PTMBA III / TRIM VII YEAR 2010-11 Personal Financial Planning

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Transcript PTMBA III / TRIM VII YEAR 2010-11 Personal Financial Planning

PTMBA III / TRIM VII
YEAR 2010-11
Personal Financial Planning (PFP)
Mahesh Parikh / JUNE 2010
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PTMBA III TRIM VII YEAR 2010-11
Personal Financial Planning
(PFP)
Some like it. Some don’t. But personal financial planning is a
reality for every working person. Most young people today
think of retirement as a distant reality.
However, it is important to plan for your post-retirement life
if you wish to retain your financial independence and
maintain a comfortable standard of living even when you are
no longer earning. This is extremely important, because,
unlike developed nations, India does not have a social security
net.
Financial Planning acquires added importance because of the
fact that though longevity has increased, the number of
working years haven’t
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Personal Financial Planning
(PFP)

People are facing a common problem. They have uncertainty in their financial
plans.

That personal financial planning is a niche area meant for the affluent class and
is for the needy is a general feeling among people. Financial planning does not
require heavy bank balances or real estate property. Whether one has enough
money or very less, personal financial planning comes handy for everyone.
Personal financial planning refers to the proper planning and implementation of
well-coordinated plans to achieve financial objectives. If a person has huge cash
reserves, he can plan to invest and spend it wisely. Similarly, even for a person
who has low or inadequate income, financial planning is the need of the day.
Financial planning can help such a person to deploy the scarce available
resources in a wise manner. In other words, whether the person is rich or poor,
depending on his future goals, savings and investments become essential. The
savings and investments made today have to match the future goals. To make sure
that this happens, proper projection of the future needs and the evaluation of the
future courses of actions becomes necessary.

Thus, Personal Financial Planning can be defined “ as taking conscientious and
systematic steps towards fulfilling one Financial Goals”
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Personal Financial Planning
(PFP)
Rewards of Financial Planning
• Improved Standard of Living
• Spending Money Wisely
• Current Needs
• Future Needs
• Accumulating Wealth
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REWARDS OF FINANCIAL PLANNING
1.
Personal Financial Planning
(PFP)
Improved Standard of Living
Management of resources and controlling undue expenses. To provide
for investment to meet future needs. As income increases, the need for
planning also increases.
2.
Spending Money Wisely
Spend it or save it for the future. Sometimes, it is important for an
individual to forgo current needs to save for the future. If money is to
be spent, it should be spent wisely.
3.
Current Needs
Current needs depend on level of basic necessities of life such as
food, clothing, shelter etc. and propensity to consume. One can easily
be influenced by various attractive schemes for buying expensive
consumer durables, large houses, clothes etc. irrespective of income.
One has to strike a balance between current expenses and future
requirements. This is dependent upon individual attitude of the person.
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Personal Financial Planning
(PFP)
REWARDS OF FINANCIAL PLANNING
4. Future Needs
Future needs can be taken care of by allocating a part of current
income for saving or investment. Lower the income, lesser is saving /
investment. But, it is imperative for a person to save for the future. There
may be a need to spend a lump-sum which has to be catered to out of
saving / investment; saving for such needs may call for sacrificing on
current needs.
5.
Accumulating Wealth
* Accumulation in the form of tangible or intangible assets.
* Assets can be Earning Assets & Tangible Assets (Car is tangible but not
earning)
* Tangible asset have two character
- Income Generating (e.g. Rent)
- Capital Appreciation (e.g. land / real estate)
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Objectives
1.
Regular Income
2.
For predictable events / goals
-Education
-Marriage
-Holidays
3.
Funds for Emergency
- Hospitalisation / Accident
-Family Needs
-Un-employed Period
4.
Investment Planning
-Housing
-Car/Vehicle
- High Value Entertainment objects like Home-Theatre
- Club/Gymkhana Membership / Entrance Fees
5.
Wealth Creation
6.
Hedge against inflation
7.
Retirement Planning / Estate Planning
8.
Unfortunate events like
- pre-mature or early death
- Disability Losses
- Unemployment
Personal Financial Planning
(PFP)
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Personal Financial Planning
(PFP)
STEPS IN FINANCIAL PLANNING PROCESS
1.
Defining Goals
2.
Developing Goals
3.
Implementation
4.
Monitor & Control
5.
Evaluating results of Plans & Budgets
6.
Revising & Redefining Goals
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Personal Financial Planning
(PFP)
DEFINING FINANCIAL GOALS
Goals should be
a)
b)
c)
d)
SPECIFIC
REALISTIC
FOR WHOLE FAMILY
HAVING TARGET DATES
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Personal Financial Planning
(PFP)
Types of Financial Goals
1.
Long term Goals
May extend beyond 5/6 years. The time-period should not be so long that the
goal become unrealistic to achieve. The goals change over a period of time and
need to be revised on regular basis. The table below illustrates individual’s
long-term goals.
Goal
Priority
Target Date
Cost Estimate
Take Home Loan
Priority
3 Yrs. from now
5,00,000/- own
20,00,000/- own
Investment in
Land / Farm
House
Medium
5/7 yrs. from now
Take Singapore
Holiday
Medium
2/3 Yrs. from
now
2,00,000/-
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Personal Financial Planning
(PFP)
SHORT-TERM GOALS
Period one year or less. They are immediate goals in the form of expenses in the
current period. The Short-Term goals also provide for the surplus required for
savings, which are crucial for long-term goals. The following table illustrates the
same.
Goal
Priority
Target Date
Cost Estimate
School Uniform &
accessories for children
High
Immediate
4500/-
Replacement of mobile
which has battery problem
High
Immediate
15000/-
Seat-Cover for Car
Medium
1 / 2 months from
now
3000/-
Buy Crockery Set
Low
1 / 2 months from
now
3000/11
Personal Financial Planning
(PFP)
INTERMEDIATE GOALS
They fill up the gap between the short term & long term goals. They are spread
over 2 to 5 years.
Goal
Priority
Target Date
Cost
Estimates
Re-payment
High
of Educational
Loans
1 year from
now
1,00,000/-
Take OneMonth
holiday
6 Months
from now
1,00,000/-
Medium
Advisable to prioritize goals on the basis of urgency to fulfill them. This would
help individual to concentrate on some goals & defer some.
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Personal Financial Planning
(PFP)
PLANNING FOR A LIFE-TIME
Financial Planning is a dynamic process. Goals & Targets change
with changing environment and situations. They have to be
updated at the right time. Contingencies such as unemployment,
illness, disability etc. have impact on Financial Planning.
To start with, one depends upon parents. Then Career starts for
the self. The income increases as years pass by and stabilize at one
stage. One takes responsibilities for children and requisite
standard of life. Also, one has to plan retirement needs.
Financial plan give a picture of what financial plans can be
adopted in various stages of life.
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Personal Financial Planning
(PFP)
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Personal Financial Planning
(PFP)

Asset Acquisition Planning
Asset planning is the first form of financial planning. The assets acquired
may range from liquid assets to real estate property to personal assets.
Cash held and balances in savings accounts are examples of liquid assets,
while assets such as automobiles, household furniture, appliances and
jewellery are personal assets. Land and structures fixed to it, like houses,
etc., constitute real assets.
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Liability and Insurance Planning
A person may have to manage his/her debt like education / car loan etc. in
the same way as managing his / her assets. Apart from managing one’s
debt, one also has to provide for his or her insurance. There is the risk that
a critical illness may wipe out the entire earnings of a person or that an
accident wipes out the savings accumulated through years of hard work.
Thus, it is essential to have an adequate insurance cushion for a smooth
living. Too much of insurance, too, is not desirable.
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Personal Financial Planning
(PFP)

Savings and Investment Planning
As a person’s income increases, the importance of savings and
investment will also increase. People generally start savings
for meeting unexpected situations. At a later stage, it is
essential to start investing in investment instruments such as
bonds, saving schemes, personal property to accumulate
wealth.

Tax Planning
Tax planning assumes importance for an individual, once he
or she falls in the tax bracket. There are various exemptions
and deductions available, under different sections of the
Income Tax Act for different purposes and based different
criteria. Not considering the tax benefits available when
planning the investments, can result in loss of a substantial
portion of the return to taxes. Hence, tax planning and
financial planning go hand in hand.
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Personal Financial Planning
(PFP)

Employee benefit Planning
Generally, large firms provide employee benefits in the form of
life and health insurance, disability insurance, reimbursement
plans for education or it may be in the form of pension or
retirement plans. Apart from these traditional plans, firms
now-a-days also give benefits in the form of stock options,
health and child care expenses, vacation leave, sick leave, etc.
An individual should try to integrate his/her own personal
plans with the benefit plans provided by the organization
should also be duly supplemented by personal policies.
In today’s uncertain employment conditions, one should be
prepared for eventualities like a loss of job – either through
layoffs or dismissal – and having no run the family without a
job for some time.
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Personal Financial Planning
(PFP)
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Retirement and Estate Planning
One of the main long-term goals of financial planning is to
make proper retirement plans. Apart from maintaining one’s
standard of living and meeting all necessities in life, one has to
take care of his/her retirement days. Old age brings with itself
increased medical expenses and other requirements. Thus,
investment in a retirement plan is of utmost importance for a
person who is approaching middle age.
It is always advisable to start planning for retirement well in
advance , rather than after one is into the late 40s or the 50s.
This is because, investments made early in life multiply with
accrual in interest and the final sum available will be much
more. Apart from retirement plans, estate planning should also
be done carefully for passing on the wealth to legal heirs.
Estate planning is a complicated topic that calls for an
understanding of wills, trusts, and their legal aspects. It will
be covered in detail later.
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Personal Financial Planning
(PFP)
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The planning Environment
Financial and economic environment need to be
properly understood by an individual before starting
his/her financial plan. The economic environment of a
country influences the individual financial decisions
made by a person. Economic variables such as
inflation, interest rates, retirement plans available by
the government agencies, etc., influence the planning
decisions.
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Personal Financial Planning
(PFP)
The Planning Environment

Government
There are two main tools applied by the government, which impose
restrictions – they are taxation policies and government regulations.

Taxation
The government levies taxes on the income of the individual, sales, real
estate and personal property. Taxes form one of the main sources of
revenue for the government. By changing the taxation rates, the
government can decide the amount of disposable income in the hands of the
consumers and affect their financial planning.

Regulations
Governments impose various regulations to safeguard interests of the
consumers, investors and general public as a whole. The government may
impose restrictions on the undesirable activities of the sellers, producers,
financial institutions, etc.
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Personal Financial Planning
(PFP)
The Planning Environment

Business
Business enterprises produce goods and services by employing labor and
utilizing land, capital and technology. Business firms need to pay wages,
interest, and rent for the use of the factors of production and in turn earn
profits. Thus, business enterprises facilitate the circular flow of income in
the economy. Enterprises not only create healthy competition in the
economy but also facilitate greater array of goods and services available to
the customers.

Consumers
Consumer is the ‘king’ in today’s dynamic environment. Consumer’s tastes
and preferences determine the strategies of the business enterprises. In
case the economy is depressed with low economic activity, the general
public may cut its expenditure and vise-versa.
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Personal Financial Planning
(PFP)
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Personal Financial Planning
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Other Factors Affecting Financial Planning

Economy
The economy is the result of interaction among various groups
such as the government, business and the consumers. The
government is the most important player in the economy,
maintaining the economic stability and high employment
levels. The government through its monetary and fiscal policy
is able to determine the requisite level of economic activity by
influencing the interest rates, inflation and money supply. The
government, by reducing and increasing taxes and interest
rates, is able to regulate the fundamentals of the economy.
Taxes and interest rates are generally lowered when the
economy needs a stimulus and they are increased when the
economy is getting overheated, during a boom.
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Personal Financial Planning
(PFP)
Other Factors Affecting Financial Planning
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Economic Cycles
The level of economic activity changes constantly giving rise to various economic
cycles also known as business cycles. An economic cycle goes through the following
stages:
Expansion
Expansion in the economy occurs when the economy goes through high levels of
employment and production.
Recession
Recession results, when the economic activity declines for a period of more than six
months (often mentioned as two consecutive quarters).
Depression
Depression in the economy is said to occur, when the economic activity comes to a
standstill.
Economic Recovery
The recovery stage in the company occurs when the production and employment
levels start rising indicating a revival in the economic activity. Percentage changes
in the Gross Domestic Product (GDP) are commonly used to measure the growth of
an economy. An increase in the GDP means that the economy is growing and a fall
in GDP indicates poor economic conditions. Unemployment rate is also used
frequently to measure the health of an economy.
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Personal Financial Planning
(PFP)
Other Factors Affecting Financial Planning
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Inflation, Level of Prices and Interest Rates
Every economy is based on the exchange of goods and services among
business and their customers. This exchange is facilitated by ‘Money’ and
the price of the product or service. Inflation occurs when the level of prices
increases. In this situation, the economy is said to be going through
inflation.
The level of inflation influences financial planning, as the disposable
income in the hands of the individual may reduce. Inflation also affects
interest rates – high rates of inflation increase the cost of borrowing, as the
lenders demand a higher compensation as a price for parting with their
money. Inflation also affects stock and debt market. Apart from all this,
high level of inflation affects the retirement plans drastically. Thus, the
economic scenario should be completely understood before formulation of
any long-term financial plan by an individual.
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Personal Financial Planning
(PFP)
DETERMINANTS OF PERSONAL INCOME

Persona1 income of an individual depends on various factors such as age,
marital status, IeveI of education; place of residence and last but not the
least, the choice of career. Earning money is not difficult, but it is
influenced by the above mentioned variabIes associated with the individual.

Age
The age group in which an individual falls determines his/her earning
capacity.
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Marital Status
Where both the spouses are working, it is easier to plan financially for the
future and also maintain the requisite lifestyle of the family.
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Personal Financial Planning
(PFP)
Determinants of Personal Income

Education
Although it is not necessary that the education of a person is the sole
determinant of an individual's income but high education makes a
difference in the long run for thefinancial stability of a person.
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Place of Residence
Number of opportunities available in a bigger city or town gives a better
exposure for finding a better job or changing a job than a smaller city for
an individual.

Choice of Career
Earning capacity of a person depends on the type of career he or she
chooses. The career chosen by a person is again dependent on the
education, standard of living, skills and interests of a person, his / her
preferences and personal values.
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Personal Financial Planning
(PFP)
Determinants of Personal Income
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Career Plan
There is a close relationship between career and financial planning.
Decisions made in one area affect the other. Career planning is similar to
financial planning, as short and intermediate goals determine long-term
goals of an individual. Proper career planning helps in determining the
financial goals of an individual.

The foIlowing points will help in proper financial
planning for an individual:
1. Identify skills, interests, values, etc.
2. Identify long-term and short-term career goals.
3. Develop a career plan and implement it to achieve the targets set.
4. Keep reviewing the plan to adjust to the changing situations.
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