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Fundamentals of Personal Finance
Participants - Team CTS
FinervaFinancial Wisdom 4 Young Indians
FINERVA www.finerva.com 2
Learning Objectives1. List the benefits of studying personal finance.
2. Summarize the key steps in successful personal financial engineering.
3. Understand the basic terms in personal finance
1. Assets Vs Liabilities
2. Savings Vs Investments
4. Understanding time value of money
5. Applying time value of money concept to 1. Wealth Creation
2. Retirement
3. Insurance
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Financial Literacy
Financial literacy is knowledge of...
Facts Concepts Principles Technological
tools
...fundamental to being smart about money.
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Financial Responsibility
Financial responsibility is being accountable for:
Your financial decisions andYour own financial well-being.
“If it is to be, it is up to me”
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Personal Financial Engineering
What is it? Personal Financial Engineering is the development and implementation and monitoring of long-term plans to achieve Financial Freedom.
What are the steps in the financial engineering process?
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Financial Planning Benefits Financial planning helps you
achieve: Financial Success – achievement of
financial aspirations. Financial Security – being able to
fulfill any needs and most wants. Wealth – an abundance of money and
other financial resources. Financial Freedom – the state where
work is an option, you choose. Not compelled to opt.
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The Building Blocks ofFinancial Freedom
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Important Personal Finance Terms
Asset – is one that gives a positive cash flow
Liability – is one that gives a negative cash flow
Examples?
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…Important Personal Finance Terms…
Inflation–Steady rise in the general level of prices (reduces purchasing power)
Deflation–Falling prices.
Examples?
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…Important Personal Finance Terms
Comparision
Savings Investment
Returns Low, Fixed, Less Risky
Higher, Variable, Risky
Types of Returns Cash Flow only (if any)
Cash Flow and Capital Appreciation
Term Short Term Long Term
Purpose Festivities, Gifts, Small down-payments, Religious purpose
Education, Marriage, Wealth creation, Large down-payments, Retirement
Savings Vs Investment
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Opportunity Costs and Trade-offs in Decision Making
Opportunity Cost – Value of the next best alternative that must be foregone.
Opportunity cost reflects the best alternative of what one could have done instead of choosing to spend, save, or invest money. Examples?
Trade-offs occur when you give up one thing for another.
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The Time Value of Money in Financial Decision Making
The Time Value of Money compares:
value in the future of a Rupee received today (FV)
value today of a Rupee amount to be received in the future (PV)
Key factors: Time, Interest, Principal
Annuity - a series of payments/deposits
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Compound Interest
Compound Interest – interest earned on interest.
Compounding – the process of earning compound interest – is the best way to to build wealth over time.
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Calculating Future Values
Future Value (FV) – Value of an asset at the end of a particular time period.
Example: Wealth Creation
?
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Easy Thumb Rule - The Rule of 72
Calculates the number of years it takes for principal to double
Years = 72 divided by interest rate. Example: 72 divided by 8% = 9 years
Calculates the interest rate it takes for principal to double
Interest rate = 72 divided by number of years
Example: 72 divided by 10 years = 7.2%
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Illustration: The Rule of 72
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Future Value of an Annuity What lump sum will be got over time if a
series of deposits are made (assuming same amount is deposited each time)
Example: Power of Compounding:
Kaun Banega Crorepathi?
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Present Value of a Lump Sum
Present Value (PV) - Today’s value of an amount to be received at a future date.
Example: How much should I deposit?
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Present Value of an Annuity
Present value of a stream of payments to be received in the future.
Example: Retirement Planning
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Risk Management Insurance helps to transfer risk
at low cost How much insurance do I
need? Milestone Planning Income Replacement Met
hod
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Golden Rules of Personal Finance
1. “Pay yourself first” by spending less than you earn
2. Stay up-to-date about current economic conditions
3. Map your financial future by establishing goals and making realistic plans to achieve them
4. Insure your risks
5. Take advantage of tax benefits on investments
6. Develop expertise in financial matters
7. Remember that you are responsible for your own financial success.
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Thank you
Questions Session
This training was delivered by FINERVAwww.finerva.com