Basics of Financial Planning

Session 1

Financial Planning and Its Benefits 

Personal financial planning - Process of managing money to achieve personal economic satisfaction. Advantages of personal financial planning: 

1) Increased effectiveness in obtaining, using, and protecting your financial resources. 2) Increased control of your financial affairs. 3) Improved personal relationships. 4) A sense of freedom from financial worries obtained by looking to the future.

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Liquidity. Develop and define your financial goals. Identify alternative courses of action Evaluate your alternatives.The Financial Planning Process Determine your current financial situation/financial health. reevaluate and revise your plan. 1-3 .  keeping in mind Flexibility. Protection and minimisation of taxes Create and implement your financial action plan. Review.

What you give up when you make a choice ‡The cost. or trade-off of a decision.  What opportunity costs do you have from being a student at IILM? 1-4 .Consequences of Choices: Opportunity Cost ‡Opportunity cost . cannot always be measured in monetary terms Sometimes the cost is your time.

safety.  Liquidity risk.  Higher return may mean less liquidity. 1-5 .  The loss of a job.  Effect costs of borrowing and rate of return.  Rising prices cause lost buying power.  Income risk.  Personal risk.  Health.Every Financial Decision Involves Evaluating Types of Risk  Inflation risk.  Interest-rate risk. or costs.

 Financial planners. online sources. accountants. insurance agents. ‡ The internet. bankers.Financial Planning Information Sources ‡ Printed materials. lawyers and tax preparers. ‡ School courses and educational seminars. 1-6 . ‡ Financial institutions. computer software. ‡ Financial specialists.

 Goals for different financial needs  Consumer product goals.Developing Personal Financial Goals  Types of financial goals include those.. Influenced by the financial need that drives your goals. intermediate and long-term goals. etc.  Influenced by the time frame in which you want to achieve your goals.   Timing of goals.  Short-term. 1-7 ..

Goal-Setting Guidelines      Goals should be realistic Goals should be stated in specific terms Goals should have a time frame Goals should indicate the action to be taken Discuss some of your goals 1-8 .

retirement. children. etc.  Marital status. Major events. and employment. marriage. What values are important to you? 1-9  Values.   Global influences Economic conditions  .   Graduation.Influences on Personal Financial Planning Life situation and personal values  Adult life cycle stage. household size. 27984/fwk-collins-fig14_007.Individual's Financial Life cycle SOURCE: https://static.jpg .

The demand for goods and services by individuals and households. cost of credit when you borrow.Changing Economic Conditions Consumer prices Consumer spending The value of the rupee changes in inflation. return on your money when you save or invest. 1-10 Interest rates . The cost of money.

Changing Economic Conditions (continued) Money Supply The dollars available for spending in our economy. The number of individuals without employment who are willing and able to work. 1-11 Unemployment Housing starts . Number of new homes being built.

such as the Dow Jones Average or the S&P 500.Changing Economic Conditions (continued) GDP: Gross Domestic Product Total value of goods and services produced in a country. Trade balance Market indexes 1-12 . The relative value of stocks as represented by the index. Difference between a country¶s exports and imports.

investments. health) Financial Opportunity Costs (Interest. home. effort. liquidity.Opportunity Costs and Financial Results Evaluated When Making Decisions Personal Opportunity Costs (time. insurance. retirement fund) 1-13 . college education. safety ) Financial Acquisitions (automobile.

Principles of Personal Finance ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Risk-Return Trade off The Time Value of Money Diversification reduces risk All risk is not equal Investment markets are competitive Taxes affect financial planning decisions Liquidity is important Very important to make a financial plan Knowledge is very important Time dimension of investing Agency problem .

Session 2     Financial Planning and Financial Literacy Measuring your financial health Making a financial plan Time value of money .

Financial Literacy and Financial Planning ‡ Financial literacy can be defined as the ability to effectively evaluate and manage one¶sfinances in order to make prudent decisions toward reaching life goals. ‡ ‡ If you fail to plan. such as a CPA or other financial advisor. can be your partner in financialsuccess. such as financial planning and eldercare guidance. He or she will gain an intimate knowledge of your finances and can providemany services beyond tax preparation. you plan to fail. . A professional.

Spending means lost interest. Current needs can make spending worthwhile. 1-14 .  Saving and spending decisions involve considering the trade-offs.  Saving today means more money tomorrow.Time Value of Money  Increases in an amount of money as a result of interest earned.

Rs.05 x 1 = Rs. 1-15 . Amount in savings x annual interest rate x time period equals the interest.How Simple Interest is Computed  Simple Interest.00 in interest for a total of Rs.100 x 5% x 1 (1 year) 100 x .100 in principle plus Rs 5.5.00 In one year you have Rs.105 at the end of the year.

Future value is also called as compounding earning interest on previously earned interest. Future value can be computed for a single amount or for a series of deposits.Future Value  Future value is the amount to which current savings will increase based on a certain interest rate and a certain time period.   1-16 .

Present Value  The current value for a future amount based on a certain interest rate and a certain time period. Present value can be computed for a single amount or for a series of deposits. The present value of the amount you want in the future will always be less than the future value. 1-17    . Present value calculations are also called discounting.

Components of Financial Planning ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Obtaining Planning Saving Borrowing Spending Managing risk Investing Retirement and estate planning 1-18 .

1-19 .Developing a Flexible Financial Plan  A financial plan is a formalized report that..  Summarizes your current financial situation.. or made using a money management software package. Recommends future financial activities. with assistance from a financial planner. Analyzes your financial needs.    Your financial plan can be created by you.

Implementing Your Financial Plan  Develop good financial habits. while allowing you to save and invest for the future. Study personal finance. Have appropriate insurance protection to prevent financial disasters.  Use a well conceived spending plan to help you stay within your income. 1-20    . Become informed about tax and investment alternatives.

Courses and seminars.Implementing Your Financial Plan (continued)  Achieving your financial objectives requires two things. Personal financial software. Financial institutions. 1-21 . Current periodicals. Appropriate information sources (see Appendix A). A willingness to learn. The World Wide Web.

100 million lottery and you are given the choice of taking a lump sum or payments over 20 years. Which would you do? Why? 1-22 .Lucky You  Suppose you just won a Rs.

Decisions must be coordinated with needs.   3-2 .Planning for Successful Money Management  Daily spending and saving decisions are the heart of financial planning. while working toward long-term financial security. goals. and personal situations. Money management is the day-to-day financial activities needed to manage personal economic resources.

3-3 . ‡ Saving and investing for the future reduces the amount you can spend now. ‡ Buying on credit ties up future income.Opportunity Cost and Money Management ‡ Spending money on current living expenses reduces the amount you can save and invest. ‡ Comparison shopping can save money but takes valuable time. ‡ Using savings for purchases results in lost interest and depletes savings.

3-4 . Creating and implementing a plan for spending.Major Money Management Act v t es Storing and maintaining personal financial records and documents. Creating personal financial statements (balance sheets and cash flow statements of income and outflow). and saving (budgeting).

3-5 . including payment of bills on time. ‡ Determining available resources for current and future buying. ‡ Planning and measuring financial progress.Benefits of an Organized System of Financial Records ‡ Handling daily business affairs. ‡ Making effective investment decisions. ‡ Completing required tax reports.

Tax records. 3-6        . Investment records. auto and credit records. Insurance records.  Personal and employment records. Housing records. Money management records. Financial services records. Consumer purchase.What to Keep in Your Home File  Items you refer to often.

Serial numbers and photos of valuables. 3-7        Coins and other collectibles.  Birth. marriage and death certificates. copy of will Citizenship and military papers. List of insurance policy numbers. Mortgage papers and titles. Stock and bond certificates. Adoption and custody papers. .What to Keep in a Safe Deposit Box  Safe deposit box is for records that would be hard to replace. CDs and credit and banking account numbers.

and Social Security information should be kept indefinitely. wills.How Long to Keep Records  Birth certificates. Copies of tax returns and supporting data should be kept six years. Keep records on personal property and investments as long as you own them. Keep documents related to the purchase and sale of real estate indefinitely.    3-9 .

Purpose of Personal Financial Statements ‡ Report your current financial position in relation to the value of the items you own and the amounts you owe. ‡ Provide data you can use when preparing tax forms or applying for credit. 3-10 . ‡ Maintain information on your financial activities. ‡ Measure your progress toward your financial goals.

Personal possessions. Real estate. Current liabilities (< 1 year). Investment assets.  .what you own. 3-11 ‡ Liabilities . Long term liabilities.Components of a Balance Sheet (net worth statement) ‡ Assets . Assets minus liabilities.     Liquid assets.what you owe   ‡ Compute your net worth.

Net cash flow can be a surplus or a deficit.Where Did Your Money Go? Components of a Cash Flow Statement ‡ Shows inflow. outflow for a given time period.  Record inflow. . 3-12    Record cash outflows. saving and investment plan.    Use this statement as a basis for creating a spending.  Net income from employment. Fixed and variable expenses. Other sources. Savings and investment income.

Americans tend to be poor savers. shows how well short term assets cover short term debt. higher ratio is good Debt payments ratio = monthly credit payments/take-home pay. compares debt to net worth.Ratios for Evaluating Financial Progress  Debt ratio = total liabilities/net worth. try to keep ratio below 20% Savings ratio = monthly savings/gross income. higher ratio is good Liquidity ratio = liquid assets/monthly expenses. shows # of months that living expenses can be paid. shoot for at least 10% 3-13     . lower debt ratio is best Current ratio ± current assets/current liabilities.

3-14     . A budget helps you«  Live within your income. which was a record of how you spent money in a past time period. Develop wise financial management habits. Prepare for financial emergencies. Spend your money wisely. a budget is a plan for spending in the future. Reach your financial goals.Purposes of a Budget  In contrast to cash flow. such as for the next month.

Creating and Implementing a Budget ‡ Assessing your current situation. Estimate income from all sources. Determine your needs. 1 2 3 4 Budget set amounts that you are obligated to pay.    Measure your current financial position. Set financial goals. . values and life situation. Budget amount for an emergency fund. These are your fixed expenses. Steps in the budgeting process. periodic expenses and financial goals. BE SURE TO 3-15 BUDGET FOR SAVINGS.

3-16 . 7 Review your spending and savings patterns and evaluate whether revisions are needed in your savings and spending plans.Creating and Implementing a Budget ‡ Steps in the budgeting process (continued). Record actual amounts for inflows and outflows. These are your variable expenses.  6 Deficits and surpluses. 5 Estimate amounts that are to be spent for household and living expenses. comparing actual amounts with budgeted amounts to determine variances.

‡ Clearly communicated.Characteristics of Successful Budgeting ‡ Well planned. ‡ Flexible. ‡ Realistic. 3-17 .

Selecting a Budgeting System 1) Mental budget ± it is all in your head 2) Physical budget-use envelopes for your expenses such as food. 3) 4) Written budget ± use spreadsheets Computerized budget 3-18 . rent.

make periodic deposits Write a check each payday as a % of income and deposit into savings 3-20    . I won·t spend it   Payroll deductions into saving accounts Automatic payments from checking into savings accounts or mutual funds Saving regularly in SIP plans Also save coins.Savings Techniques-If I don·t see it.

Money Management & Achieving Financial Goals  Balance Sheet reports current financial position Cash Flow Statement shows cash you have received and spent in the past Budget helps you to spend and save to achieve financial goals   3-21 .

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