Present Vole of a Series of Equal Future Cash lw or Ancity In order to find out the series of equal cash flows, the PVs of diferent times are wo be calculated and (eye Poel feu ow maybe cea nh ba Pen lemma Ts Example: MR. Ais depositing €25000 annual fr 5 years, in Pom ofce saving banktan interest cae of 9 Pa Find the Present Vale of anny 1 = 2500 XPVA ane = 25,000%:389, = 197250 Example: A students awarded sholaship and two options ae pat before hi: (to receive 11000 ‘now oi) to receive 81000 Pet month atthe end ofthe next | months. Which options shold be chosen ifthe rt ofinere is 12% pa? Option-1 Sine £11000 is receivable now itis steady expressed in present ales and hence needs adjustment. Option 2 Since thera of eres 12% pa. andthe anny conse of 2 psd the rte of ‘nurs per period maybe exresedas 1%, On the basis otal Ate pet abe ay be eclnce Py amount x PV = 000% PYAR ay ia = 1000x1285, =n > Septet winnie pe ape choose option 2.' {is} Presnt Vou fon Ant De or Ansty Det th Begining of ah Yer __ Brample Mt Aha wo rive 2000 athe binning each er Sys. Cake the peet , ‘abe ofthe ani ue isming 108 pee Setation Y= Annu amount x PYAR. x4 = 20900271410 =toa 4.8 Some Application of Time Vole Techniques 3 |, Determination of neces Rte/Gowh Rte Sometimes various schemes are oflered bythe france companits unde which a person is equired to ‘epoita specie sum inthe beginning of period an then return valet him inform aan + er certain numberof years. The investor would like to allt the te fintret valale toh ‘eof such scheme for which the flowing formla can be wed PV = Annuity x PVAF,, ple: A finance compa ofer a scheme in which the investor is being ofeed annul Solution: : PV = Annuity PVAR,, 20.000 5,000 PVAF 5, PVAF y= 2000500 = ¢ Using table A 4, Look for the interest corresponding to value apuins 3 ea. The tres tes + Stas corresponding to 5! year for 8%, the vale 399 Le. covet to 2. Determination of Growth Rates a ‘The time value of technique can also be used o find ou the growth resin revenues, cosa pros of ; «business firm. The compounded growth ate canbe calculated as flow . FV = PV (4G) and » (FVIPV)""-1 Where Gis the growth rate . Example: Profits fmshas grown fron in yeatineFindthecompounded rate of growth company as maintained in profit during this Perio Aste the roth grown evenly ¢ throughout thi period Solution: We Know, £20000 is deposit riveted today and apaist ty of 85.00 fr nent ive years nd out the rae of interes fered BV = Pv (I4G)y Time Value wats aa 100 10,140)" 1 (4G) 10010610 foe 10 yer. rom table A ‘The LHS i the compounded interest for G rato intrest see tha the aor 10 nthe 10 years ow sa the 2% rate fete calm, Th, growth ate of company 20% 3, Delerminotion of Humber of Yeors. ‘Tame va of money concep canbe wed o find ot the numberof pride needed to row #certuin prevent amount oa specie far ale a given cate of ere Sometimes a investor may be Invested to ow in how many year his money wl be doubled or tripled ot wil grow toa certain amount forage tf inere. The compound terest ables can provide lc newer such cae. Example Aniavestor who is depostng 1,000 in bank was to know how may yar are required to doubles money a 10% ate ofineest? Soto: Using the compound interes femal: FvePv(leer 20000 1.00000 (1+ 010)" (1+ 010)" 200,001,000 «2 ‘ov sing the compound inte blefor a age sum (ube AI), we fd # compound inter lator of 1.949 appearinthe 7 yar ows of 10% nee ae cla. Soin approximate years the investor money wil be doubled 4, Collation of Deferred Payments ‘Deere Payments means the Payments that are started afer a certain amber of ears. In many anes ‘we finda borrower aking loan who isnot ilrestd in ating the repayment mune ars yar {such case, the interest on loan would get accumulated fr thse Ini years fo which the payoent 's deferred As res the repayment instalment willbe akulted for am obtained afer coining, ‘the loan and the accumalted interest amount. Both ehnique of compounding and dacountng art required tobe ued to cal the repayment inaalment amount. ‘Example: company borrowed a loun of 00,000 athe rat of 10% ad the repayment wil be made in five equal instalment starting rom the endothe fourth ya. Calculate the anna repeymentinstalment ‘Solution As the repayment wl sat at the end of he fourth yer, So et us calculate the amount ofoan Andres at that tine 4 yeu). ‘ Fev (ie ‘ = 4000061108) Secng ble A (compound interes attr sige wm) FV 40000 1464 $58.604.14 nancial Literacy ince the amount repayable athe end ofthe fourth years 85.6,000 isto be pad in five equal Instant. Ths, we hve ocalcaltethat any which has preset value qual to 85.85.60 when ld fora yeast 10% rate of ineest in 4 years PV = Annuity amount x PVAF 5.850 = Anti mount x PAF yy Ant amount = 5856013791 ! ater 5, Siking Find bles Sometimes franc manage i faced with he deco wo cle specie sum on periodical baie a apcted ate to reach ata prescribed target moan Or in oem if we alo face wit sim stuton For example fy have tage to go te Europe ip ae year nd forth you need 210K, ‘mount Now the question arse tha if compound rate of 10% is vale then what amount shal be Allocated or provisioned every years thatthe end ofS yea, you would have €10 ah avasble with you This ca be waked out sing the formula gen below Future value» Aneuity mount CVA, Annuity mount = Future vle/CVAF In ths case rand represent the inter rat and ime pig Inthiserample Anny amount = 1Q00001CVAFIO = 19000006105 = t163800 ‘Sowe have o depos 1634000 make 1000000 after 5 yer ‘6, Amortization of Loon or Copital Recovery ‘When wees home ana a ony er ype tan fom yank maybe egaedo shesamein forme specie perdensalmets nr tein oun tatime o theloun we canoe thunder mentored arma roel the atk geno ‘Example Sanna borrow Lon of 85,0000, wich stobe repaid inform off equa nstainents Now ithe compounding rat 12%, the amount of sch alent would be given PV = Annuity x PVA) Py PYARon Pv= 500.000 PVA ag #3605 (ie Table A2) ‘Annuity = ne Time Value of Money || 4.15 500000 005 = 11385625 7 Riedl? Coeyondy 0) tn finance the rule of 72s form that estimais the amount of time it takes for an investment to double in ale ezning a ited annul rate of tur. The rales shortcut calculation o determine the ‘mount of ime for an investment to dole in value. The simple calculation is ding 72by the annual interest ate It depend upon the rate of interest ‘nila approximate 9 years to double the amount, Proce Problems (QU. Nidhi want to go ona word tou after 10 years. The tour is expected to cost him £70,000. ow much should se save angually (per yet) 1 have x sum of87,00,000 after 10 years if rate ofinteret iss (0 spa (i) 1% Seluion: (0 Rater 108 Fate value= £70000 trea = Anny VAR, 700900 = Ansty xCVAF gy oni = 70000018837 Abn anourt= 52. (0) Raectinerts 26 | Foturevaie Anny CVAF sy “Anu = Future vaCVAF my Anny = 7.000178 Anny = 35,8 (QL Mz A sey to depot 00 today in bnk orig compounded inter pa Find alae sete endo 9and 0 yea, Selaton Use table A2) ‘Present Value = %0,000 ‘ zi4116 j) Financia teracy Preten Vlue x CVF, | Pstostmade toryears [Amounts | cvrean ] [evo J 5, Sts is de to receive 500 each Fectved if the required rate of eu Solution: Year for nex seven yeas. Fad the sais 12%, Present Value of the amount Annuity» 300 Tine =? yeas Compounded Rate ofimerest = 12% Present Vl = Annuity x PVAF Present Vale = 500 4564 220 (24 Me Shara is Planng to rete this ye He gen two choices is company can imam sama 4000 or to eine ss cteatecoeone shermasec att 20 more ers Ihe ha opportu to carn inerestat te tae of l2b pe eee staan howl be chose? Would his econ chang ihe hasopporuniniwean ecree of 4% pa Solution: 3 Present value= 400.000 Annuity amount» 8000 Period of annuity = 20 years +4) Whe has opportunity to earn interest rte of 12% Present alu of anit = 6000 PVAF nay = 6000 «7469 tas. (W the bas opportunity to ear tet ate of 1% Preset value of annuity = 6000 x PVAF ay = 6,000 6.623 =097380 Mr. Sharma should choose annuity payment of £6000, if he has opportunity to earn rate of return of 12%, However he shal opt fr lamp sum payment if he has opportunity to ean return of 14% p. og tble 46) (Using table a4) Time Value of Money|) 4.17 count ati 10% (05, What the present alae of 100,000 receivable 50 years from now if the di Suton: Present vale = Future vale x PVF oy = 1000000» 0.0085 = t6500 ‘ (Qs. Mahesh depots £200.00 ina bank account which ays 18 interest. How much cn be withdraw annul fora period of 15 yeast Solution: (see table A3) Present value» 20000, Rate of interest = 108 “The annual wthrayal sequal Annuity amount = Present ale! PVAF iy = 20000077606 Annuity amount = 125.295 7. Shyam Borrons 280000 fora musical system aa monthly interest of 1 percent. Te loan is to be ‘epud in 12 equal monthly instalments, payable a the end of ech month? What ithe monthly instalment? Soaton Preven Vale = £80000, Rat ofinteret = 1% per month Time = 12 month Preen Value = Annuity x PVAF ine “Annuity = 80000/12551, Annuity = €7108, | (8. tf you invest £500 today ats compounded interes of percent, Wht willbe future value ser 75a! ‘ Solution: Present Value = 85,000, Rate offnerest = 9% Time 75 years, Future Vale = Preset Value CVE Since the CVE able as value ofS years the fture vale expression may be tated a: ture Vale» 5,000 (14.09 (14,09) (Gee table Al) = 5000743578 «86231 = 03205960, ' oe 3 @ ADB) 22 6 s 4 ‘ ‘ { {SUOUOCObbodd divided 4.18 J Financia Literacy © tafe acm terme govt eg Solution: os 3.00 per sare to 402 pr shar ovr period of years what Present vale = 3 ature vale» 4.02 Time=6yeun Rateof growth =? Future ale» reer vale (Leg* (lope amn= 134 sTSe mn epou ar hee inconpund eA. eve (Q10-Mz Reet Lal wants wo buy house thats crety eval in the mare st £50.00, bt He Saeed th on Howes, He has ht He wal be lea bya et the Ee ceitaon respite pre ef ibe 8 peryea wha peed pe Solution: Present ale of house = 850000 Rate ofineren = 6% Time = 2 year, f=? FV=PVxCVF ag, = 850,000 1.124 = 195,400. ‘So the expected price fer 2 years wil be 89,5 400, (Q11.M. Amar Singh deposits €10,00 fora period of two years t per annum interest compounded quater How mach money wil be with Me, Ama Slagh afer to yeas? Solution: In this case interest is compounded quarterly 1 iter ee willbe divided by 4,and ime peciod wil be multiply by 4. Therefore, willbe 2 year times 4=8 prods, Prevent Value = 210000 Ref aaw, 4 Time= 244-8 “The Future Value wil be clelated as below: V=PVxCVEa By referring table, A-1, (Giver Inthe appendix) the combination of 2% interes ate with 8 periods is 172 ee eee Time Val of Money | 4.19 FV = PVXCVF uy C FV» 10000 CVF pay ‘hereon, vet 1 tree dpi ak tpg 67 et 3 amped wn Fd el ene one he ep saat te tnd etree peo ‘Solution: The FV of an annuity may be calculated by asing the following equation: PV Anownte Aay CV om rae CVF ne 398 Tet, "Washo ss¥s=Ban00 (1st gtd 20nd ny Mr ‘tmnt 0000 back er Ferbowlong le ony be pene bck phe adenoma A Senin Wear he Sods tine pid wiht no 8 0 wl acme {Stenos oh ps amp ay Fv=toom Fv-tmo af = 108 1V=P CF, Leptin retin en te pen 840«800* Cv, rcerng Table 2) 000 rrp 's™ ano00 715 Wefound te ale 218 inthe 108 roby wing the uble 1, Theale doses t0 215 afew year Therefore, Mr Aj wl get Back 43,0 back in § ea tie period (QU4Mr Shanta took x peronalloan of 300,00 at 12% pa. Te lo i be epi in fe equ ‘nna salen starting rom heen ofthe fs yar Cause the mount ofeach eel neal insalment. Solution: PY=AXxPVFA,,«) 300000 = Ax PVFA ins (see Tale) sonor0 5 ean: ARS ears ‘So.the anna instalment ibe of 4217754.20 | Fin (Q15.Me Aoki tikey to get 200 Sime rete 12.00 fer 3 yas, Witt vale son tL. preset ve ifthe Solution: PV=FV PVE, PV «2.000% PVF igs = 2000 x(0751) = tsi (6 Mr. Haris depositing 125400 nou Sean oof tng heme xan ine te f9% pa. Find the PV of anuiy, Solotion: PY ofan annuity = 25000 PVFA ga) = 25000% 3.89 7250 So the present value of nny is 97240 Practical Exercise (2) Student wil se the interstate calulitoro find ot the amount of neet paid on oa swell as ‘comparing the diferent interest rates The interest rate cakcultorigven on diferent bse soho, + hups:/iceataxin/ssimple compound intces- Aagtuay 8 jo A 6 vORRROED oUHS emg pa on me Not Rs CmpR ANON AH PIR GRE HE HEv : 4.26 | nancial Literacy Tie Vale of Money| 4.27 ». : ‘ ear x, Me Shi whe calle the presen vale he ney consisting ofa eas inflow of 0 oe CS 2 % ‘ eo z)® vwendnies DAD a 3| 3 nee ae ee = Xat » _ pia cal % ak Aol = | rate “SO = ” Calculation of PV | fomatnine [BET W ae ‘ ‘Annually | ‘ 2 ok Future Value 0000 |? fate of interest 10% | [es : f - Perio Years 3 | 79 Z RS ee | | ane ithepanrets ~~ Ex-7. Seema want to invest in an investment opportanity that wil give her 8100000 on maturity afer || Calculation of PV - ate tebe Hai ‘Annually \« Future Value ° pane 3 Rate of Interest 10% al | 6 Petiod/ Years a E male PMT -10000 w | i I Pv 3 24,868.52] | a a < 2 a Type is taken as 0 > ciate | | sis vice. alle a | x3, MR. Aria aie lot of 90000 from bank interest eof 10 for years Thee 2 * | | Storia egal insalinens Clete he iaalimen