1

Personal Finance & Wealth Management Project submitted towards the partial fulfilment of Post Graduate Diploma in

Management

“FORMING CASELET OF A FAMILY & ANALYSING THE

PERSONAL FINANCIAL PLAN FOR THE SAME.”

.SUBMITTED BY:

Mohammad Ikram

PGDM (Finance) (2010-2012)

Enrollment No: 2010080.

GUIDE:

Dr. Puneet Dublish Professor-Finance.

NIILM-Centre for Management Studies (CMS) Gr. Noida, Delhi (NCR)

2 ACKNOWLEDGEMENT

I wish to express my gratitude to Northern Institute for Integrated Learning

in Management Centre for Management Studies (NIILM-CMS), Greater

Noida Delhi NCR for giving me an opportunity to be a part of it and enhance

my knowledge by granting permission to do this project.

I’m grateful to Puneet sir senior faculty finance NIILM-CMS Greater Noida

for his invaluable guidance and cooperation during the course of the project. He

provided me assistance and support whenever I needed that has been

instrumental in completion of this project.

The learning during the project was immense & invaluable. My work includes

study of “FORMING CASELET OF A FAMILY & ANALYSING THE

PERSONAL FINANCIAL PLAN FOR THE SAME.”

MOHAMMAD IKRAM

2010080

PGDM BATCH-2010-2012

3 PREFACE

This is to certify that Mr. Mohammad Ikram a student of Post Graduate

Diploma in Management, NIILM-Centre for Management studies, Greater

Noida has worked under the able guidance and supervision of Mr. Puneet

Dublish, Professor in finance Northern Institute of Integrated Learning In

Management Greater Noida.

This Project report has the requisite standard for the partial fulfilment of the

Post Graduate Diploma in Management. To the best of our knowledge no part

of this report has been reproduced from any other report and the contents are

based on original research.

(Mr.Puneet Dublish) (Mr. Mohammad Ikram)

4 TABLE OF CONTENTS

S.NO. PARTICULAR PAGE NO.

ACKNOWLEDGEMENT

2

PREFACE

3

INTRODUCTION TO PERSONAL FINANCE

5-8

WEALTH MANAGEMENT

9-10

PERSONAL FINANCE PLANNING

11-13

1.

TITLE OF CASE – PERSONAL FINANCE CASELET

14

2.

ABOUT THE CASE

A- INCOME INFLOW STATEMENT

B- EXPENSE OUTFLOW STATEMENT

C-PERSONAL BALANCE SHEET

D- FINANCIAL GOAL INTERMEDIATE & LONG TERM GOAL

E- RISK APPETITE & FINANCIAL CONDITION

15-23

3.

CASE SOLVE

VARIOUS RATIOS CALCULATION

24-26

4.

BIBLOGRAPHY

27

5.

QUESTIONNAIRE

28

5 INTRODUCTION

PERSONAL FINANCE

“Personal finance is the application of the principles of finance to the

monetary decisions of an individual or family unit. It addresses the ways in

which individuals or families obtain, budget, save, and spend monetary

resources over time, taking into account various financial risks and future life

events. Components of personal finance might include checking and savings

accounts, credit cards and consumer loans, investments in the stock

market, retirement plans, social security benefits, insurance policies,

and income tax management.”

PERSONAL FINANCE PLANNING

A key component of personal finance is financial planning, which is a dynamic

process that requires regular monitoring and revaluation. In general, it has five

steps:

1. ASSESSMENT:

One's personal financial situation can be assessed by compiling

simplified versions of financial balance sheets and income statements. A

personal balance sheet lists the values of personal assets (e.g., car, house,

clothes, stocks, bank account), along with personal liabilities (e.g., credit

card debt, bank loan, mortgage). A personal income statement lists

personal income and expenses.

2. SETTING GOALS:

Two examples are "1. Retire at age 65 with a personal net worth of $1,

000, 000," and, "2. Buy a house in 3 years while paying a monthly

mortgage servicing cost that is no more than 25% of my gross income."

Having multiple goals is common, including a mix of short term and long

term goals. Setting financial goals helps to direct financial planning. Goal

setting is done with an objective to meet certain financial requirements.

6 3. CREATING A PLAN:

The financial plan details how to accomplish your goals. It could include,

for example, reducing unnecessary expenses, increasing one's

employment income, or investing in the stock market.

4. EXECUTION:

Execution of one's personal financial plan often requires discipline and

perseverance. Many people obtain assistance from professionals such as

accountants, financial planners, investment advisers, and lawyers.

5. MONITORING AND REASSESSMENT:

As time passes, one's personal financial plan must be monitored for

possible adjustments or reassessments.

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The six key areas of personal financial planning, as suggested by the Financial

Planning Standards Board, are:

1. FINANCIAL POSITION:

This area is concerned with understanding the personal resources

available by examining net worth and household cash flow. Net worth is

a person's balance sheet, calculated by adding up all assets under that

person's control, minus all liabilities of the household, at one point in

time. Household cash flow totals up all the expected sources of income

within a year, minus all expected expenses within the same year. From

this analysis, the financial planner can determine to what degree and in

what time the personal goals can be accomplished.

2. ADEQUATE PROTECTION:

The analysis of how to protect a household from unforeseen risks. These

risks can be divided into liability, property, death, disability, health and

long term care. Some of these risks may be self-insurable, while most

will require the purchase of an insurance contract. Determining how

much insurance to get, at the most cost effective terms requires

knowledge of the market for personal insurance. Business owners,

professionals, athletes and entertainers require specialized insurance

professionals to adequately protect themselves. Since insurance also

enjoys some tax benefits, utilizing insurance investment products may be

a critical piece of the overall investment planning.

3. TAX PLANNING:

Typically the income tax is the single largest expense in a household.

Managing taxes is not a question of if you will pay taxes, but when and

how much. Government gives many incentives in the form of tax

deductions and credits, which can be used to reduce the lifetime tax

burden. Most modern governments use a progressive tax. Typically, as

your income grows, you pay a higher marginal rate of tax. Understanding

how to take advantage of the myriad tax breaks when planning your

personal finances can make a significant impact upon your success.

8 4. INVESTMENT AND ACCUMULATION GOALS:

Planning how to accumulate enough money to acquire items with a high

price is what most people consider to be financial planning. The major

reasons to accumulate assets are for the following:

1. purchasing a house

2. purchasing a car

3. starting a business

4. paying for education expenses

5. Accumulating money for retirement, to generate a stream of

income to cover lifestyle expenses.

Achieving these goals requires projecting what they will cost, and when

you need to withdraw funds. A major risk to the household in achieving

their accumulation goal is the rate of price increases over time, or

inflation. Using net present value calculators, the financial planner will

suggest a combination of asset earmarking and regular savings to be

invested in a variety of investments. In order to overcome the rate of

inflation, the investment portfolio has to get a higher rate of return, which

typically will subject the portfolio to a number of risks. Managing these

portfolio risks is most often accomplished using asset allocation, which

seeks to diversify investment risk and opportunity. This asset allocation

will prescribe a percentage allocation to be invested in stocks, bonds,

cash and alternative investments. The allocation should also take into

consideration the personal risk profile of every investor, since risk

attitudes vary from person to person.

5. RETIREMENT PLANNING:

Retirement planning is the process of understanding how much it costs

to live at retirement and coming up with a plan to distribute assets to

meet any income shortfall.

6. ESTATE PLANNING:

Involves planning for the disposition of your asset when you die.

Typically, there is a tax due to the state or federal government at your

death. Avoiding these taxes means that more of your assets will be

distributed to your heirs. You can leave your assets to family, friends or

charitable groups.

9 WEATH MANAGEMENT

Wealth management is an investment advisory discipline that

incorporates financial planning, investment portfolio management and a

number of aggregated financial services.

High Net worth Individuals (HNWIs), small business owners and

families who desire the assistance of a credentialed financial advisory

specialist call upon wealth managers to coordinate retail banking, estate

planning, legal resources, tax professionals and investment management.

Wealth managers can be an independent Certified Financial

Planner, MBAs, Chartered Strategic Wealth Professional, CFA Charter

holders or any credentialed professional money manager who works to

enhance the income, growth and tax favoured treatment of long-term

investors.

Wealth management is often referred to as a high-level form of private

banking for the especially affluent. One must already have accumulated a

significant amount of wealth for wealth management strategies to be

effective.

Private wealth management (PWM) is the term generally used to describe

highly customized and sophisticated investment management and financial

planning services delivered to high net worth investors. Generally, this includes

advice on the use of trusts and other estate planning, vehicles, business

succession or stock option planning, and the use of hedging derivatives for large

blocks of stock.

Traditionally, the wealthiest retail clients of investment firms demanded a

greater level of service, product offering and sales personnel than were received

by the average clients. With an increase in the number of affluent investors in

recent years, there has been an increasing demand for sophisticated financial

solutions and expertise throughout the world.

The CFA Institute curriculum on "Private Wealth Management" indicates that

there are two primary factors that distinguish the issues facing individual

investors from those of institutions.

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Time horizons are different. Individuals face a finite life as compared

to the potentially infinite life of institutions. This fact requires

strategies for transferring assets at the end of an individual’s life.

These transfers are subject to laws and regulations that vary from

locality to locality and therefore the strategies available to address this

situation vary.

Individuals are more likely to face a variety of taxes on investment

returns that vary from locality to locality. Portfolio management

techniques that provide individuals with after tax returns that meet

their objectives are necessarily going to be specific to these tax

structures.

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WHAT IS PERSONAL FINANCIAL PLANNING?

Personal Financial planning is about setting goals, understanding what financial

resources you have and will get in the future, and making a plan to properly use

the resources to meet your goals. A key element of the planning also involves

understanding how the outside financial world impacts you. These include

inflation, interest rates, returns you get on your financial assets and the financial

assets you can invest your savings in.

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To make an effective financial plan, you will need the following at a minimum.

1. A list of goals you want to achieve. Be clear of the date you want it to be met on

and the value of the goal. Some examples are:

A house valued today at Rs. 30 lacs by the year 2020

An education fund for my daughter worth Rs. 5 lacs by the year 2022

For my retirement at age 55 years, a monthly pension of Rs. 50,000 at today's

value.

2. A list of your existing financial assets. Some examples are:

Savings in bank account of Rs. 75,000

Provident fund balance of Rs. 1.1 lacs

Equity shares worth Rs. 40,000

3. A list of loans that you have taken.

4. An approximate understanding of how your incomes and expenses will change

in the future. No one can accurately predict this, but it is important to at least

make an attempt to project this. It will help to be careful in not over estimating

your income or thinking that your expenses will be low. Have a realistic opinion

here.

5. Try to understand what inflation, interest rates and returns on assets mean. You

don't need to know how to calculate it as today you have access to the internet

where you can find tools to calculate them for you or provide you with the

required information.

6. An understanding of your risk appetite is essential to choose the right financial

products. This will depend on

How comfortable you are financially?

Do you have dependents?

Can you withstand large changes in the value of your investments?

What sort of incomes you will have in the future?

Do you have the access to buy and sell required financial products?

You don't need to take any additional risks if you are meeting your goals. Try to

find the minimum risk you need to take for meeting your goals. On the other

hand don't take a risk free approach. You should have a right mix of different

financial investments to help you find the right balance.

13 7. Once you determine the type of financial products that you are comfortable

with, it is essential that you check periodically if the values of your financial

products are following your risk needs. Buy and sell small portions of your

financial assets once every 12 months so that the mix is as per your risk

preference.

8. Finally, don't make your plan and forget about it. Remember, there are external

factors like inflation and interest rates that can change and impact your plan. A

review once in 3 months is recommended. Review need not mean a complete

planning. You can check if the plan you have is on track to help you meet your

goals.

A good financial plan will help you make you meet your goals and sleep

peacefully at night.

14 [1]. Title of case PERSONAL FINANCIAL PLAN CASELET

Following below is a caselet of the personal financial plan as on 31st march

2011 of a family comprises of three people in whom there is one earning

member Mr. khan and the other dependents. I.e. Mrs. Khan and their 15 years

old child name Salman. The earning member is working from the past 15 years

and presently he is of 36 years.

Mr. Khan is working in a Dubai based Bank Of Bahrain & Kuwait and earning

Per Annum which is equal to [Saudi Riyal (SAR) 88,458.64] س.ر ٤ ٦ . ٨٨ ٤, ٨ ٨

1,200,000.00 P.A Indian National Rupee (INR) [1INR=0.0737155 SAR

SAR=13.5657 INR] . Whereas Mrs. Khan is also working in Gulf Lubricants

with gross salary of س.ر ٨ ٠ ٠ ٤٤,٢٣ [44,230.08 SAR] Per Annum which is

equal to Rs. 6, 00,000 per annum INR. They have various sorts of expenses.

They purchased a flat from their own money & have insurance for the same of

Rs. 30,000 annually. They owe a car for which they pay Rs. 10,000 as

insurance annually. The value of their car at present is Rs. 8 lakhs .They have

one more car whose present value is Rs. 3 lakh for which they pay insurance of

Rs. 20,000 annually. They have purchased a plot of investment for Rs. 2 lakhs.

Mr. Khan invested in Capital market worth Rs. 1 lakh of various company

shares. They got an annual dividend of Rs. 2,000 from shares. And rent from

their plot Rs. 50,000 annually. They have taken an educational loan for their

child which is secured over their assets of Rs. 4 lakhs for their child from a bank

for which they pay interest of Rs. 1,000 per month. They have other unsecured

loan of Rs. 2 lakhs. The current assets of the family such as cash in hand are Rs.

1 lakhs and Rs. 5 lakhs as a bank account in their savings. Other fixed assets

include furniture of Rs. 3 lakhs and jewellery of Rs. 3 lakhs. The furniture

which they have purchased have not fully paid amount for which Rs. 50,000

are still remaining as outstanding. Mr. Khan is a member of a city club of which

his expense comes out to be Rs. 15,000 per annum. And the present value of

their house comes out to be Rs. 30 lakhs and their total expenses come out to be

Rs. 40,000 per month which includes their petrol expenses, electricity expense,

water, car expense, and other household expense. And other miscellaneous

expenses came out to be Rs. 3 lakhs P.a.Mr. Khan has to pay tax also as a liable

citizen of the country. The tax will be calculated according to the tax slab

introduced by the govt.

15

[2]. ABOUT THE CASE

The income and expenses of the family can better be determined with the help

of a cash flow statement, also called a personal income and expenditure

statement. It summarizes the cash receipts and payments for a given period such

as a month etc. Their income & expenses are mentioned as below. The data on

the income and spending patterns are-

PERSONAL INCOME STATEMENT

INCOME OF MR.KHAN & MRS. KHAN

[A]. INCOME (CASH INFLOWS) AS ON 31ST MARCH 2011.

PARTICULARS IN INR( )

Basic salary of Mr. Khan 12,00,000

Basic salary of Mrs. Khan 6,00,000

Dividend on shares 2,000

Rent 50,000

TOTAL INCOME 1 8,52,000

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EXPENSES OF MR.KHAN & MRS. KHAN

[B]. EXPENSES (CASH OUTFLOWS) AS ON 31ST MARCH 2011.

PARTICULARS IN INR ( )

Insurance 60,000*

Interest on loan 12,000**

Membership fees 15,000

Other household expenses 4,80,000

Miscellaneous 3,00,000

TOTAL EXPENSES 8,67,000

NET INCOME 9,85,000***

(Income - expense)

(-) LESS TAX @ 30% 2, 95,500

NET INCOME AFTER TAX 6, 89,500

17 WORKINGS:- *INSURANCE PER ANNUM CHARGED - On 1st car 10,000

On 2nd car 20,000

On flat (+) 30,000 60,000 INR **INTEREST ON LOAN PER ANNUM CHARGED – On Salman’s Education loan 1,000X 12 =12,000 INR *** NET INCOME=TOTAL INCOME – TOTAL EXPENSE

TOTAL INCOME 18, 52,000 TOTAL EXPENSES (-) 8, 67,000 9, 85,000 INR

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[C]. PERSONAL BALANCE SHEET

BALANCE SHEET OF KHAN AS ON 31ST MARCH 2011

Their assets and liabilities both short term & long term are mentioned

as below-

ASSETS

IN INR

IN INR

CURRENT ASSET

Cash in hand 1,00,000 Bank account 5,00,000 Securities 1,00,000 TOTAL OF

CURRENT ASSETS

7,00,000 FIXED ASSETS

Car ( 1st ) 8,00,000

Car ( 2nd

) 3,00,000 House 30,00,000 Furniture 3,00,000 Jewellery 3,00,000 TOTAL OF

FIXED ASSETS

47,00,000

TOTAL ASSETS

54,00,000

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LIABILITY IN INR IN INR

SHORT & LONG TERM LIABILITITY

Educational loan 4,00,000

Unsecured loan

2,00,000

TOTAL OF SHORT & LONG TERM LIABILITY

6,00,000

CURRENT LIABILITY

Furniture outstanding 50,000 50,000

TOTAL OF CURRENT LIABILITY

50,000

TOTAL LIABILITY 6,50,000

20 [D]. INTERMEDIATE AND LONG-TERM GOALS OF

MR.KHAN & MRS. KHAN

Financial planning is done to achieve the future financial goals. The factors that

have to be considered by an investor while developing the personal financial

goals are:

Timing of goals - Setting appropriate time for achieving financial goals is

very essential because it helps to monitor the current expenses and limits

the unwanted usage of money.

Goal frequency - Identifying the frequency of occurrence of goals is very

important as it helps to plan for it in advance. This prevents the changes

that can alter the investor’s plan. For example goals like money for gifts,

vacations occur more frequently whereas goals like children’s education,

marriage, or house occur less frequently.

Goals for different needs - Identifying goals for different financial needs

like the consumable product goals and the durable product goals is

essential. The consumable product goals occur on periodic basis such as

food, clothing, and entertainment. The durable product goals may be

expensive items such as car, appliances and so on which do not occur that

frequently.

Goal setting guidelines - The planned financial goals should follow

certain guidelines such as:-Financial goals should always be realistic.

Financial goals have to be stated in specific measurable terms.

Financial goals should have time lines.

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FOLLOWING STEPS CAN BE APPLIED FOR SUCCESSFUL ACHIEVEMENT OF FINANCIAL GOALS:

Identify goals.

Classify goals.

Set deadlines.

Monitor progress.

After listing all the goals, classify and prioritise them. The classification can be

done as short-term goals, intermediate goals, and long-term goals.

Short-term goals - Short-term goals are the goals that are to be achieved

in a year or two such as saving for vacation or paying off small debts.

Mr & Mr. Khan made a provision for a European vacation.

A trip to remember before the kids start of on their higher education.

Can be Met Goal is to be achieved on 01-May-2014. It is planned for

Family.

Current Value is Rs. 400,000, a Lump sum.

Intermediate goals - Intermediate goals are the goals that have a time

frame of two to five years such as buying a bike or a car, paying off debts

like credit cards, getting a certification and so on.

Long-term goals - Long-term goals are the goals that have a time frame

of more than five years. They involve financial plans such as money for

children’s education, retirement savings, purchase of home, children’s

marriage and so on.

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A fund for Mr. khan’s Retirement Days

Generate interest income out of this fund and enjoy retired life

Possible, plan again

Goal is to be achieved on 31-Oct-2030. It is planned for self.

Current Value is Rs. 10,000,000, a Lump sum amount.

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[E]. RISK APPETITE AND FINANCIAL CONDITION

After knowing about their balance sheet and about their income statement we

can say that the family financial condition is very sound.

As their total income is more than 18 lakhs [12 lakhs + 6 lakhs] and after

deducting all the expenses it is again more than 9 lakhs which is quite very

good for a family where there are two earning members with a child or we can

say that there are 3 members in a family total.

As part of their risk appetite as we can say that Mr. Khan has interest in

the share market and he had purchased the equity of more than Rs. 1 lakh.

So accordingly we can say that Mr. khan is less risk averse and more

Risk taker as dealing in equities is riskier for a person because dividend is

unknown moreover share market is less predictable.

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[3]. SOLVE THE CASE

(i). Calculate their net worth.

Net worth is the difference between everything of value that a person owns and

all the debts that that person owes. In short, a person's net worth is the value of

all assets minus the value of all liabilities. If the person has more assets than

liabilities, then that person has a positive net-worth. If the person has more

liabilities than assets, then that person has a negative net worth.

NET WORTH OF KHAN ’S FAMILY

TOTAL NET WORTH = TOTAL ASSETS – TOTAL

LIABILITIES

= 54, 00,000 – 6, 50,000.

= 47, 50,000. (POSITIVE NET WORTH)

(ii). liquidity ratio.

LIQUID ASSETS/CURRENT LIABILITY

6, 00,000 / 50,000 = 12

(iii). Housing payment ratio.

HOUSING COST/GROSS MONTHLY INCOME

25 2, 50,000/1, 50,000= 1.67

(iv). solvency ratio.

o CURRENT RATIO =

CURRENT ASSETS/ CURRENT LIABILITIES

= 7, 00,000 / 50,000 = 14

o CURRENT LIABILITIES TO NET WORTH RATIO=

C.L. / NET WORTH

= 50,000 / 47, 50,000 = 0.011

o FIXED ASSETS TO NET WORTH RATIO

FIXED ASSETS/ NET WORTH

= 47, 00,000 / 47, 50,000 = 0.989.

o TOTAL LIABILITIES TO NET WORTH RATIO

TOTAL LIABILITIES / NET WORTH

= 6, 50,000 / 47, 50,000 = 0.137.

26 (v). savings ratio.

o CURRENT SAVING RATE =

1 – CURRENT SPENDING / CURRENT INCOME

= 1 – 8, 67,000 / 18, 52,000

= 1 - 0.468 = 0.532.

(VI). DEBT TO INCOME RATIO

DEBT / NET INCOME

= 6, 00,000 / 6, 89,500

= 0.870

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BIBLIOGRAPHY

Personal finance by Reynolds.

The complete idiot’s guide to retiring early by Dee Lee, CFP, Jim

Flewlling.

Personal finance by Kapoor, Dlabay Hughes (TMH).

Financial planning journal- FPSB.

Course Manual.

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Questionnaire PERSONAL FINANCE PROJECT

NOTE: This mail is addressed to those students who have opted for

Personal Finance & Wealth Management. Those who haven't opted

may ignore this mail.

Dear Students

As announced in the class for internal assessment in PF&WM you

will develop a situation in the form of a caselet and also solve that

case. The relevant information and guidelines for the above are given

below:

1. Title of the Case = Personal Financial Plan

2. About the Case = Think of a family in which one or two are

earning members with mentioned income, expenses, assets and

liabilities (Short-term and Long-term). Write about their intermediate

and long-term goals. Analyze their financial condition and risk

appetite.

3. Solve the Case = Calculate their net worth, liquidity ratio, housing

payment ratio, solvency ratio, savings ratio, debt to income ratio.

Finally draft a financial plan based on the analysis of the financial

condition so as to enable your client to achieve specified goals.

The case project will be evaluated out of 50 marks. There will be no

other criteria for internal assessment. This project is compulsory for

all students (including ones who are not attending classes due to their

early joining) and hence non submission will result in zero marks.

The project should be send in soft copy and mailed at

pdublish@niilm.com latest by March 31, 2012.

With best wishes

Dr.Puneet Dublish

Professor-Finance

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