Chapter 3 Financial Management

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Chapter 3

Financial Management

Introduction
In contemporary life, money is a crucial factor for everyone’s daily living and for
conducting business in all sectors, whether public or private. Money serves as a medium for
acquiring resources or necessary factors for living or conducting business, including the four
essentials: land, buildings and equipment, and human labour. Therefore, financial planning and
understanding orderly and systematic financial management are essential for creating stability
and ensuring sustainable future security, thus protecting financial safety. In practice, financial
planning is a challenging task that most people struggle to accomplish, especially when various
factors impact financial planning, such as increasing desires and aspirations, leading to higher
expenses. Hence, learning financial management is necessary for planning quality spending.
Understanding various aspects of finance, the meaning of financial management,
financial planning, the use of capital in operations, investment alternatives for savings, and life
insurance can serve as guidelines for financial management planning. With patience,
perseverance, and determination, one can achieve the goals of financial management step by
step.

Definition of Financial Management


Management refers to the process of carrying out tasks or activities by utilising various
administrative resources to achieve operational results or success according to the
organisation's objectives or goals in an efficient, effective, economical, and maximally
beneficial manner for individuals, work, and the organisation.
The definition of money has been given in several similar ways by various authors, such
as:
• Methee Dulyachinda: Money is a magical entity that, once in our hands, allows us to
obtain anything except happiness and comfort.
• Surak Bunnak and Wanee Jongsirivivat: Money is something that everyone in
society accepts as a medium of exchange and a measure of the value of all kinds of
goods and services.
• Uthit Naksawat: Money is anything that people in society accept as a medium of
exchange at that time.
• Reay Tolfree: Money is anything accepted for the settlement of debts or that can be
spent directly without needing to be exchanged for something else.
• Wirat Sanguanwongwan: Money is anything generally accepted by people as a
medium of exchange and a legal tender for debt settlement.
In summary, financial management aims to achieve financial stability, which should
start with cultivating good saving and spending habits and financial discipline from today.
When entering the working age, one must know how to plan and allocate money sufficiently
for daily living expenses, future expenditures, and saving for retirement. Financial management
is, therefore, a crucial concept that can help navigate through life stages to achieve financial
success.

Concepts of Financial Management


Capital is considered a crucial factor for any general business. This is because capital
serves as a medium for acquiring the resources or production factors necessary for operations,
such as land, labour, machinery, and various equipment. Moreover, when a business succeeds
and generates profit, a portion of the profit, besides being the reward for the entrepreneurs, is
reinvested to expand the business. Thus, efficient financial management plays a vital role from
the inception of the business, through current operations, and into future growth.
Investment capital for business operations can come from various sources, either from the
business owner or through incurring debt. The effective use of investment capital, which
influences the success of the business, is reflected in the business's value (Value of the Firm).
This is demonstrated by the business's growth, which can be measured by its financial standing
and past performance, profitability, and risk. These are key factors in determining the business's
value. If a business can reduce risk and increase profitability, its value will rise. The factors
related to profitability and risk are as follows:
1. Type of Business: This factor indicates the ability to generate profit. A low-risk
business, such as a rice and curry shop, has fewer profit opportunities compared to a
high-risk business, such as shrimp farming, which, if successful, has higher profit
potential.
2. Business Size: Measured by the amount of investment. A large business requires more
capital than a small one. If unsuccessful, the losses are greater. Conversely, large
businesses have a higher profit potential due to advantages in production costs,
procurement of raw materials, and market reach.
3. Type of Fixed Assets: Investing in appropriate, efficient, and modern technology in
fixed assets leads to high productivity and, consequently, higher profits for the business.
4. Capital Funding: If a business lacks sufficient investment capital, it must seek
additional funding through borrowing, which requires repayment of principal and
interest. However, without the willingness to take on debt, the business's growth
potential is limited.
5. Financial Liquidity: Businesses must have sufficient working capital to avoid
operational interruptions. A lack of financial liquidity can lead to business failure;
therefore, careful financial planning is essential.
By understanding these concepts, businesses can better navigate financial management
to ensure stability and growth.

Utilisation of Operating Capital


Financial management involves two key principles: acquiring capital and utilising the
available capital to its maximum potential. This can be categorised into two main areas:
1. Investment in Fixed Assets (Fix Asset): Fixed assets are those with a useful life
exceeding one year (one accounting period), which can extend to 10-20 years. These assets
require significant investment to facilitate operations, such as machinery, vehicles, and
factories. The decision to purchase fixed assets should be meticulously planned to ensure the
assets provide value commensurate with the investment. This involves capital budgeting and
systematic planning steps:
1.1 Purpose of Asset Purchase: This involves determining how the asset will be used.
For instance, if a factory produces 500 cans of water daily but the market demand is 2,000 cans
per day, it necessitates purchasing additional machinery to meet the demand. The necessity of
acquiring the asset must be thoroughly evaluated.
1.2 Estimating Cash Flows: This includes assessing the payback period for the
investment. Entrepreneurs may use investment analysis tools, such as the Payback Period or
Net Present Value (NPV), to evaluate the project's feasibility by considering the cash flows
over the project's lifespan. These tools and methods will be detailed in subsequent sections.
2. Use of Working Capital: Working capital refers to the funds invested in the
business's current assets (short-term assets that can be converted within one year or one
accounting period), such as cash, bank deposits, receivables, and inventory. These assets are
continuously converted, as depicted in the following cycle:
Finished Goods
Work-in-Progress
(WIP)

Raw Materials,
Labour Costs, and Debtors
Production Costs

Cash

Figure 3-1 shows working capital.


Source: Thanin (1994)
From Figure 3-1, working capital is illustrated as follows:
The process begins with payments for raw materials, wages, and production expenses.
Once production is complete, the output becomes finished goods and work-in-progress
inventory. These items, when sold, can be categorised into different types: cash sales and credit
sales.
For cash sales of finished goods, cash is received immediately. For credit sales, finished
goods are converted into accounts receivable. Once accounts receivable are settled, the cash is
received again.
Working capital can be divided into two types:
2.1 Permanent Working Capital
This refers to the minimum level of working capital that a business needs to maintain
at all times. Examples include a minimum cash balance and accounts receivable that are
consistently overdue if the business has a credit sales policy. Although this type of working
capital is classified as working capital, it has a long-term nature. Therefore, the business must
secure long-term financing to ensure liquidity.
2.2 Fluctuating Working Capital
This is the working capital that a business needs intermittently for investing in current
assets that fluctuate periodically. For example, a factory producing canned rambutan will
purchase raw materials during the harvest season to match its production capacity, as rambutan
is a seasonal fruit. When the season ends, the raw materials will also be depleted. Alternatively,
if a product is in high demand, the business may need to hold more cash than usual. Once the
peak period ends, the excess cash requirement is no longer necessary.
For the use of capital in working assets, including cash, receivables, and inventory, the
following principles of managing working capital should be observed:
2.2.1 Cash Management
To ensure effective cash management, businesses should aim for the following:
• Synchronise Cash Inflows and Outflows: Ensure that cash receipts and payments are
aligned.
• Accelerate Cash Receipts: Collect payments promptly, especially for credit sales.
• Delay Cash Payments: Pay creditors slowly, such as by issuing crossed cheques
instead of paying with cash.
• Maintain Financial Discipline: Establish clear procedures for cash transactions, such
as paying small purchases in cash and larger amounts by cheque. Ensure cash receipts
are deposited into the bank and conduct regular account audits to monitor financial
status and prevent leakage.
2.2.2 Management of Credit or Accounts Receivable
Businesses must establish appropriate guidelines for managing credit, as accounts
receivable involve costs, profits, and risks. Since accounts receivable arise from credit sales,
businesses should set policies on the extent to which credit sales are permitted. Credit policies
should include:
• Define Credit Terms: Set appropriate credit periods for each customer.
• Apply the 5 Cs of Credit Evaluation: Similar to financial institutions, evaluate
customers based on the following factors:
a) Character: Assess the customer's spending habits and their responsibility in
repaying debts. Determine whether the customer is diligent or prone to financial
irresponsibility.
b) Capacity: Evaluate the customer's ability to work and predict their future
capability to generate income to repay debts.
c) Capital: Review the customer’s existing financial position to ensure it is stable.
d) Collateral: In some cases, businesses may require customers to provide
security, either in the form of assets or a guarantor, depending on the nature of
the credit being extended.
e) Condition: Analyse the economic environment to determine if it is appropriate
to extend credit.
2.2.3 Inventory Management
Effective inventory management involves maintaining an optimal level of inventory—
not too high and not too low. Excessive inventory can lead to high maintenance costs, while
insufficient inventory can result in stockouts or shortages of raw materials, disrupting
production. Therefore, inventory management should aim to control costs and ensure an
adequate supply. Proper control includes determining the appropriate order quantities
(Thanavut Pim, 2013: 113-117).

Financial Planning
4 Steps to Achieve Financial Stability and Independence
Step 1: Wealth Creation
"Wealth Creation" is the first hurdle to overcome if you aspire to financial
independence. To build wealth, one must consistently "earn, save, spend wisely, and invest"
until these practices become second nature. Create wealth for yourself by "planning your
spending," "managing debt," and "planning your savings." The core principle of wealth
creation is to remember that "every pound saved today is like having an additional pound to
build future wealth."
Step 2: Wealth Protection
Life presents various risks, including unforeseen events such as accidents or illness that
can affect you and your family at any time. Without proper planning, your accumulated assets
might be depleted due to unexpected risks. Therefore, it is prudent to seek methods for "Wealth
Protection" to safeguard your assets. Implementing "insurance planning" can help mitigate
financial losses, even though it may not eliminate all risks. Additionally, planning for
retirement from today is crucial to ensure you have sufficient funds to live comfortably in your
later years.
Step 3: Wealth Accumulation
In recent years, inflation has outpaced interest rates on savings accounts. Solely saving
money in a bank may not achieve the financial goals or wealth accumulation you desire, as
savings grow slower than prices and costs. Instead, consider letting your money work for you
through various investment opportunities. "Investment planning" becomes crucial, as investing
acts as a fast track to wealth. Starting early, following a well-designed plan, and focusing on
investment growth will help you reach your financial goals. Additionally, paying attention to
tax planning can further enhance your wealth, as "tax planning" reduces your tax burden,
leaving you with more money to save and invest. Exploring tax-advantaged savings and
investment options, such as long-term equity funds (LTF), retirement mutual funds (RMF), or
life insurance, can contribute to long-term wealth accumulation.
Step 4: Wealth Distribution
Once you have built and accumulated a certain level of wealth, it's time to consider how
to distribute it. Reflect on what assets you have, their value, and whether your heirs will receive
the legacy you intend to leave. "Wealth Distribution" is an essential step in wealth management,
as it ensures your accumulated wealth is allocated according to your wishes. This may include
donations to charities, foundations, or individuals in need, or during emergencies. The key to
effective wealth distribution is "estate planning," which ensures that your wealth is passed on
according to your intentions and helps secure the legacy for future generations (Stock Exchange
of Thailand, 2015).

Investment Options for Saving


Using future money for spending can lead to increased interest costs, which erodes the
real value of income over time. Savvy individuals, however, choose to save and invest the
remaining portion of their income, leading to increased financial growth and sufficient funds
for their needs without hardship.
Most people aspire to be wise investors, but investment carries risk. A poor decision
can result in the loss of savings rather than generating returns. Investors should thoroughly
research options, starting with allocating investment funds appropriately to their lifestyle.
Typically, it is advisable to maintain an emergency reserve covering about 3-6 months of
expenses to prevent liquidity issues.
Additionally, diversifying an investment portfolio can help spread risk while potentially
increasing returns. Today, there are various investment channels, each with different risks and
returns.

Investment Options
Investment risk is often correlated with potential returns, and assets can be classified into
three risk categories:
1) High-Risk (High Return)
o Stocks: The value of stocks can fluctuate due to various external factors.
Returns from stock investments come from dividends and profits from trading,
with the latter being tax-free. Stocks vary in types; for stable long-term returns,
consider investing in well-established companies with consistent dividend
payouts and moderate price fluctuations. For higher risk and short-term gains,
one might opt for stocks with significant price volatility. Keeping abreast of
news and market trends is essential; alternatively, investing through equity
mutual funds managed by experts is also an option.
o Derivatives: These are contracts whose value depends on the underlying asset,
which could be financial instruments like foreign exchange rates, bonds, or
common stocks, or commodities such as gold, oil, or rice. Derivatives are
primarily of two types:
a) Futures Contracts: Agreements to buy or sell an asset at a
predetermined price in the future. The buyer and seller are obligated to
fulfill the contract, but it can be offset by executing a counter-transaction
before the contract expires. Futures require less investment compared to
the actual asset value, thus presenting higher risk if predictions are
incorrect.
b) Options Contracts: Agreements allowing the buyer the right, but not
the obligation, to buy or sell the underlying asset at a specified price
within a certain period. If the buyer chooses to exercise the option, the
seller must comply. Both types of derivatives can be used for short-term
speculation or for hedging risks associated with primary assets.

2. Medium-Risk Investment Options (Moderate Returns)


1) Bonds
Bonds are debt instruments issued by government entities or private companies
to raise capital from investors. Common types include government bonds, state
enterprise bonds, and corporate bonds. Investors receive periodic interest payments
(coupons) at a fixed rate and the principal amount upon maturity, which could be 5, 10
years, or more. Bonds are ideal for those seeking stable returns over the medium to long
term. However, they tend to have lower liquidity. If market interest rates rise above the
bond’s coupon rate, the bond's price will fall, potentially resulting in a loss if the bond
needs to be sold before maturity.
2) Commodities
Investment in commodities has become increasingly popular due to rising prices.
Commodities are categorized into two main types:
o Finite Commodities: Includes resources like gold, copper, oil, natural gas, and
coal. These resources are limited and costly to replace. As they become scarcer,
their prices generally increase significantly. Investing in these commodities
often involves purchasing physical assets or investing through commodity
funds.
o Renewable Commodities: Includes agricultural products, which are produced
continuously and have growing demand due to increasing global population.
However, prices can be volatile due to factors like weather conditions, political
issues, and labour costs. Typically, investments in agricultural commodities are
made through commodity funds, though gold can be directly purchased for
speculation.
3) Mutual Funds
Mutual funds involve investing in various securities or assets through a mutual fund
management company (Asset Management Company). The company sets the investment
policy and manages the fund to achieve returns, which are then distributed to investors based
on their proportion of investment, represented by "investment units" provided by the company
as evidence. Mutual funds have varying levels of risk and return depending on their investment
policies, generally divided into three main types:
• Equity Funds: These focus on investing in stocks, typically 65-100% of the fund's
assets. The risk level is similar to investing directly in stocks, but there is an advantage
in that the fund is managed by investment experts, allowing investors to use a smaller
amount of capital. However, dividends received are subject to taxation.
• Bond Funds: The risk depends on the types of bonds the fund invests in. If the focus
is on government bonds, the principal is not lost, but the returns are lower compared to
funds that invest in corporate bonds.
• Mixed Funds: These invest 35-65% of their assets in stocks, with the remainder in
other securities. This results in returns and risks being at a middle level between equity
funds and bond funds.
4) Tax-Advantaged Mutual Funds
These funds are similar to regular mutual funds but offer the special benefit of tax
deductions if specific conditions are met. Investment units in these funds cannot be
transferred, pledged, or used as collateral. There are two types:
1. Long-Term Equity Fund (LTF): Invests at least 65% in stocks listed on the stock
exchange. Investors receive tax deductions if they hold the investment for at least 5
years (based on the calendar year, with each year counted separately). Units can be sold
back no more than twice per year.
2. Retirement Mutual Fund (RMF): Offers various investment strategies from low-risk
bond funds to high-risk equity funds. Tax benefits are available if investments are made
continuously, with a minimum annual purchase of 3% of income or 5,000 baht, but not
exceeding 15% of annual income or 500,000 baht. Investments must not be suspended
for more than 1 year, unless there is no income in that year. Units can be sold back
when the investor reaches 55 years old and has invested for at least 5 years.

If investors do not meet the conditions, they will not receive the tax benefits and may
have to repay the tax benefits received, with Long Term Equity Fund ( LTF) requiring
repayment for 5 years and Retirement Mutual Fund (RMF) requiring repayment with a 1.5%
monthly increase from April of the year the tax exemption was claimed. Additionally, capital
gains from selling units are subject to tax. Therefore, investors should carefully consider
whether they can meet the conditions before investing in these funds.
3. Low-Risk Group (Low Returns)
• Bank Deposits: Currently considered the lowest risk investment, as the government
provides deposit insurance. Therefore, depositors do not need to worry about losing their
principal, but the returns are very low. In some cases, the returns may be so low that they may
not keep up with inflation, leading to a potential loss of purchasing power. Since August 2012,
the government reduced the deposit insurance coverage to 1 million baht per depositor per
financial institution, meaning amounts exceeding this may be at risk if the financial institution
is poorly managed. Thus, bank deposits are not the best long-term investment choice but are
the safest option for new investors who do not have much experience.
• Life Insurance: Another investment form, life insurance, may not offer high returns
but provides risk protection. There are various types depending on the assessed risks, such as
critical illness insurance or health insurance. There are also life insurance products with savings
components or investment-linked insurance that may offer returns comparable to market
investments but with increased risks.
Principles of Asset Allocation for Risk Management
Allocating investments across multiple asset types is the best way to diversify risk.
Here, risk refers to the potential loss of principal due to various factors such as market volatility,
the management capability of the invested companies, currency depreciation from inflation,
liquidity issues leading to premature withdrawals, and risks from exchange rate fluctuations
and interest rate changes.
The most popular approach to managing risk through asset allocation involves
spreading investments across various channels. The guidelines for this practice are as follows:
• Avoid Concentration: Investors should not place all their funds into a single
investment option. Instead, they should diversify investments across different asset
types and securities, and across short, medium, and long-term periods appropriately.
• Avoid Over-Diversification: Investing in too many channels or spreading investments
too thinly can make it challenging to track prices and news related to those investments.
• Balance Risk and Return: Create a balance between investments with low risk and
guaranteed returns and those with higher risk and potentially higher returns. Allocate
proportions that align with your personal investment goals.
• Maintain Flexibility: Ensure that your investment portfolio is flexible enough to adapt
to changes in circumstances. Monitor economic and financial news regularly and adjust
your portfolio to align with the current situation.
This approach helps in managing risk by ensuring that investments are not overly concentrated
and by maintaining the ability to adapt to changing economic conditions.

Asset Allocation Based on Investment Capability


Given the inherent risks and complexities of investing, beginners should focus on
structuring their investment portfolios according to their risk tolerance. This involves
considering their financial capacity and understanding of investments. The allocation can be
divided into three stages:
1. Beginning Stage: Investors may have limited knowledge and experience, especially
those with a fixed income and limited savings. At this stage, the focus should be on
safety. Recommended allocation is 30% in stocks, 40% in bonds, and 30% in savings
deposits. For those who cannot monitor investments closely, investing in mutual funds
is advisable. This includes 30% in equity mutual funds and 40% in bond mutual funds,
allowing investors to diversify and learn from fund managers.
2. Intermediate Stage: As investors gain experience and become familiar with market
volatility and risk, they should adjust their portfolio to 50% stocks, 30% bonds, and
20% savings deposits. With a better understanding of investments and sufficient
savings, direct stock investments can be considered. Diversify across various industries
to mitigate risks. Continuous monitoring of economic and political news affecting
investments is necessary.
3. Advanced Stage: Investors who are confident in their knowledge and have a higher
risk tolerance should allocate 70% in stocks, 20% in bonds, and 10% in savings deposits
to maximize returns.
Age and Goals Considerations: The investment strategy should also consider the
investor's age, as different life stages come with varying income and expense profiles, affecting
risk tolerance and investment amounts. Investment goals are crucial; for retirement savings, a
lower-risk portfolio with consistent returns is ideal. For tax reduction, focus on L o n g Te r m
Equity Fund (LTF) and Retirement Mutual Fund (RMF) funds, while for profit generation,
prioritize high-return assets, understanding that higher risk accompanies higher returns.
Personal Preference: Align the investment strategy with personal traits. Those who
prefer less risk and minimal monitoring should invest primarily through mutual funds, managed
by experts. Conversely, those who enjoy challenges and regularly follow financial news may
prefer high-return investments, given their capacity to handle greater risk.
Emerging Investment Options: Investment opportunities are continually evolving,
with new and increasingly complex options emerging. Apart from traditional equity, debt, and
money markets, alternative investments can help diversify risk and enhance portfolio
efficiency. Investors should stay informed to identify and capitalize on better investment
opportunities.
1. Retirement Savings
Typically, people retire at an average age of 55-60 years. Statistics show that the
average life expectancy is 85 years for men and 90 years for women. This means that, on
average, individuals need to support themselves for 25-30 years during retirement. Given the
uncertainty of future events, it is crucial to save money to ensure financial stability in retirement
and reduce reliance on family members.
To determine how much money is needed for a comfortable retirement, it’s essential to
estimate future expenses and set savings goals accordingly.
2. Post-Retirement Expenses
As people age, certain expenses may decrease because they no longer bear costs
associated with purchasing property or supporting education for children. However, some
expenses may increase:
Decreased Expenses:
• Taxes: Tax payments are based on income. Without employment or income, there will
be no tax obligations unless other income is still present.
• Education Costs: By age 55, children are often done with their education, leading to a
reduction or elimination of these expenses.
• Loan Payments: If mortgage or car loans are paid off, these expenses cease.
• Work-Related Costs: Costs for commuting, meals, and work attire decrease or
disappear.
Increased Expenses:
• Healthcare Costs: As people age, they may face health issues such as diabetes, high
cholesterol, high blood pressure, and heart disease, leading to ongoing medical
expenses.
• Travel Costs: Many retirees use their free time to travel, increasing their travel
expenses as they reward themselves for years of hard work.
3. Consequences of Poor Savings Planning
Retirement expenses are not limited to basic living costs; they also include health care and
other unforeseen costs. To avoid financial strain and not depend on family, substantial savings
are necessary. Common reasons for inadequate retirement savings include:
3.1 Lack of Financial Planning: Without a retirement plan, it is difficult to estimate
required expenses, monthly income needs, and whether savings are sufficient.
3.2 Starting Too Late: Starting to save for retirement at age 50, aiming to withdraw THB
10,000 per month for 25 years, requires a retirement fund of at least THB 3 million. Starting at
age 20, a monthly saving of around THB 7,000 would be sufficient.
3.3 Insufficient Savings: Delayed savings often mean larger amounts are needed later,
exceeding one’s saving capacity and leading to inadequate funds for retirement.
3.4 Lack of Discipline: Retirement savings require long-term discipline. To accumulate a
substantial amount, one must start early and consistently save a significant amount. Without
discipline, it is challenging to reach the desired savings goal.
3.5 Inappropriate Saving Strategies: Overly conservative savings, such as only saving in
low-risk bank accounts, may yield insufficient returns, requiring higher savings amounts.
However, higher savings can become a financial burden.
A suitable retirement fund should be approximately 70% of average pre-retirement income.
This percentage helps maintain a similar lifestyle post-retirement. However, when this amount
is multiplied by the number of years expected to live after retirement, it becomes a significant
sum, often higher than monthly income. Therefore, early and well-planned savings are crucial.
Balancing current happiness with future financial goals requires strategic planning and
investing to grow savings effectively.
4. Suitable Savings Formulas
Start by determining your savings amount by considering your salary and deducting
necessary expenses. The remaining amount can be allocated for savings without causing
excessive financial strain. Next, seek investment avenues that can enhance your savings by
choosing investments aligned with your lifestyle and current expenses. Below are
recommended allocation strategies:
Part 1: Retirement Savings Plans
Save money through retirement savings systems that offer benefits from government
and employer contributions, such as:
• Social Security Fund
• Government Pension Fund
• Provident Fund
• Retirement Mutual Funds
These options often come with tax benefits.
Part 2: Equity Investments
Invest in stocks, which provide the highest returns but also come with higher risk. If
you lack expertise, consider investing through mutual funds for safer exposure.
Part 3: Stable Return Investments
Invest in assets that provide consistent returns, ensuring yields surpass inflation rates.
Alternatively, you can invest through mutual funds that aim for steady returns.
Part 4: Liquid Assets
Keep funds in bank accounts, short-term government bonds, and other financial
instruments to maintain liquidity for emergencies.

Suitable Investment Strategies for Different Age Groups


Investment strategies should be primarily based on earning potential, with
consideration of current expenses and investment proficiency. Generally, suitable investment
patterns for each age group are as follows:
Age 25-35:
In the early working years and possibly starting a family, individuals generally have
fewer financial obligations and can tolerate higher risks. It is advisable to invest in:
• Stocks (75%): To maximize potential returns.
• Bonds (25%): To provide some stability.
Age 36-45:
With a peak earning capacity but reduced risk tolerance due to family responsibilities,
it is prudent to adjust investments to:
• Stocks (55%): For growth potential.
• Bonds (45%): For stability and income.
Age 46-55:
As expenses decrease and earning potential starts to decline, investment allocations
should shift to:
• Stocks (35%): To maintain some growth potential.
• Bonds (65%): To provide more security and income.
Age 55 and Above:
With reduced earning capacity, focus should be on preserving capital while still aiming
for some growth. Investment allocation should be:
• Stocks (25%): For potential growth and income.
• Bonds (75%): To ensure stability and consistent income.
Even in retirement, individuals can still generate income from their savings. By
investing in high-yield assets and selecting stocks with strong fundamentals and annual
dividends, retirees can continue to receive income. It is important to diversify investments
across various sectors and industries to manage risk effectively.

Life Insurance
Life insurance is a long-term savings tool that not only aims to provide funds for use in
retirement but also serves as a risk management tool. It can be used for savings protection,
health insurance, and ensuring the quality of life for loved ones in the event of unexpected
circumstances leading to their premature departure.
Saving money through life insurance offers higher returns compared to deposit interest
rates. Throughout the policy period, you will receive coverage up to the sum insured. You have
the option to purchase supplementary insurance such as health insurance, accident insurance,
and income compensation, which can be used as emergency funds without withdrawing from
your savings or investments, thus avoiding missed opportunities for higher returns.
Additionally, insurance premiums can be deducted from taxes up to 100,000 baht.
However, life insurance is not a guaranteed formula for maximising savings benefits.
It is one of the top choices when considering saving for retirement, particularly when you have
limited savings capacity, and should be a primary option in your investment portfolio when
you have sufficient savings for more significant investments.

Choosing the Optimal Insurance Plan


Currently, there are various insurance plans, each with different proportions of coverage
and returns under different conditions. Selecting a plan that aligns with your objectives and
payment capabilities will provide the greatest benefit. Here are some guidelines for choosing
an insurance plan:
1. Lifetime Coverage Plan
If the insured person passes away while the policy is in effect, the life insurance
company will pay the sum insured to the beneficiaries. The primary purpose of this type of
insurance is to provide financial support for dependents or to cover end-of-life and funeral
expenses to avoid burdening others. This plan offers high coverage amounts but low insurance
premiums. Payment methods include a one-time payment, lifetime payments, or payments for
a specified period.
2. Savings Insurance Plan
This is a type of life insurance where the company will pay the sum insured to the
insured if they survive the policy term or to the beneficiaries if the insured dies within the
coverage period. Premiums are higher than for lifetime coverage but offer cash returns
periodically throughout the policy's duration. Additionally, savers can choose flexible payment
and coverage periods according to their needs, making it suitable for those wanting to combine
savings with protection.
3. Term Insurance Plan
This life insurance provides benefits to the beneficiaries if the insured dies during the
coverage period. If the insured survives until the policy expires, no money is returned. This
plan offers the highest coverage with the lowest annual premium or is the most affordable
insurance premium, covering the insured only in case of death.
4. Education Insurance for Children
This insurance plan provides a lump sum payment at key educational transitions,
helping cover part of the educational expenses for children. It also offers coverage throughout
the policy term, with a final lump sum payment at the end of the contract.
5. Retirement Preparation Insurance
The premiums for this insurance are similar to those for savings plans but begin
providing returns when the policyholder reaches retirement age, such as 55 or 60 years old.
Payments continue annually until the policyholder's average life expectancy, with a lump sum
paid out at the end of the policy term.
6. Supplementary Insurance
Examples include accident insurance with income compensation, accident insurance
covering medical expenses, health insurance, and critical illness insurance. These are annual
policies with premiums adjusted every 4-5 years based on the policyholder’s age. These
premiums cover risk management and direct expenses and are not included in savings plans.
They should be considered if employer-provided benefits are insufficient or of lower quality
than needed.
7. Insurance for the Elderly
This type of insurance has similar conditions to accident and critical illness insurance
but is tailored for the elderly. It is available for those aged 55 to 65 years and provides coverage
for approximately 15 to 25 years.
8. Asset-Linked Payment Insurance
Typically, this is a lifetime insurance policy required by banks from home loan
borrowers. In the event of an unexpected incident affecting the borrower, the insurance
company pays off the outstanding loan balance to the bank. Any remaining funds are paid to
the beneficiaries named in the contract, and the property becomes the beneficiary's asset. Policy
terms range from 10 to 30 years. The value of coverage depends on the borrower’s repayment
capacity. If confident in repaying within 10 years, a 10-year policy may be chosen for lower
premiums. However, if unsure, opting for a longer term (5-10 years) with higher premiums
provides continuous coverage throughout the policy term. This approach often offers good
value compared to the protection received (Tadthong Tiattrakool, 2016: 24-49).
Summary
Financial management is crucial for achieving financial stability, and it should begin
with instilling good saving and spending habits, as well as maintaining financial discipline
from today. As one enters the workforce, it's essential to understand how to plan and allocate
funds effectively to cover daily expenses, future spending, and retirement savings. Proper
financial management encompasses key concepts such as financial planning, investment in
fixed assets, and managing working capital.
The steps in financial planning are as follows:
1. Building Stability: Establish a strong financial foundation.
2. Protecting Wealth: Safeguard your accumulated wealth.
3. Increasing Wealth: Enhance and grow your assets.
4. Transferring Wealth: Plan for the distribution of assets.
Investment options for saving can be categorized into three groups:
1. High-Risk (High Return): Investments with higher risk and potentially higher returns.
2. Medium-Risk (Medium Return): Investments with moderate risk and returns.
3. Low-Risk (Low Return): Investments with lower risk and returns.
Principles for managing investment risk include determining the right investment mix for
retirement savings, understanding post-retirement expenses, and avoiding poor savings
planning. Appropriate saving formulas and investment strategies should be tailored to different
life stages.
Life insurance is one of the tools that can contribute to financial security and stability in
society.
Exercise Chapter 3

1. Describe the factors related to profit and risk. What should be considered?
2. Explain the key principles of financial management. How many are there and what are
they?
3. Describe what investment in fixed assets is.
4. Explain what the 5 Cs are. What are they?
5. Explain how investment risk is often linked to the level of return. How can risks be
categorized? What are the categories?
6. Describe what future investment is.
7. Describe what type of investment a mutual fund represents.
8. Describe the characteristics of mutual funds used for tax benefits. What are the types?
9. Explain what asset allocation is.
10. Describe the characteristics of a savings insurance plan.

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