session 12 - slides

8/7/2019 Session 12 - Slides

1/46

Session 1

Basics of

Financial Planning


2/46


3/46

Financial Planning and ItsBenefits

Personal financial planning - Process of managingmoney to achieve personal economic satisfaction.

Advantages of personal financial planning:

1) Increased effectiveness in obtaining, using,and protecting your financial resources.

2) Increased control of your financial affairs.

3) Improved personal relationships.

4) A sense of freedom from financial worriesobtained by looking to the future. 1-2


4/46

2001 2002 2003 2004 2005 2006 2007 2008 2009

0

100

200

300

400

500

600

700

800

900

1000

CFP Professional Growth in India

starting year 2001

year

number


5/46

The Financial PlanningProcess

Determine your current financialsituation/financial health.

Develop and define your financial goals.

Identify alternative courses of action

Evaluate your alternatives.

keeping in mind Flexibility, Liquidity,

Protection and minimisation of taxes

Create and implement your financial actionplan.

Review, reevaluate and revise your plan. 1-3


6/46


7/46

Every Financial DecisionInvolves Evaluating Types of Risk

Inflation risk.

Rising prices cause lost buying power.

Interest-rate risk.

Effect costs of borrowing and rate of return.

Income risk.

The loss of a job.

Personal risk.

Health, safety, or costs.

Liquidity risk.

Higher return may mean less liquidity.

1-5


8/46


9/46

Developing Personal FinancialGoals

Types of financial goals include those...

Influenced by the time frame in which you wantto achieve your goals.

Influenced by the financial need that drivesyour goals.

Timing of goals.

Short-term, intermediate and long-term goals.

Goals for different financial needs

Consumer product goals, etc.

1-7


10/46

Goal-Setting Guidelines

Goals should be realistic

Goals should be stated in specific terms

Goals should have a time frame

Goals should indicate the action to be taken

Discuss some of your goals

1-8


11/46

Influences on Personal FinancialPlanning

Adult life cycle stage.

Marital status, householdsize, and employment.

Major events.

Graduation, marriage, children, retirement, etc.

Values.

What values are important to you?

Global influences

Life situation and personal

values

1-9


12/46

Individual's Financial Life

cycle

SOURCE:

https://static.flatworldknowledge.com/sites/all/files/imagecache/book/

27984/fwk-collins-fig14_007.jpg


13/46

Changing EconomicConditions

Consumer The value of the rupeeprices changes in inflation.

Consumer The demand for goods andspending services by individuals and

households.

Interest rates The cost of money; cost ofcredit when you borrow; returnon your money when you saveor invest.

1-10


14/46

Changing Economic

Conditions (continued)

Money Supply The dollars available forspending in our economy.

Unemployment The number of individualswithout employment who arewilling and able to work.

Housing starts Number of new homes beingbuilt.

1-11


15/46


16/46

Opportunity Costs and Financial ResultsEvaluated When Making Decisions

Personal

Opportunity Costs

(time, effort, health)

FinancialOpportunity Costs

(Interest, liquidity,

safety )

Financial

Acquisitions

(automobile,

home, college

education,

investments,insurance,

retirement fund)

1-13


17/46

Principles of PersonalFinance Risk-Return Trade off

The Time Value of Money

Diversification reduces risk

All risk is not equal

Investment markets are competitive

Taxes affect financial planning decisions

Liquidity is important

Very important to make a financial plan

Knowledge is very important

Time dimension of investing


18/46


19/46

Financial Literacy andFinancial Planning Financial literacy can be defined as the ability to

effectively evaluate and manage onesfinances inorder to make prudent decisions toward reaching life

goals. A professional, such as a CPA or other financial

advisor, can be your partner in financialsuccess. Heor she will gain an intimate knowledge of your

finances and can providemany services beyond taxpreparation, such as financial planning and eldercareguidance.

If you fail to plan, you plan to fail.


20/46

Time Value of Money

Increases in an amount of moneyas a result of interest earned.

Saving today means more moneytomorrow. Spending means lost interest.

Saving and spending decisions involveconsidering the trade-offs. Current needscan make spending worthwhile.

1-14


21/46

How Simple Interest isComputed

Simple Interest.Amount in savings x annual interest rate xtime period equals the interest.

Rs.100 x 5% x 1 (1 year)100 x .05 x 1 = Rs.5.00

In one year you have Rs.100 in principle plusRs 5.00 in interest for a total of Rs.105 at theend of the year.

1-15


22/46

Future Value

Future value is the amount to which currentsavings will increase based on a certaininterest rate and a certain time period.

Future value is also called as compounding -earning interest on previously earnedinterest.

Future value can be computed for a singleamount or for a series of deposits.

1-16


23/46

Present Value

The current value for a future amount based ona certain interest rate and a certain time period.

Present value calculations are also called

discounting.

The present value of the amount you want inthe future will always be less than the future

value. Present value can be computed for a single

amount or for a series of deposits.

1-17


24/46

Components ofFinancial Planning

Obtaining

Planning

Saving

Borrowing

Spending

Managing risk Investing

Retirement and estate planning

1-18

Components ofFinancial PlanningComponents of

Financial Planning


25/46

Developing a FlexibleFinancial Plan

A financial plan is a formalized report that...

Summarizes your current financialsituation.

Analyzes your financial needs.

Recommends future financial activities.

Your financial plan can be created by you,with assistance from a financial planner, ormade using a money management softwarepackage.

1-19


26/46

Implementing Your FinancialPlan

Develop good financial habits.

Use a well conceived spending plan to helpyou stay within your income, while allowing

you to save and invest for the future.

Have appropriate insurance protection toprevent financial disasters.

Become informed about tax and investmentalternatives.

Study personal finance.

1-20


27/46

mp ement ng our nanc aPlan

(continued)

Achieving your financial objectivesrequires two things.

A willingness to learn.

Appropriate information sources (see AppendixA).

Current periodicals.

Financial institutions.

Courses and seminars.

Personal financial software.

The World Wide Web. 1-21


28/46

Lucky You

Suppose you just won a Rs.100 million

lottery and you are given the choice

of taking a lump sum or payments

over 20 years. Which would you do? Why?

1-22


29/46

Planning for SuccessfulMoney Management

Daily spending and saving decisions are theheart of financial planning.

Decisions must be coordinated with needs,

goals, and personal situations. Money management is the day-to-day

financial activities needed to manage

personal economic resources, while workingtoward long-term financial security.

3-2


30/46

Opportunity Cost andMoney Management

Spending money on current living expensesreduces the amount you can save and invest.

Saving and investing for the future reduces the

amount you can spend now.

Buying on credit ties up future income.

Using savings for purchases results in lost

interest and depletes savings.

Comparison shopping can save money buttakes valuable time.

3-3


31/46

MajorMoney Management Act v t es

Creating and

implementing

a plan for

spending,and saving

(budgeting).

Creating

personal

financial

statements(balance

sheets and

cash flow

statementsof income

and

outflow).3-4

Storing

and

maintaining

personalfinancial

records

and

documents.


32/46

Benefits of an OrganizedSystem ofFinancial Records

Handling daily business affairs, includingpayment of bills on time.

Planning and measuring financial progress.

Completing required tax reports.

Making effective investment decisions.

Determining available resources for currentand future buying.

3-5


33/46

What to Keep in YourHome File

Items you refer to often.

Personal and employment records.

Money management records.

Tax records.

Financial services records.

Consumer purchase, auto and credit records. Housing records.

Insurance records.

Investment records. 3-6


34/46

What to Keep in a SafeDeposit Box

Safe deposit box is for records that would behard to replace.

Birth, marriage and death certificates, copy of will

Citizenship and military papers.

Adoption and custody papers.

Serial numbers and photos of valuables.

CDs and credit and banking account numbers.

Mortgage papers and titles.

List of insurance policy numbers.

Stock and bond certificates.

3-7

H


35/46

How Long to KeepRecords

Birth certificates, wills, and Social Securityinformation should be kept indefinitely.

Keep records on personal property and

investments as long as you own them. Keep documents related to the purchase and

sale of real estate indefinitely.

Copies of tax returns and supporting datashould be kept six years.

3-9


36/46

Purpose of PersonalFinancial Statements

Report your current financial position inrelation to the value of the items you own andthe amounts you owe.

Measure your progress toward your financialgoals.

Maintain information on your financial

activities. Provide data you can use when preparing tax

forms or applying for credit.

3-10

omponen s o a a ance


37/46

omponen s o a a anceSheet

(net worth statement)

Assets - what you own.

Liquid assets.

Real estate.

Personal possessions.

Investment assets.

Liabilities - what you owe

Current liabilities (< 1 year).

Long term liabilities.

Compute your net worth.

Assets minus liabilities. 3-11


38/46

Components of a CashFlow

Statement

Shows inflow, outflow for a given timeperiod.

Record inflow.

Net income from employment.

Savings and investment income.

Other sources.

Record cash outflows.

Fixed and variable expenses.

Net cash flow can be a surplus or a deficit.

Use this statement as a basis for creating a 3-12


39/46


40/46


41/46


42/46


43/46

Characteristics of SuccessfulBudgeting

Well planned.

Realistic.

Flexible.

Clearly communicated.

3-17


44/46


45/46

M M &


46/46

Money Management &Achieving Financial Goals

Balance Sheet reports current financialposition

Cash Flow Statement shows cash you have

received and spent in the past Budget helps you to spend and save to

achieve financial goals

3-21

session 12 - slides

Documents