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By Group 4 Section A Mohammad Arshad Islam Saba Rais Mitesh Parmar Danish Haidar Sakshi Khurana 41 59 75 95 145
Personal financial planning is the process of managing your money to achieve personal economic satisfaction. It is the process of systematically planning your finances towards achieving your short-term and long-term life goals. Financial planning is the process of developing a personal roadmap for your financial well being.
The inputs to the financial planning process are: your finances, i.e., your income, assets, and liabilities, your goals, i.e., your current and future financial needs and your appetite for risk.
The financial planning process Step 1: Identify your current financial situation Step 2: Identify your goals Step 3: Identify financial gaps Step 4: Prepare your personal financial plan Step 5: Implement your financial plan Step 6: Periodically review your plan .
Enables maintenance of an optimum balance between income and expenses. Helps reduce tax liability.Benefits of financial planning Helps monitor cash flows and reduces unnecessary expenditure. Maximizes returns from investments. Helps boost savings and create wealth. .
Lastly. Reviews insurance needs and therefore also ensures that dependents are financially secure in the unfortunate event of death or disability. it also ensures that a will is made.Contd« Creates wealth and ensures better wealth management to achieve life goals. Financially secures retirement life. .
Helps achieve peace of mind .
Personal Financial Planning Lifecycle Income Income Stream Retirement/ Estate Savings/ Investment Liability/Insurance Asset Acquisition 10 20 30 40 50 Age 60 70 80 Tax Benefits .
Case Study .
Building your financial plan Dave and Sharon Thompson are 30 years old They have 2 children who are 5 & 6 years old Dave·s salary is currently $48000 per year They have not been able to save any money as Dave·s income is just enough to cover their expenses Sharon has just taken up a part time position at a local department store at a salary of $12000 per year Assess their current financial position .
or Low) Money Owed Salary Amount nil $100000 $60000 Financial Goals Goal 2. Pay for Goal 1.CURRENT FINANCIAL POSITION Major Assets Savings (High. Medium. Purchase children's college new car for Sharon education in 12-17 this year years from now save $500 each save $300 each month month Goal 3. Set aside money for retirement consult a financial advisor How to Achieve the Goal .
maintenance.Personal Cash Flow Statement Cash Inflows Salary after taxes per month This Month $4.000 $900 60 80 70 500 160 180 300 1.370 $630 .000 Total Cash Inflows Cash Outflows Rent/Mortgage Cable TV Electricity and water Telephone Groceries Health care insurance and expenses Clothing Car expenses (insurance. and gas) Recreation Credit card minimum payments Other Total Cash Outflows Net Cash Flows $4.000 20 100 3.
000 Total Assets $1.Balance Sheet Assets Liquid Assets Cash Checking account Savings account Total liquid assets Household Assets Home Car Furniture Total household assets Investment Assets Stocks Bonds Mutual Funds Total investment assets $300 1.000 9.000 $1.14.00.12.700 $2.000 3.000 $1.000 .
Liabilities and Net Worth Current Liabilities Loans Credit card balance Total current liabilities Long-Term Liabilities Mortgag e Car loan Total long-term liabilities Total Liabilities 2.000 100.000 Net Worth $12.000 .000 $100.000 $2.000 $102.
Savings for child education Their oldest child is 6 years old and will begin college in 12 years They are investing $300 per month in the savings account earning 5% p. They also want to know the accumulated savings if they invest $400 per month . interest They wonder how much will they accumulate at an interest rate of 7% p.a.a.
302 $3600 7% 12.402 $4800 7% 12.00 $57.00 $76.600 per Year) Amount Saved Per Year Interest Rate Years Future Value of Savings $3600 5% 12.800 per Year) Amount Saved Per Year Interest Rate Years Future Value of Savings $4800 5% 12.00 $64.Savings Accumulated Over the Next 12 Years (Based on Plan to Save $3.398 Savings Accumulated Over the Next 12 Years (Based on Plan to Save $4.865 .00 $85.
000 for their children's college education in 12 years. how much would they have to save by the end of each year to achieve this goal.If the Sampsons set a goal to save $70. assuming a 5 percent annual interest rate? Calculator: Savings Needed Each Year Future Value Interest Rate Years $70.78 .397.000 5% 12 Savings Needed Each Year $4.
Tax Planning Dave·s earnings are $48000 Sharon·s earnings are $12000 Child tax credits are currently $1000 per child The Sampsons will pay $6300 in home mortgage They will pay $1200 in real estate taxes They will make charitable contributions of $600 per year They file for tax jointly and income tax rate is 15% Assess their income tax liability .
785 $51.000 $5.000 .200 600 $8.Calculating Tax Liability Gross Income Retirement Plan Contribution Adjusted Gross Income Deductions Interest Expense Real Estate Taxes Contributions Exemptions ($3.900 $6.200 each) Taxable Income Tax Rate Tax Liability Before Tax Credits Child Tax Credit(s) Tax Liability 15% $7.000 $60.300 1.100 $60.785 2.
Managing credit The Sampsons have by now saved $2000 They are currently earning an interest of 5% on their savings. They have been carrying a balance of $2000 on their credit card The credit card is charging them 18% They want to evaluate the return they are receiving from their savings versus the interest expenses they are accruing on their credit card .
000 $360.Savings Interest rate earned on savings Savings balance 5% $2.00 Paying Off Credit Balance Interest rate paid on credit Credit balance Annual interest paid on credit 18% $2.00 .000 Annual interest earned on savings $100.
Suggestion The interest owed on credit card exceeds the interest earned on deposits by $260 He should use the available balance to pay off his credit bill immediately He would lose the opportunity to earn $100 but will also be able to avoid the liability of $360 Thus his wealth would be higher by $260 .
Personal Loan The Sampsons have saved $500 a month for 10 months to be used as down payment for the purchase of their new car The car is priced at $25000 plus 10% sales tax They shall receive $1000 trade-in credit on their existing car They would like to allocate maximum $500 per month towards loan payment of the new car The annual interest rate is currently 7% .
Three-Year (36.250 Monthly payment $625 $485 $400 .250 $25.250 $25.250 $25.Four-Year (48.250 $20.Five-Year (60month) Periods month) Periods month) Periods Interest rate Total finance payments Total payments including the down payment and the trade-in 7% 7% 7% $20.250 $20.
Purchasing and financing a home The Sampsons have bought a home for $90000 at a 30 years mortgage The interest rate is 9% After 1 year the interest rates have fallen to 8%. The cost of refinance is $1400 They are in the 25% tax bracket Should they refinance the loan? .
16 Mortgage Payments after Refinancing Mortgage loan Interest rate Years Loan payment $90.39 .000 8% 30 $660.Current Mortgage Payments Mortgage loan Interest rate Years Loan payment $90.000 9% 30 $724.
Savings on refinancing Current mortgage payment New mortgage payment Monthly savings Annual savings $724.77 $765.32 $956.16 $660.26 Marginal tax rate Decrease in taxes Annual savings after-tax Years in house after refinancing Total savings 25% $191.28 .39 $63.58 29 $27740.
Investment Decision The Sampsons save $300 per month for their children·s education They are currently investing this amount in bank CDs earning an interest of 5% Investment in a particular stock shall yield 2% in weak market conditions and 9% in strong market conditions What should they do? .
66 $48.600 $3.59 .4121 9% 20.301.9171 2% 13.600 Annual return FVIFA (n=12 years) 5% 15.283.600 $3.1407 Value of investments in 12 years $57.506.52 $72.Savings Accumulated Over the Next 12 Years CD: Annual Return Weak Stock Strong Stock Market Market Conditions Conditions = 5% Amount invested per year $3.
8% 1.Investment in bonds Type of Bond Bond Yield offered Risk premium within bond yield 0.8% 8.5% 7.8% 2.8% 9.5% Treasury bonds AAA rated corporate bonds A rated corporate bonds BB rated corporate bonds CCC rated corporate bonds 7% 7.0% 0.5% .5% 0.
Suggestion Out of all the bonds only the Treasury bonds are risk free The other bonds have a risk premium which is subject to change over time The Sampsons should prefer either Treasury bonds or AAA rated bonds They should be risk averse and the risk premium is not enough compensation for the risk .
Retirement Planning Dave Sampson shall contribute $7000 of his salary per year The employer shall contribute $3000 The retirement funds will be invested in mutual funds The expected return is 7% and he hopes to retire after 30 years .
00% $5510 .44.Future Value of Annuity Contribution Years Annual rate of return Future value $10.44.607.00% $9.86 Monthly cash flows Future Value Rate of interest Cash Flows per month $9.607.000 30 7.86 7.
Pearson Publication .com Tata McGraw Hill Case Study.References www.moneycontrol.Personal Finance by Jeff Madura.
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