PERSONAL FINANCIAL PLANNING (FIN654)

ROSELIZA HAMID/UITM KELANTAN/2010

INTRODUCTION


Personal financial planning The importance A planning approach Time value of money Personal finance record keeping


An individual’s fund management 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.


Non-financial goals• Family, children, education, religious, social, etc.• Finances can affect your ability to attain these goals

Financial goals• Financial independence is an important goal for many

people. Financial independence is defined as having enough income or resources to be self-reliant.

• One of the financial choices that we make is between consumption today versus consumption in the future.

• Must be realistic/reasonable, specific/measurable term, have time frame and having course of action.


Planning is the key to achieving all goals especially financial goals.

Life-cycle planning is the phrase that suggests that financial planning is a lifelong process.• People experience different phases in their life such

as career development and family formation, retirement, etc.

Major financial planning areas• The different phases of life impact the importance of

the various components of financial planning. At different phases, different financial planning areas increase or decrease in importance.


Definition: Look at how much you earn, figure out how much you will need in the future to maintain your desired lifestyle and try to come up with an investment plan that will help you reach the amount that will allow you to retire

Financial success is defined as obtaining the maximum benefits from limited financial resources.


It is the key to financial success It is a life-long process or also known as

life-cycle planning It can control one’s financial situation A good financial planning can lead to

enhancing the quality of life and increasing personal satisfaction by reducing uncertainty about future needs and resources


It can increase effectiveness in obtaining, using, and protecting one’s financial resources

It can increase in control of one’s financial affairs by avoiding using a lot of debts or dependency on others for economic security

It can improve personal relationship because of having well-planned financial decisions

It gives a sense of freedom from financial worries related to the future, anticipating expenses and achieving personal economic goals.


Consumption and Savings Planning Debt Planning Insurance Planning Investment Planning Retirement Planning Estate Planning Income Tax Planning


Life-Cycle Phases Financial Planning Areas

Young adult(18–25)

Consumption and savings; career

Family formation(26–35)

Consumption and savings; career; debt; insurance; income taxes

Family development(36–49)

Investment; retirement; income taxes

Family maturity(50–60)

Investment; retirement; estate

Retirement (above 60) Estate; income taxes


Step 1: Determine concrete goals. First state your broad goal such as the purchase of

a home. Determine the specific pieces to achieve that goal

such as the cost of the house, the down payment amount, etc.

Step 2: Create an action plan. How will you achieve the goals stated in step 1?

How much will you save each month and where will the money be invested?

Step 3: Evaluate performance. At least annually, evaluate steps 1 and 2 to

determine if any adjustments should be made in the action plan or goals.

Step 4: Decide on a future course of action. Is your goal realistic or should it be reevaluated?


There are two economic concepts that are helpful in financial decision making.

Marginal Analysis: involves the analysis of the changes in important variables• E.g.: choosing between a public and private

university; the public university costs $15,000 per year whereas the private university costs $40,000 per year. Does the private university provide benefits that compensate for the additional $25,000 ($40,000–$15,000)?

Opportunity Costs: the benefits given up when one alternative is chosen over another• E.g.: putting money in a savings account rather than

investing in the stock market. The opportunity cost is the higher return that could potentially be earned in the stock market.


Present value Future value Annuity

• Ordinary annuity• Annuity due

Amortisation


Balance sheet• Assets = Liabilities + Not worth

Income Statement/Cash Flow Statement• Income – Expenses = Savings/Dissavings

Budget• Master budget• Monthly income and expense plan


INCOME TAX PLANNING

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PERSONAL FINANCIAL PLANNING (FIN654)