Transcript Why study Personal Finance?

Personal Finance for Accountants
(U13763)
Lecture 1 Introduction
Personal Finance for Accountants
• Studying Personal Finance
Scheme of work
Assessment
• Introduction to Personal Finance
Why study Personal Finance?
Topical issues
• Principles of Financial Planning
Studying Personal Finance
Recommended Core Text:
Personal Finance and Planning Theory and Practice by Debbie Harrison. Published by FT Prentice Hall (2005). ISBN13:
9780273681014 ISBN10: 027368101X
Assessment
• Group Presentation on a Personal Finance
Topic 40%
• Seminar Preparation 10%
• In-Class Test week 11 (Multi-choice questions)
50%
Topical Issues- Banks in Trouble
Credit Crunch
• Credit crunch – a period of restricted lending
• Nationalisation of banks: Northern Rock;
Bradford and Bingley.
• Other Banks in trouble e.g. HBOS
• Recession looming (?)
Why study Personal Finance?
• Throughout our lives there are major financial
milestones such as buying a house and
preparing for retirement. These types of
decisions are long term and involve large sums
of money so they need to be carefully
planned.
Why study Personal Finance?
• There are also changing trends in the
economy which require us all to be more
financially astute. An example is the level of
unsecured personal debt that we are all living
with. Most students are graduating with
considerable amounts of debt (see
creditaction article). We are also bombarded
on a daily basis with tempting offers of credit,
these need to be treated with some caution.
Why study Personal Finance?
• So this course aims to increase your
awareness of such issues and to arm you with
the tools to help you to make sound life long
financial decisions.
• We will cover such topics as Banking and Debt,
Savings and Personal Taxation. We will
examine opportunities to keep our precious
savings out of the Tax man’s net!
Why study Personal Finance?
• Provision for retirement may seem a long way
away but the simple rule is the earlier that you
start the better so we will investigate different
ways of providing for retirement. This will
include the traditional pension and
alternatives such as buy to let property
Why study Personal Finance?
• As background to Personal Finance it is
necessary to have an understanding of the
regulatory environment in which it operates
and also to have an appreciation of financial
planning.
Principles of Financial Planning
• The first step in achieving Personal Finance goals is to prepare a plan.
• Financial Planning has be described as:
• A service that helps individuals and families to achieve their personal
objectives through the construction of an appropriate financial plan. The
plan represents a journey..to the desired goal. Harrison (2005)
• Some typical personal finance goals are:
Reducing or eliminating debt
Buying a house
Achieving a comfortable retirement
Principles of Financial Planning
• The planning process will go through several
activities including:
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Data gathering;
Goal/objective setting;
Identification of financial issues;
Preparation of alternatives and
recommendations;
• Implementation of the alternative selected, and
• Revision of plan
Principles of Financial Planning
• Any good planning system will involve periodic
reviews where the actual outcome is
compared to the plan.
• As a result of this the either action must be
taken to get us back on track to achieve our
plan or possibly the plan will be revised in the
light of new information..
Principles of Financial Planning
• As part of the data gathering activity we will
be required to:
• Prepare a statement of the individuals
financial circumstances, issues and objectives.
• Prepare an assessment of the individuals risk
profile.
• Prepare a financial statement for the
individual
Principles of Financial Planning
• Use appropriate financial data to make
realistic assumptions regarding, inflation,
interest rates, investment growth etc.
• Produce a written plan. This will identify the
individuals objectives including time frames
and set out how to make the most of existing
resources
Risk
• From a mathematical point of view risk is
defined as the standard deviation of the
average return.
• However individuals perception of risk is very
subjective. The measurement of risk is an
attempt to measure uncertainty.
Risk
• With certain types of investment we have the
potential to lose our capital (the amount we
invested) such as when investing in a company’s
shares. Compare this to investing in premium
bonds (a government scheme) where the capital
is returned on demand.
• We will see later that risk and return have a direct
relationship. Generally speaking low risk equals
low return and high risk equals high return.
Balance Sheet of an Individuals Assets and Liabilities.
Assets
Liabilities
After tax Earnings
Living expenses
Savings and Investments
Mortgage and other loans
Equity in Property - main residence and
buy to let.
Credit card debt
Company share schemes
Education fees
Occupational and private pensions
Charitable giving
Tangible assets e.g. works of art, antiques
and classic cars.
Insurance and maintenance
Example: eliminating all my personal debt
• Data gathering
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How much debt do I have?
With who?
How much interest am I paying?
Are there any penalties to get out early?
• Goal/objective setting
• To eliminate all my personal debt (excluding the mortgage)
by the end of 2010 (make the objective measurable so that
you know if you have achieved it)
Example: eliminating all my personal debt
• Identification of financial issues
• How do I continue to pay essential bills during this time.
• Preparation of alternatives and recommendations;
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Getting rid of most expensive debt first.
Setting a weekly spending budget.
Getting additional income E.g. Extra job, take in a lodger
Review all spending to look for savings e.g. uswitch.
• Implementation of the alternative selected and
• Revision of plan.
Seminar Work
• Review Qs pp 17 & MCQs as given.
• Required Reading
• Core Text - Personal Finance and Planning Theory
and Practice by Debbie Harrison.
• Chapter 1 The Principals of Modern Financial
Planning