Introduction of Personal Finance for beginners

Introduction of Personal Finance for beginners

1. PERSONAL FINANCIAL PLANNING By – Dr. Yogesh Dhoke

2. Course Outcome Examine the meaning and appreciate the relevance of financial planning. Demonstrate the concept of investment planning and its methods. Examine the scope and ways of personal tax planning. Analysis the insurance planning and its relevance. Interpret insights into retirement planning and its relevance.

3. CONTENTS-: 1. Introduction – what is Planning and personal financial planning. 2. Benefits of financial planning 3. Financial planning pyramid. 4. Financial planning process and steps. 5. Financial planning concepts. 6. Factors determining financial planning. 7. Basis of financial planning. 8. Conclusion.

4. 1.Introduction-: What is planning - Planning is the process of thinking about the activities required to achieve a desired goal. It is the first and foremost activity to achieve desired results. It involves the creation and maintenance of a plan, such as psychological aspects that require conceptual skills. A proper planning prevents poor performance, So a proper planning is necessary in every day life whether it is related to personal financial planning or in any other sports related activities , at the time of presenting your views before everyone, preparing for any type of exam such as competitive exams or academic exams, planning a vacation, et cetera. 3. Planning thus precedes all efforts and action, as it is the plans and programmes that determine the kind of decisions and activities required for attainment of the desired goals.

5. Personal Financial Planning-: Financial planning   has become one of the most important aspects of life. Correct planning helps you in achieving your personal financial goals and keeps you financially secure for unforeseeable situations. In general usage, a financial plan is a comprehensive evaluation of an individual's current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plans. The entire gamut of financial planning is explained by RETIIRS, which means-: R – RISK, E – ESTATE, T – TAX, I – INVESTMENT, I – INSURANCE, R – RETIREMENT, S – SAVINGS. 3. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals.

6. Benefits of financial planning-: 1 . Correctly managed cash flow. 2. Personal finances. 3. Achieving personal goals. 4. Clear retirement goals. 5. A secure retirement income. 6. Reduced risk. 7. Insurance.

7. Financial planning pyramid -:

8. Financial planning process-:

9. The steps in the financial planning process are as follows-: Establish   and define the relationship with the client-: The financial planning professional informs the client about the financial planning process, the services the financial planning professional offers, and the financial planning professional’s competencies and experience. The financial planning professional and the client determine whether the services offered by the financial planning professional and his or her competencies meet the needs of the client. Collect   the client’s information-: The financial planning professional and the client identify the client’s personal and financial objectives, needs and priorities that are relevant to the scope of the engagement before making and/or implementing any recommendations. The financial planning professional collects sufficient quantitative and qualitative information and documents about the client relevant to the scope of the engagement before making and/or implementing any recommendations.

10. Analyze    and assess the client’s financial status -: The financial planning professional analyzes the client’s information, subject to the scope of the engagement, to gain an understanding of the client’s financial situation. The financial planning professional assesses the strengths and weaknesses of the client’s current financial situation and compares them to the client’s objectives, needs and priorities. Develop the financial planning recommendations and present them to the client-: The financial planning professional considers one or more strategies relevant to the client’s current situation that could reasonably meet the client’s objectives, needs and priorities; develops the financial planning recommendations based on the selected strategies to reasonably meet the client’s confirmed objectives, needs and priorities; and presents the financial planning recommendations and the supporting rationale in a way that allows the client to make an informed decision.

11. Implement the financial planning recommendations-: The financial planning professional and the client agree on implementation responsibilities that are consistent with the scope of the engagement, the client’s acceptance of the financial planning recommendations, and the financial planning professional’s ability to implement the financial planning recommendations. Based on the scope of the engagement, the financial planning professional identifies and presents appropriate products and services that are consistent with the financial planning recommendations accepted by the client. Review   the client’s situation-: The financial planning professional and client mutually define and agree on terms for reviewing and re-evaluating the client’s situation, including goals, risk profile, lifestyle and other relevant changes. If conducting a review, the financial planning professional and the client review the client’s situation to assess progress toward achievement of the objectives of the financial planning recommendations, determine if the recommendations are still appropriate, and confirm any revisions mutually considered necessary.

12. Financial planning concepts -: Cash flow analysis-: It includes – Sources of cash, Uses of cash, change in cash balance. Current asset allocation-: Asset allocation is an investment portfolio technique that aims to balance risk by dividing  assets  among major categories such as cash, bonds, stocks, real estate, and derivatives. Each  asset  class has different levels of return and risk, so each will behave differently over time. Networth -: Your  net  worth is the amount by which your assets exceed your liabilities. In simple terms,  net  worth is the difference between what you own and what you owe. If your assets exceed your liabilities, you have a positive  net  worth. ... Your  net  worth provides a snapshot of your  financial  situation at this point in time. It is calculated as -: Total assets(-)Total liabilities Risk profiling-: Risk profiling is a process Advisers use to help determine the optimal levels of investment  risk  for clients. It aims to identify the  risk  required to meet your investment objectives, your  risk  capacity, and your tolerance to  risk . Emergency fund analysis-: An emergency fund is a readily available source to help you solve  financial  crises due to unexpected reasons. This  fund  helps improve  financial  security by creating highly liquid cash to meet any  emergency  and reduce the use of unsecured loans. Protection planning-: Just as you implement risk management strategies to protect your investments, you should have strategies in place to protect yourself. Insurance is a key element of any financial strategy.

13. Estate planning-: Estate planning is the process of arranging and  planning  your succession and  financial  affairs. ... Assets, Life Insurance, Pensions, Real  Estate , Cars, Personal Belongings, and Debts are all part of one's  estate . Tax planning-: Tax planning is the process of analysing a financial plan or a situation from a  tax  perspective. The objective of  tax planning  is to make sure there is  tax  efficiency. With the help of  tax planning , one can ensure that all elements of a  financial plan  can function together with maximum  tax -efficiency.

14. Basis of financial planning-: Life cycle of individual -: Childhood stage – Learner. Young unmarried stage – Earner. Young married stage – Partner. Young married with children stage – Parent. Married with older children stage – Provider. Post family/pre-retirement stage – Empty Nester. Retirement stage – Enjoyer. The 3 phases of one’s life -: Birth and education – 22 to 23 years. Earning years – 30 to 40 years. Retirement – At 58 or 60 years.

15. Conclusion-: Introduction Personal finance is all about how to effectively manage your money in order to achieve set goals. To achieve financial goals it is crucial that you adequately plan your life such as how, when and on what to spend your money because this discipline will enable you to stick to your goals. Therefore, you have to have a budgeted life. Budget refers to the financial plan which contains information on expected expenses and income within a set period of time.

16. In this course (personal financial planning), we do this assignment and carry out some conclusion. All of that, were about its beneficial of financial planning, what should we do or how we can prevent when we face to financial problem and planning for the better life style. For this personal financial planning is a kind of useful soft skills in our future life, it will bring us improvement of standard of living and achieve or goals. After discussion in this assignment, we gain of understanding for financial planning process, we also learn more about beneficial of using the personal financial planning by influencing economic environment. For example, we can classify about our investment and planning our wealth for better when make our decision in future planning.

17. Cash F low Budgeting A cash flow budget is a summary of the projected cash inflows and outflows for a business over a period of time. The time period is usually a future accounting period and is divided into quarters or months. As a primary purpose is to estimate the amount and timing of future borrowing needs and the ability of the business to repay loans.

18. Illustration of Cash flow

19. Insurance planning Risk-: A condition where there is a possibility of adverse outcome, however the outcome is uncertain. This is applicable to individuals as well as corporate houses. Probability of risk lies between 0 to 1 There are four ways to manage the risk. i ) Avoiding ii) Controlling iii) Accepting iv) Transferring- Insurance

20. Concept : Insurance is the tool used for the protecting asset from risk arises of uncertainties (insurance can protect only the economic value of the asset), as there is a chance of damage to asset before the expected life through accidental occurrences. Such accidental occurrences are called as PERIL . Insurance is a contract between Insurer ( insurance co.) & Proposer / insured ( cover holder), where insurer accepts the risk according to the terms & conditions, and for same insured pays some consideration called as premium.

21. Working principles of Insurance : Uncertainty. : Covers only uncertainties 2. Shearing of losses. : The total loss is shearing among large no. of units having same risk. 3. Law of Large numbers. : Large no. assure the correctness in the statistics of premium calculations.

22. Following are the characteristics which can be covered by insurance : 1. Loss must occur by chance 2. Loss must be definite, quantifiable. 3. Loss must be significant. 4. Loss rate must be predictable. 5. Loss must not be catastrophic to insurer.

23. Principles of Insurance: Principle of Utmost Good Faith 2. Principle of Insurable Interest 3. Principle of Indemnity –Principle of Contribution –Principle of Subrogation 4. Principle of Proximate Cause 5. Principle of Average

24. Principle of Utmost Good Faith : It is a voluntary duty to disclose all material facts which can affects the judgment in analyzing the risk. – Examples: Life insurance – medical history, financial status, lifestyle (smoking, drinking) etc. General insurance – previous convictions, previous losses, claims, policy cancellations. Personal accident – nature of occupation Fire Insurance – Construction of building Motor Insurance – purpose for which vehicle is used Marine Insurance – Method of packing Normally all insurance application forms has questionnaire to collect this data. The principle of utmost good faith is applicable while entering into the contract & come in force again at the time of revival

25. Principle of Insurable Interest : Generally insurable interest exits only if insured would suffer a financial loss in the event of damage to or destruction of the subject matter. – Insurable interest can be acquired by: Ownership, legal possession, custody of property belonging to others e.g. marriage-spouses on each others life, Employer - employee vice versa, partners, debtor and creditor. A parent usually deemed to have insurable interest in his or her child’s life The insurable interest is applicable at the time of entering in the contract in the life insurance & applicable at the time of entering in the contract as well as at the time of claim in the general insurance except Marine insurance.

26. Insurance Terms : Types of deductibles which form part of general insurance policy in most cases Excess Portion of any claim that is not covered by insurance provider Deductible must be met before benefits of the policy can apply Motor insurance deductible applies to claims arising from damage to his own vehicle. Travel insurance policies have deductibles Health insurance policies have deductible which does not Cover cost of routine visits Franchisee Kind of excess with a difference Like in excess if reported claim is below limit of franchisee it is not payable If claim amount is more than franchisee amount the insured gets full amount of claim without any deduction

27. Types of insurance policies : 3 types of life insurance policies – Term Insurance (Risk Cover only ): provides life insurance protection for a specific period of time – Pure endowment plan (Pure Investment): insurer pays fixed sum of money periodically, while insurer will give survival benefit to insured – Endowment (Combination of Term Insurance + Pure endowment ) : in addition to life insurance protection, it also builds internal cash values. So policy holder gets both life cover as well as maturity survival benefit.

28. Types of insurance policies : Term Insurance Plans Level term Decreasing term Increasing term Renewable term Convertible term Term insurance with return of premium Level term: Sum Assured (SA) same and uniform throughout term of policy, in case of death anytime during term, SA is payable. Decreasing term: Premium remains constant, but benefit payable decreases with time: for mortgage Increasing term: premium and benefit increases with time, wherein the increase could be linked to fixed % Renewable term: policy is issued for fixed term, with option to policy holder to renew without providing proof of health status

29. Types of insurance policies : Convertible term: policyholder has option to convert his term insurance to a permanent insurance plan without undergoing medical test Term insurance with return of premium: same as level term, except policyholder on survival gets back full premium paid

30. Life insurance products.: Whole life policy Ordinary life insurance: Limited paying life insurance Endowment Policy Money Back Policy Unit Linked Policy Pure Investments Annuities/Pension plans ULIP ( Unit linked insurance plan ) : Policy rider: Gives additional benefits that supplement basic benefit of SA. You have to pay extra premium for same.

31. Life insurance products.: Riders : Critical illness cover rider Disability benefit rider: Waiver of Premium (WOP) Accident death benefit: Level term cover rider: Payor rider.

32. General Insurance Products Home Insurance Motor Insurance Accident & Disability Insurance Mediclaim Critical Illness Overseas Travel: Actual Travel Guard Policy Liability insurance

33. Tax Benefits on Insurance. Section 80C deduction: Upto 1 lac for premium paid on life of self, spouse, children including adult children and married daughter Section 80D deduction: for medical insurance and all health riders upto 15000 pa (Rs. 20000 for senior citizens) Section 10(10D): Any sum received under insurance policy including maturity bonus etc is exempt. If annual premium is > 20% of SA on maturity, then differential between SA & Premium paid is taxable

34. Accident & Disability Insurance Cover: Physical loss to an individual due to accidental bodily injury (including fatal) 24 hour worldwide cover Any individual aged between 5 and 70, Subject to medical exam at 70, person can be covered upto 80 Scope of Cover Death 100% of SI Permanent Total Disablement 100% of SI Loss of 2 limbs/2 eyes or 1 limb + 1 eye 100% of SI Loss of 1 limbs or 1 eyes 50% of SI Permanent Partial Disablement Varying % of Sum insured as per policy Temporary Total Disablement : 1% of SA per week, subject to Rs. 3000 max per week, for max of 104 weeks

35. Accident & Disability Insurance : Exclusions: Compensation under more than one clause for same period of disability not exceeding CSI Any payment after admission of claim for 50%/100% of CSI Any claim in the same period of insurance exceeding the CSI Suicide, attempt there at, criminal breach of law, accidental death/injury under influence of liquor/drugs Pregnancy related claim War and nuclear perils

36. Mediclaim : Covers: Expenses incurred by insured for hospitalization/domiciliary for illness/diseases or injury sustained. Includes: Hospital charges(room, boarding, operation theatre) fees for surgeon, anaesthetist , nursing, specialist etc. diagnostic tests, cost of medicines, blood, oxygen etx , cost of appliances like pacemaker, artificial limns etc. Domiciliary Hospitalization is capped at 20% of Sum Assured Any person in age group of 5 to 75 years, children between 3 months and 5 years can be covered only along with parents. Usually claim permitted only subject to minimum hospitalization of 24 hours except for specific ailment

37. Mediclaim : Exclusions: Diseases contracted within 30 days of insurance Dental treatment except arising out of accident. Debility and General Run Down Conditions. Sexually transmitted diseases and HIV (AIDS) Circumcision, Cosmetic surgery, Plastic surgery unless required to treat injury or illness Vaccination and Inoculation Pregnancy and child birth War, Act of foreign enemy, ionizing radiation and nuclear weapon. Treatment outside India Naturopathy Experimental or unproven treatment All external equipments such as contact lenses, cochlear implants etc.