PERSONAL FINANCIAL PLANNING (FIN654)

1. PERSONAL FINANCIAL PLANNING(FIN654) INTRODUCTION ROSELIZA HAMID/UITM KELANTAN/2010

2. CHAPTER OUTLINE Personal financial planning The importance A planning approach Time value of money Personal finance record keeping ROSELIZA HAMID/UITM KELANTAN/2010

3. PERSONAL FINANCE 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. ROSELIZA HAMID/UITM KELANTAN/2010

4. INDIVIDUAL GOALS 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. ROSELIZA HAMID/UITM KELANTAN/2010

5. ACHIEVING FINANCIAL GOALS THROUGH PLANNING 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. ROSELIZA HAMID/UITM KELANTAN/2010

6. FINANCIAL PLANNING • 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. ROSELIZA HAMID/UITM KELANTAN/2010

7. THE IMPORTANCE 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 ROSELIZA HAMID/UITM KELANTAN/2010

8. THE ADVANTAGES 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. ROSELIZA HAMID/UITM KELANTAN/2010

9. FINANCIAL PLANNING AREAS Consumption and Savings Planning Debt Planning Insurance Planning Investment Planning Retirement Planning Estate Planning Income Tax Planning ROSELIZA HAMID/UITM KELANTAN/2010

10. Life-Cycle Financial Planning ROSELIZA HAMID/UITM KELANTAN/2010

11. A PLANNING APPROACH 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? ROSELIZA HAMID/UITM KELANTAN/2010

12. MAKING FINANCIAL DECISIONS 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. ROSELIZA HAMID/UITM KELANTAN/2010

13. TIME VALUE OF MONEY Present value Future value Annuity Ordinary annuity Annuity due Amortisation ROSELIZA HAMID/UITM KELANTAN/2010

14. PERSONAL FINANCERECORD KEEPING Balance sheet Assets = Liabilities + Not worth Income Statement/Cash Flow Statement Income – Expenses = Savings/Dissavings Budget Master budget Monthly income and expense plan ROSELIZA HAMID/UITM KELANTAN/2010

15. NEXT CHAPTER: INCOME TAX PLANNING ROSELIZA HAMID/UITM KELANTAN/2010