Introduction to Personal Finance

Introduction to Personal Finance

Personal Financial Planning in Action
 Planning is important to ensure a direction for your day-
to-day actions.
 Creating a personal financial plan has six basic steps:

1. Determine your current financial situation.

2. Develop your financial goals.
3. Identify alternative courses of action.
4. Evaluate alternatives.
5. Create and implement your financial action plan.
6. Review and revise the financial plan
1. Determine your current financial situation
The first step in creating your personal financial plan is
determining your current financial situation.
Having a thorough understanding of your current financial
situation will help you to formulate realistic and well-informed
goals. Assets (What I own) Liabilities (What I Owe)
Cash & Cash Equivalents Current Bills
1, 2, 3………. 1. ……
Personal Property 2. ……
1, 2, 3………. Outstanding Debt
Invested Assets 1. ……. Total Assets
1, 2, 3………. 2. …… Total Liabilities
Total of all Assets Total of all Liabilities Net Worth
 2. Develop your financial goals
 Goals should be SMART, that is specific, measurable, attainable,
realistic, and time-based.
 Also develop short-term, intermediate, and long-term goals.
Developing each of these types of goals will allow you to achieve
successes early in the plan while also keeping your eye toward the
future.
 Short-term or intermediate goals may also serve as stepping stones to
reach long-term goals.
 When developing your goals, be sure to differentiate between
necessities and wants. Establish priorities
 Using the worksheet on the next slide, add to, amend or re-record
those goals for incorporation into your personal financial plan.
 Financial Plan Goals Worksheet
Short-Term Goals (Less than 1 year)
Priority Goal Total Cost Duration Monthly cost Target Date

Intermediate Goals (1-10 years)

Priority Goal Total Cost Duration Monthly cost Target Date

Long-Term Goals (Over 10 years)

Priority Goal Total Cost Duration Monthly cost Target Date
3. Identify alternative courses of action
You will have to devise strategies to help you bridge the gap from
where you are today to where you would like to be.
Alternative courses of actions will fall into one of two categories:
Reallocating existing resources, or Generating new ones.
Existing resources can be utilized by earmarking current savings or
shifting current allocations as in the example above.
Generating new resources may require changing jobs to improve
your wage outlook, taking on additional hours or investing your
savings more aggressively to generate higher rates of return.
 Goal Strategies Worksheet
Short-term Goal:
Target Date: Monthly Cost:
Strategy 1:
Strategy 2:
Strategy 3:

Intermediate Goal:
Target Date: Monthly Cost:
Strategy 1:
Strategy 2:
Strategy 3:

Long-term Goal:
Target Date: Monthly Cost:
Strategy 1:
Strategy 2:
Strategy 3:
4. Evaluate alternatives
Once you have given serious thought to the options available that
could lead you to your goals, you may begin to realize just how
many options there are. So, which courses of action should you take
to achieve your desired goals?
The answer is: that depends
Before you can select strategies to complete your financial plan,
you’ll have to thoroughly evaluate and weigh your options.
When assessing your options consider the pros and cons of each
option.
 Goal:________________

Strategy 1:
Pros Cons

Strategy 1:
Pros Cons
 5. Create and implement your financial action plan
 Having identified options for reaching your goals and having weighed each
strategy, it’s now easier to look at the cost of your goals in terms of your current
situation.
 This can help you to prioritize your goals as you consider how much it will cost
you to implement each one.
 Finalizing your plan will require you to make decisions as to which goals to
pursue and the best courses of action to take.
 Once you’ve gone through the effort of creating your plan, discipline is
paramount.
 Be conscious about establishing actionable steps you can take to lead you to
success when creating your plan. Having concrete steps to take will help you
ensure you are doing what you need to do to stay on track to accomplish your
goals.
6. Review and Revise your Plan
 One fact remains: life happens. For this reason, it is important to review
your plan often and revise it as needed.
 Reviewing your financial plan can help you to gauge your progress
toward meeting your goals.
 Your financial situation will change from time to time. You may incur
unplanned expenses or receive unplanned incomes. These events may
require you to change the path you will follow to reach your goal.
 The fact is your life will change. Your financial plan will have to change
too. Be faithful in reevaluating your plan from time to time to ensure
your goals haven’t changed and that you are on pace to reach those goals.
Money Management Skills
 Money Management Skills

• Set Realistic Financial Goals

• Create a Personal Budget
• Limit Credit Card Expenses
• Contribute to Savings
• Be Consistent
 1. Set Realistic Financial Goals
“knowing where you stand
financially and create where
you want to be in five, 10, or
25 years in the future”

People should prioritize simple wins:

 Pay off credit card debt
 Cut out unnecessary expenses
 Avoid changes to your plan or goals
 Understand your relationship to money
 2. Create a Personal Budget

 Having a budget is crucial to

managing money effectively.
 Budgets keep track of expenses, help
keep people out of debt, and help
people organize their financial
priorities.
 It is important to note that budgets can change over time. The
first budget you create will not be the one you’ll have forever.
3. Limit Credit Card Expenses
A simple swipe can do more harm
than good.
According to Wallet hub, the average
American household has over
$7,000 in credit card debt.
psychology behind credit card spending. Since consumers
aren’t spending “real” money, they’re more likely to make use
of their plastic cards. The bill that comes at the end of the
month is in the back of their minds.
4. Contribute to Savings
A goal for expert money managers is to grow wealth and
stability through financial security.

 Experts believe that savings accounts are the best place to

start investing and managing money
A savings account is important because it is the backstop for
your financial life.
Overall, consistent saving allows people to meet their money
management goals.
5. Be Consistent
 To put all of your money management skills to use, you must
be consistent.
 People who have successful saving habits stick to their goals
and only change them when life events such as pay raises and
career changes occur.
 “A financial plan is simply a guide,” Hyde said. “You’re
stating where you want to go.”
 Without consistency, it is easy for money management
beginners to fall back into old habits or make money
mistakes.
Common Money Mistakes to Avoid
1. Delaying on a Financial Plan
Not having a financial plan leads to bigger financial risks. Without a financial
plan, people are more likely to be unprepared for unexpected surprises.
2. Spending Mindlessly
• Using shiny credit cards for every purchase can lead spenders down a dull
path.
• “As long as you have control of your spending daily, you’ll remain
confident.”
3. Letting Payments Pile Up
If you let payments pile up, it only hurts in the long run. But the coronavirus
pandemic has made it more difficult for people to stay on top of their
payments.
Taxes in Your Financial Plan
 Taxes in Your Financial Plan
 Tax planning is the analysis of a financial situation or plan to ensure that all
elements work together to allow you to pay the lowest taxes possible.
 Proper tax planning makes it easier to build your personal finances and
afford the things you want.
 Taxation becomes relevant at various stages of your financial plan.
 For example, 1) There is a tax rebate when you invest in select categories of
investments.
2) There is also a tax implication when you earn regular returns in the
form of interest or dividends.
3) There is a tax implication at the time the capital gains are realized on
assets.
4) Lastly, there is the all important concept of EET that could
change the economics of your financial plan.
Tax breaks at the time of investing
One of the basic principles of long term investing is that you must
not focus overly on the tax aspect. But given a choice, you need to
consider a more tax efficient option.

If you need to make an allocation of Rs.100,000 during the year

to mutual funds, then should you do it in diversified equity funds or
an ELSS. Remember, an ELSS is also an equity fund with a 3-year
lock period and giving the additional benefit under Section 80C.

The 30% exemption in the year of investing substantially improves

your yield on the fund.
Tax breaks at the time of investing
Defining Capital Assets
Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and
jewellery are a few examples of capital assets. This includes having rights in or in relation to an
Indian company. It also includes the rights of management or control or any other legal right.

The following do not come under the category of capital asset:

•a. Any stock, consumables or raw material, held for the purpose of business or profession
•b. Personal goods such as clothes and furniture held for personal use
•c. Agricultural land in rural(*) India
•d. 6½% gold bonds (1977) or 7% gold bonds (1980) or National Defence gold bonds (1980) issued
by the central government
•e. Special bearer bonds (1991)
•f. Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued
under the Gold Monetisation Scheme, 2015
Tax implications of regular income on investments
This is an important consideration when you have to choose between
similar investment products.
Assume that you have an allocation of 20% to debt products during
the year. You can invest in a bank FD but then the interest earned on
the FD will be taxed at the peak rate of tax applicable to you. That
will substantially reduce your post-tax returns.
On the contrary, if you invest the money in debt mutual funds and opt
for a dividend plan, then the dividend earned by you will be entirely
tax-free in your hands. You also get the added benefit of capital
appreciation when the interest rates go down, further adding to your
post-tax yields.
Tax exemption at the time of booking profits
 This factor is very relevant when you are actually comparing equity versus
debt.
 The definition of capital gains is much more favourable in the case of equities
as compared to debt.
 For example, in case of equities and equity mutual funds, the definition of
long term is determined by the holding period of 1 year. Additionally, STCG
for equities is charged at a concessional rate of 10% while the LTCG on
equities are charged at 15%.
 Alternatively, if you own a debt fund with a growth option then it will be long
term only if it is held for 3 years. In this case, short term capital gains will be
taxed at your peak rate while long term gains will be taxed at 15% after
considering indexation.
 A good option for you to consider will be the Balanced Fund plan since it
combines the benefits of debt and equity.
Understanding EEE and EET when it comes to redemption

When you currently invest in an endowment life policy or in a

provident fund, it is classified as EEE (Exempt, Exempt, and
Exempt). That means, there is tax exemption at the time of
investment, tax exemption on returns and also tax exemption on
redemption.
This tends to distort the yield curve and hence the CBDT has already
initiated the plan to shift to EET, meaning that in the year of
redemption it will be treated as income in the hands of the investor.
If the complete shift to EET happens, it could make a huge difference
to your post-tax returns.
 Difference between tax planning and financial planning based upon some important parameters.
PARAMETERS TAX PLANNING FINANCIAL PLANNING

Objective Tax planning is aimed at reducing The primary objective of

your tax liability by helping you avail financial planning is to help you
tax benefits allowed under the create and manage wealth in
relevant sections of the Income Tax order to eventually meet your
Act, 1963. As an efficient tax planner, financial goals in the long run.
you should always be keen on An efficient financial planner
reducing your tax burden in the should look ahead and plan for
short-term. Planning your taxes short-term as well as long-term
beyond the current year can often be financial goals.
a redundant exercise as the Indian
Government announces a new
budget each year.
PARAMETERS TAX PLANNING FINANCIAL PLANNING

Scope The scope of tax planning is solely In contrast, financial planning

limited to helping you receive the involves a more holistic
maximum possible tax benefits each approach to managing your
successive year. So, even if you wealth. It often covers various
employ the services of a professional aspects such as cash flow
tax planner, all they can help you management, asset
with is filing efficient tax returns and management, insurance,
helping you invest in tax-free investments, retirement
avenues. planning, and even tax
planning.
 PARAMETERS TAX PLANNING FINANCIAL PLANNING

Benefits Apart from increasing your overall tax Financial planning helps increase your savings
efficiency, efficient tax planning can by planning and tracking your expenditures. It
also enable you to budget and can also facilitate an overall better standard
manage your taxes at the beginning of of living by helping you utilize your money in
each fiscal year instead of scrambling the best manner possible. By planning your
to file optimum tax returns at the finances well in advance, you can create an
eleventh hour. emergency fund to take you through any
unforeseen financial obstacles in the future.
In this way, financial planning can also help
you attain some peace of mind knowing that
your finances are secure at all times.
Consumer Credit
 Consumer Credit
Consumer credit provides access to more spending power, which
enables you to do things like take out a home loan or make purchases
with a credit card.
Responsible use of consumer credit can open doors to new
opportunities, but borrowing also has the potential to result in
unmanageable levels of debt.
Types of Consumer Credit
1. Instalment Credit
2. Revolving Credit
1. Instalment Credit: typically refers to loans, such as mortgages, auto loans,
personal loans and student loans. With instalment credit, you repay what you
borrow in fixed payments made each month over a set period of time, or term. The
monthly payments, or instalments, are based on the amount you borrow plus the
interest you owe
2. Revolving Credit: you can borrow money numerous times a month as long as
you stay below your credit limit. You'll have to make at least a minimum monthly
payment on revolving credit on or before the account's due date. The amount of
your monthly payment will depend on how much money you've borrowed and
whether you regularly pay off the full balance to avoid interest changes. If you
don't pay off your debt immediately, it rolls over—or "revolves"—to the next
billing period.
The most familiar and common type of revolving credit is a credit card.
Advantages of Consumer Credit
 Building your credit history: If you establish a solid payment history for consumer
credit accounts, including credit cards and personal loans, and otherwise handle credit
responsibly, consumer credit can be a valuable tool for building your credit.
 Boosting your credit score: A positive history of making payments on credit cards,
loans and other types of consumer credit can positively affect your credit score.
 Providing perks and rewards: Consumer credit, particularly credit cards, can deliver
goodies like airline miles, hotel points and cash back rewards.
 Protecting you against fraud: Credit cards provide all sorts of ways to protect yourself
against fraud, such as contactless cards, virtual card numbers, card-locking capabilities
and little to no cardholder liability for unauthorized purchases.
 Reimbursing certain purchases: Some credit card issuers reimburse you for purchases if
you're not satisfied with an item you bought but the merchant won't accept a return.
Disadvantages of Consumer Credit

 Consumer credit can come at a cost, including interest charges and

potential fees.
 Access to consumer credit might enable you to spend beyond your means.
 Missed payments and high debt levels could damage your credit and
impact your ability to obtain credit in the future.
 Piling up a lot of consumer debt could result in your debt being turned
over to a debt collector, who might constantly nag you about paying the
debt.
 Some predatory lenders might trap you into borrowing money at sky-high
interest rates.
 Savings and Payment Services

: Advantages, Disadvantages, Sources and Costs