Introduction to financial planning

Car
Food
Education

House
Marriage

Daily
Living
Expenses Retirement

All of this requires MONEY!!

 Car

Food
Education

House
Marriage

Daily
Living
Expenses Retirement

He has done his Financial Planning!!

 Personal Financial Planning?
• Personnel Finance: Everything in your life that
involves Money becomes personnel finance.
• Personnel Financial Planning: is arranging to
spend, save, and invest money to live
comfortably, have financial security, and
achieve goals.
 Why you need Money
 Financial Goals
 Family Needs
 Social Needs

Planning your personal finances is important

because it will help you to reach your goals,
no matter what they are!!
 Need for Financial Planning
• Managing the unplanned
• Accumulate wealth for special expenses
• Save for retirement
• “Cover your assets”-A financial plan is no good if it does’nt
protect what you’ve got. A complete financial plan will
include adequate insurance at as low a cost as possible.
• Invest intelligently
• Minimize tax payment: Why earn money for the
government? Part of financial planning is to help you
legally reduce the amount of tax you have to pay on your
earnings.
 Financial Goal
• Financial Goal cover three time horizons namely:
a. Short term: goals that needs to be accomplished
within a year. Buying a television, going for a
vacation
b. Medium term: goals that needs to be
accomplished within 1-10 years. Buying a car,
foreign vacation, house –down payment
c. Long term: goals that need more than 10 years to
be to be accomplished. (accumulate money) .
Retirement, Child education.
 Setting up of Financial Goals
1. To achieve your financial goals you must set your goals.
This process involves :
a. Writing down your financial goals and attaching costs
to them.
b. Identifying when the money to accomplish those goals
will be needed.
2) Once you set goals , make them cornerstone of your
personal financial plan, a guide to action and a
benchmark for evaluating effectiveness of the plan
3) Over the years, your goals may change and every person
follows financial life cycle pattern.
Setting Financial Goals
FINANCIAL PLANNING PROCESS
Steps for assessing your financial goals

1. Find your inspiration : Instead you knowing what you want to do?
Ask Why you want to do? Attaching reasons make it more meaningful.

2. Examine your current situation: Looking at where you stand right now
can help set you on the right trajectory. Examine your present
financial condition this includes, finding your net worth, how much you
earn and how much you spend.

3. Define your short term and long term: Once you are aware of your
earnings and expenses, establish your long term and short term goals.
Debt payment, setting up an emergency fund, down payment of a house
are short term objectives. Child education, Marriage and retirement are
long term goals.
Steps for assessing your financial goals
4. Be specific and measurable in your goals: It is important to make specific
and measurable financial goals. Vagueness like ‘I will save money’ is less
motivating rather having a specific goal like “I will save 5000/- per month” or
“I will increase my saving by 10% every year”.

5. Set targets for reaching your financial goal: Fixating a target for achieving
your financial goal helps you lot. Prioritizing and building a strategy for
accomplishing it will be helpful.

6. Make an Action Plan: Once you establish your financial goals and
timeframe it, you should start taking actions to achieve it. Raising your
income level, cutting unnecessary expenses, making informed start .

7. Consistently assess and modify your goals: It is critical to periodically

change , assess and modify your goals. Change in either income or expenses
will play a crucial role in your financial goals
The life Cycle of Financial Planning
There are three stages in the financial life cycles:
Stage 1: The Beginner Step: The early years- A
time for wealth accumulation .
1. Prior to age 54.
2. Purchase a home. Prepare for child rearing
cost. Save for child’s education. Develop a
regular pattern for savings. Establish an
emergency fund.
The life Cycle of Financial Planning
Stage 2: Approaching Retirement –The Golden
Years
1. Transition years between 55-64.
2. Retirement goals are very important.
3. Continuously review your financial decisions,
insurance protection and estate planning.
4. Unplanned events have dramatic effects on
your goals.
The life Cycle of Financial Planning
Stage 3: The Retirement Years-
1. After age 65, Live off savings, Retirement age
depends on savings.
2. Less risky investment strategy –Preserving
your principle becomes important
3. Review your insurance. Consider extended
hospital coverage. Prioritize health.
4. Do a estate planning. Make a will, nominees
and do estate planning.
Step 1 Step 2
Step 3 Step 4
Evaluate your Financial Determine
Develop an Implement
Wealth Your
plan of action Your plan
Prepare a personnel Financial
Make your
Balance Sheet. Goals
spending Just do it!!
Determine what you’re Identify
confirm with
worth and prepare a what you
your budgeted
personnel Income are saving
goals
Statement for and how
Determine where your much you
money comes from and need to save
where it goes

Step 5
Review your progress , and Revise your
plan
 Principles of Personal Finance
1. The Best Protection is Knowledge
 Enable you to protect yourself from bad
investment
 It helps you to understand the importance of
planning.
 Gives you the ability to make intelligent
investments and take advantages of changing
economy and interest rates.
 Principles of Personal Finance
2. Nothing happens without a plan, begin with a simple plan
then once saving become a habit, modify and expand your plan.
3. Time Value of Money:
 Most Important concept in personnel finance. Money
received today is better than money received later.
 Importance of Time value of money :
1. Allows us to determine how much money will be needed to
achieve your future goals.
2. How inflation impacts our money over time.
3. Shows us the importance of time and interest rates in
accumulation of money.
 Principles of Personal Finance
4. Taxes affect Personal Finance Decisions
5. Stuff Happens!(Importance of Liquidity)
6. Waste not, Want Not-Smart Spending Matters!
 Differentiate between want, need and desire.
 Doing your homework to make sure you get
the quality you expect.
 Making purchases and getting the best price
 Maintaining your purchases.
 Principles of Personal Finance
7. Protect your self against major catastrophes
 Buy right kind of insurance and know your insurance
policy really well!!
8. Risk and Return go hand in hand!!
 Diversification is the key!!
9. Mind Games, your financial personality and your
money!!
 Behavioral Finance
 Mental accounting
10. Just do it!! Pay yourself first!
 Record Keeping
• Keep and Maintain records.
• Needed to prepare taxes.
• Allows your to track expenses. How much and where
are you spending.
• Makes it easier for someone to step in during an
emergency and understand your financial situation.
 Involves two steps:
a) Track your financial dealings
b) File and store your financial records so they are
readily accessible.
 Personal Budget
• Budgeting helps you in planning and
controlling.
• It controls your cash inflows and outflows.
• So it helps you in aligning your income with
your expenses and savings.
 Cash Budget:

• Examine last year’s income and make

adjustment accordingly.
• Estimate your taxes and calculate your after tax
income
• Estimate your living expenses
• Identify your fixed and variable expenses.
• At the end compare your actual income with
expenditure with your budgeted amounts.
• Try the envelop method.
 Measuring your Wealth!!
The balance Sheet
• Is a statement of your financial Position on given date.
• List your assets and liabilities and your net worth.
Assets : What you Own
• All of your possessions are considered to be your
asset. (Even if you have owe a money on them)
• Assets are valued at FMV
Liabilities : What you Owe
• Liability is a debt that may be repaid in future.
• Only unpaid amount to be considered.
 Different Types of Assets
1. Monetary assets: liquid assets –cash, savings
account.
2. Investment: Stocks, bonds and mutual funds. You
invest here primarily to satisfy your goals of buying
house(down payment)/ child’s college tution fees
and for retirement.
3. Retirement plans-Pension plans
4. Housing
5. Automobile
6. Personal property-Furniture/appliances/Jewellery
 Different Types of Liabilities
• Current Debts: must be paid off within the
next year. Unpaid bills including utility bills,
past due rent, cable TV bills and insurance
premiums. Credit card bills
• Long Term Bills- Home loan/Car loan/
Education Loan.
Net Worth( A measure for your Wealth)
Net worth= Total Assets-Total Liabilities
• Liabilities > Assets= negative net worth
(insolvency)
• Liabilities<Assets =Positive Net worth
 Annuity
• What is Annuity?
 Sequence of payment/Receipts
 Conditions to be called as annuity
a. Periodic payment(monthly/quarterly/yearly)
b. Same amount
c. Regular
d. For a specified period of time.
If annuity is for
infinite period it
is called
Perpetuity
 Types of Annuity
Regular Due

Installment starting at the end Installment starting at the

of the period –regular annuity beginning of the period
Eg. Generally happens in Loans (immediately) –due
Eg. In the case of investments.
 Which one is an annuity?
Year Case 1 Case 2 Case 3 Case 4 Case 5

0 10000 0 10000 10000 0

1 10000 10000 10000 10000 10000

2 10000 10000 10000 11000 0

3 0 10000 10000 10000 10000

4 10000 10000 10000 10000 0

5 10000 10000 0 10000

How to Identify –Annuity How to identify which type of
Question? Annuity?
Use of words like:  If question is silent about
 Annuity when installments are
 Installments starting –use Annuity
 SIP-Systematic Regular.
 Annuity Due is used when
investment plans
question is using words like
- Starting today
- Starting immediately
- Starting now
 Formulae
• Annuity Regular-
 FVAD= AI*[(1+i)^n-1]
i
Annuity Due-
 FVAD= AI*[(1+i)^n-1] *(1+i)
i
 Perpetuity : Annuity/i
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