Download - Session 12 - Slides
-
8/7/2019 Session 12 - Slides
1/46
Session 1
Basics of
Financial Planning
-
8/7/2019 Session 12 - Slides
2/46
-
8/7/2019 Session 12 - Slides
3/46
Financial Planning and ItsBenefits
Personal financial planning - Process of managingmoney 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 worriesobtained by looking to the future. 1-2
-
8/7/2019 Session 12 - Slides
4/46
2001 2002 2003 2004 2005 2006 2007 2008 2009
0
100
200
300
400
500
600
700
800
900
1000
CFP Professional Growth in India
starting year 2001
year
number
-
8/7/2019 Session 12 - Slides
5/46
The Financial PlanningProcess
Determine your current financialsituation/financial health.
Develop and define your financial goals.
Identify alternative courses of action
Evaluate your alternatives.
keeping in mind Flexibility, Liquidity,
Protection and minimisation of taxes
Create and implement your financial actionplan.
Review, reevaluate and revise your plan. 1-3
-
8/7/2019 Session 12 - Slides
6/46
-
8/7/2019 Session 12 - Slides
7/46
Every Financial DecisionInvolves Evaluating Types of Risk
Inflation risk.
Rising prices cause lost buying power.
Interest-rate risk.
Effect costs of borrowing and rate of return.
Income risk.
The loss of a job.
Personal risk.
Health, safety, or costs.
Liquidity risk.
Higher return may mean less liquidity.
1-5
-
8/7/2019 Session 12 - Slides
8/46
-
8/7/2019 Session 12 - Slides
9/46
Developing Personal FinancialGoals
Types of financial goals include those...
Influenced by the time frame in which you wantto achieve your goals.
Influenced by the financial need that drivesyour goals.
Timing of goals.
Short-term, intermediate and long-term goals.
Goals for different financial needs
Consumer product goals, etc.
1-7
-
8/7/2019 Session 12 - Slides
10/46
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
-
8/7/2019 Session 12 - Slides
11/46
Influences on Personal FinancialPlanning
Adult life cycle stage.
Marital status, householdsize, and employment.
Major events.
Graduation, marriage, children, retirement, etc.
Values.
What values are important to you?
Global influences
Life situation and personal
values
1-9
-
8/7/2019 Session 12 - Slides
12/46
Individual's Financial Life
cycle
SOURCE:
https://static.flatworldknowledge.com/sites/all/files/imagecache/book/
27984/fwk-collins-fig14_007.jpg
-
8/7/2019 Session 12 - Slides
13/46
Changing EconomicConditions
Consumer The value of the rupeeprices changes in inflation.
Consumer The demand for goods andspending services by individuals and
households.
Interest rates The cost of money; cost ofcredit when you borrow; returnon your money when you saveor invest.
1-10
-
8/7/2019 Session 12 - Slides
14/46
Changing Economic
Conditions (continued)
Money Supply The dollars available forspending in our economy.
Unemployment The number of individualswithout employment who arewilling and able to work.
Housing starts Number of new homes beingbuilt.
1-11
-
8/7/2019 Session 12 - Slides
15/46
-
8/7/2019 Session 12 - Slides
16/46
Opportunity Costs and Financial ResultsEvaluated When Making Decisions
Personal
Opportunity Costs
(time, effort, health)
FinancialOpportunity Costs
(Interest, liquidity,
safety )
Financial
Acquisitions
(automobile,
home, college
education,
investments,insurance,
retirement fund)
1-13
-
8/7/2019 Session 12 - Slides
17/46
Principles of PersonalFinance 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
-
8/7/2019 Session 12 - Slides
18/46
-
8/7/2019 Session 12 - Slides
19/46
Financial Literacy andFinancial Planning Financial literacy can be defined as the ability to
effectively evaluate and manage onesfinances inorder to make prudent decisions toward reaching life
goals. A professional, such as a CPA or other financial
advisor, can be your partner in financialsuccess. Heor she will gain an intimate knowledge of your
finances and can providemany services beyond taxpreparation, such as financial planning and eldercareguidance.
If you fail to plan, you plan to fail.
-
8/7/2019 Session 12 - Slides
20/46
Time Value of Money
Increases in an amount of moneyas a result of interest earned.
Saving today means more moneytomorrow. Spending means lost interest.
Saving and spending decisions involveconsidering the trade-offs. Current needscan make spending worthwhile.
1-14
-
8/7/2019 Session 12 - Slides
21/46
How Simple Interest isComputed
Simple Interest.Amount in savings x annual interest rate xtime period equals the interest.
Rs.100 x 5% x 1 (1 year)100 x .05 x 1 = Rs.5.00
In one year you have Rs.100 in principle plusRs 5.00 in interest for a total of Rs.105 at theend of the year.
1-15
-
8/7/2019 Session 12 - Slides
22/46
Future Value
Future value is the amount to which currentsavings will increase based on a certaininterest rate and a certain time period.
Future value is also called as compounding -earning interest on previously earnedinterest.
Future value can be computed for a singleamount or for a series of deposits.
1-16
-
8/7/2019 Session 12 - Slides
23/46
Present Value
The current value for a future amount based ona certain interest rate and a certain time period.
Present value calculations are also called
discounting.
The present value of the amount you want inthe future will always be less than the future
value. Present value can be computed for a single
amount or for a series of deposits.
1-17
-
8/7/2019 Session 12 - Slides
24/46
Components ofFinancial Planning
Obtaining
Planning
Saving
Borrowing
Spending
Managing risk Investing
Retirement and estate planning
1-18
Components ofFinancial PlanningComponents of
Financial Planning
-
8/7/2019 Session 12 - Slides
25/46
Developing a FlexibleFinancial Plan
A financial plan is a formalized report that...
Summarizes your current financialsituation.
Analyzes your financial needs.
Recommends future financial activities.
Your financial plan can be created by you,with assistance from a financial planner, ormade using a money management softwarepackage.
1-19
-
8/7/2019 Session 12 - Slides
26/46
Implementing Your FinancialPlan
Develop good financial habits.
Use a well conceived spending plan to helpyou stay within your income, while allowing
you to save and invest for the future.
Have appropriate insurance protection toprevent financial disasters.
Become informed about tax and investmentalternatives.
Study personal finance.
1-20
-
8/7/2019 Session 12 - Slides
27/46
mp ement ng our nanc aPlan
(continued)
Achieving your financial objectivesrequires two things.
A willingness to learn.
Appropriate information sources (see AppendixA).
Current periodicals.
Financial institutions.
Courses and seminars.
Personal financial software.
The World Wide Web. 1-21
-
8/7/2019 Session 12 - Slides
28/46
Lucky You
Suppose you just won a Rs.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
-
8/7/2019 Session 12 - Slides
29/46
Planning for SuccessfulMoney Management
Daily spending and saving decisions are theheart of financial planning.
Decisions must be coordinated with needs,
goals, and personal situations. Money management is the day-to-day
financial activities needed to manage
personal economic resources, while workingtoward long-term financial security.
3-2
-
8/7/2019 Session 12 - Slides
30/46
Opportunity Cost andMoney Management
Spending money on current living expensesreduces the amount you can save and invest.
Saving and investing for the future reduces the
amount you can spend now.
Buying on credit ties up future income.
Using savings for purchases results in lost
interest and depletes savings.
Comparison shopping can save money buttakes valuable time.
3-3
-
8/7/2019 Session 12 - Slides
31/46
MajorMoney Management Act v t es
Creating and
implementing
a plan for
spending,and saving
(budgeting).
Creating
personal
financial
statements(balance
sheets and
cash flow
statementsof income
and
outflow).3-4
Storing
and
maintaining
personalfinancial
records
and
documents.
-
8/7/2019 Session 12 - Slides
32/46
Benefits of an OrganizedSystem ofFinancial Records
Handling daily business affairs, includingpayment of bills on time.
Planning and measuring financial progress.
Completing required tax reports.
Making effective investment decisions.
Determining available resources for currentand future buying.
3-5
-
8/7/2019 Session 12 - Slides
33/46
What to Keep in YourHome File
Items you refer to often.
Personal and employment records.
Money management records.
Tax records.
Financial services records.
Consumer purchase, auto and credit records. Housing records.
Insurance records.
Investment records. 3-6
-
8/7/2019 Session 12 - Slides
34/46
What to Keep in a SafeDeposit Box
Safe deposit box is for records that would behard to replace.
Birth, marriage and death certificates, copy of will
Citizenship and military papers.
Adoption and custody papers.
Serial numbers and photos of valuables.
CDs and credit and banking account numbers.
Mortgage papers and titles.
List of insurance policy numbers.
Stock and bond certificates.
3-7
H
-
8/7/2019 Session 12 - Slides
35/46
How Long to KeepRecords
Birth certificates, wills, and Social Securityinformation should be kept indefinitely.
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.
Copies of tax returns and supporting datashould be kept six years.
3-9
-
8/7/2019 Session 12 - Slides
36/46
Purpose of PersonalFinancial Statements
Report your current financial position inrelation to the value of the items you own andthe amounts you owe.
Measure your progress toward your financialgoals.
Maintain information on your financial
activities. Provide data you can use when preparing tax
forms or applying for credit.
3-10
omponen s o a a ance
-
8/7/2019 Session 12 - Slides
37/46
omponen s o a a anceSheet
(net worth statement)
Assets - what you own.
Liquid assets.
Real estate.
Personal possessions.
Investment assets.
Liabilities - what you owe
Current liabilities (< 1 year).
Long term liabilities.
Compute your net worth.
Assets minus liabilities. 3-11
-
8/7/2019 Session 12 - Slides
38/46
Components of a CashFlow
Statement
Shows inflow, outflow for a given timeperiod.
Record inflow.
Net income from employment.
Savings and investment income.
Other sources.
Record cash outflows.
Fixed and variable expenses.
Net cash flow can be a surplus or a deficit.
Use this statement as a basis for creating a 3-12
-
8/7/2019 Session 12 - Slides
39/46
-
8/7/2019 Session 12 - Slides
40/46
-
8/7/2019 Session 12 - Slides
41/46
-
8/7/2019 Session 12 - Slides
42/46
-
8/7/2019 Session 12 - Slides
43/46
Characteristics of SuccessfulBudgeting
Well planned.
Realistic.
Flexible.
Clearly communicated.
3-17
-
8/7/2019 Session 12 - Slides
44/46
-
8/7/2019 Session 12 - Slides
45/46
M M &
-
8/7/2019 Session 12 - Slides
46/46
Money Management &Achieving Financial Goals
Balance Sheet reports current financialposition
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