Introduction to Personal FInance Management

Introduction to Personal FInance Management

1. Personal Finance Management (PFM)

2. Personal Finance Management Personal Finance Management (PFM) refers to the strategies, tools, and practices individuals use to effectively handle their financial goals and risks. This is related to balancing one’s income, expenses, savings, investments, and protection. Personal Finance Management Important Wealth Building: Consistent financial management leads to wealth accumulation. Peace of Mind: When you manage your finances well, you worry less.

3. Financial Goals Short-Term Goals: Emergency Fund: Building a safety net for unexpected expenses. Vacation: Saving up for that dream getaway. Budget: Managing day-to-day expenses effectively. Credit Card Debt: Paying off high-interest debt quickly. Medium-Term Goals: Car Loan: Saving for a new vehicle. Student Debt: Reducing educational loans. Home: Accumulating funds for a down payment. Business: Starting your own venture. Long-Term Goals: Retirement: Ensuring financial security during your golden years. Mortgage Loan: Paying off your home loan. Inheritance: Planning for wealth transfer. College Education: Saving for your child’s education. Vacation Home: Investing in a second property.

4. Financial Risks Market Risk: Fluctuations in stock prices, interest rates, or commodity markets. Investors face the risk of losing capital due to market volatility. Credit Risk: Also known as default risk. Associated with borrowing money—when borrowers fail to repay loans. Investors may lose principal and interest. Liquidity Risk: Arises when assets cannot be quickly converted to cash. Businesses or individuals may struggle to meet financial obligations. Operational Risk: Linked to poor management, flawed reasoning, or internal processes. Can result in financial losses due to operational failures. Legal Risk: Legal disputes, regulatory changes, or non-compliance. Businesses may face fines, lawsuits, or reputational damage. Foreign Investment Risk: Currency fluctuations, political instability, or economic changes in foreign markets. Investors in international assets face these risks. Equity Risk: Pertains to investments in stocks. Stock prices can be volatile, affecting portfolio value. Currency Risk: Exchange rate fluctuations impact investments in foreign currencies.

5. Personal financial planning (Stages)

6. 1. Gathering Financial Information: Begin by assessing your current financial situation. Understand your income, expenses, assets, liabilities, and investment portfolio. 2. Setting Financial Goals: (SMART Goals) Specific: Define clear objectives (e.g., saving for retirement, buying a home). Measurable: Quantify your goals (e.g., save 100,000 INR for a down payment). Achievable: Ensure your goals are realistic given your resources. Relevant: Align goals with your overall financial well-being. Time-Bound: Set deadlines for achieving each goal. Personal financial planning (Stages)

7. 3. Developing a Financial Plan: Create a roadmap to achieve your goals. Consider investment strategies, risk tolerance, and tax planning. Seek professional advice if needed. 4. Implementing the Plan: Take action based on your financial plan. Allocate funds, invest, and manage debt. 5. Monitoring and Adjusting: Regularly review your progress. Make necessary adjustments as circumstances change Personal financial planning (Stages)

8. Personal budgeting Personal budgeting refers to maintaining track of personal finances and controlling expenses within predetermined limits. This practice involves planning, recording, categorizing income sources, calculating expenses, evaluating cash flow, setting savings goals, and adjusting spending habits according to financial situations. Budget is the foundation of your financial plan, as it provides a base for making personal financial decisions.

9. Personal budgeting

10. S teps of personal budgeting 1. Establish Monthly Income: Calculate total monthly earnings inclusive of salary, bonuses, investments, rental properties, freelance jobs, etc., to determine disposable income. 2. Categorize Expenses: Classify expenditures into fixed (rent, mortgage, insurance premiums, loan repayments, etc.), variable (food, clothing, transportation, entertainment, etc.), and periodic (holiday trips, vacations, gifts, etc.).

11. S teps of personal budgeting (Cont.) 3. Set Savings Objectives: Define realistic short-term and long-term financial goals. 4. Record Expenditure: Maintain accurate records of daily expenses 5. Review Cash Flow: Assess income versus expenditure on regular basis to evaluate whether there’s enough money flowing in to cover bills and expenses comfortably without resorting to debt. 6. Adjust Spending Habits: Based on cash flow analysis, identify areas requiring reduction in expenditure

12. Personal Budget preparation -tips Assess your monthly expenses. Make sure you record all your regular monthly expenses, including what you spend on eating out, entertainment and hobbies. Total your earnings. Calculate how much you make per month, including any money that you receive from investments and other forms of residual income. Match your expenses with earnings. This will test how effective your budget is and how much you have left over at the end of the month. Rework your budget. If your expenses exceed your income; you will have to cut down unnecessary expenses

13. Investment plan & Saving strategies

14. Basic Investment plan & Saving strategies Time Value of Money (TVM) Rule of 80 Diversification

15. Time Value of Money (TVM)

16. What Is the Time Value of Money (TVM)? The concept of time value of money reflects the saying “time is money.” The time value of money (TVM) is the concept that a sum of money is worth more now than the same sum will be at a future date due to its earning potential in the interim. The idea behind time value of money is that one euro a person has today is worth more than one euro he has in the future. Because money can grow when it is invested, a delayed payment is a lost opportunity for growth. The principle of the time value of money recognizes that money can grow in value by investing it, and a delayed investment is a lost opportunity.

17. Time Value of Money (TVM)- Formula TVM : It calculates the  future value  of a sum of money based on: 𝐹𝑉=Future value of money 𝑃𝑉=Present value of money 𝑖=Interest rate 𝑛=Number of compounding periods per year 𝑡=Number of years

18. Example of TVM Calculate the maturity amount for a Fixed Deposit (FD) account for Rs 1000 for a 2-year time deposit with an interest rate of 7.0% compounded quarterly we need to consider the interest rate and the compounding frequency. The interest is compounded quarterly. where: - FV is the maturity amount - PV is the principal amount (INR 1000) - r is the annual interest rate (7.0% or 0.07) - n is the number of times interest is compounded per year (4 for quarterly) - t is the time the money is invested for, in years (2 years) https://mutualfund.adityabirlacapital.com/blog/time-value-of-money

19. The maturity amount for a Post Office Time Deposit of INR 1000 for 2 years at an annual interest rate of 7.0% compounded quarterly will be approximately INR 1148.88.

20. Extra reading and Activity https://groww.in/calculators/fd-calculator https://www.indiapost.gov.in/Financial/pages/content/post-office-saving-schemes.aspx https://www.investopedia.com/terms/t/timevalueofmoney.asp#:~:text=The%20time%20value%20of%20money%20means%20that%20a%20sum%20of,investment%20is%20a%20lost%20opportunity.

21. Rule of 80

22. Rule of 80 80 means the estimated age one can live. Nowadays, people can live longer with the help of science and medical development. Therefore, 80 can be replaced with 90 or 100. Rule of 80 means that when a man is getting older, the ability of taking risk is getting weaker due to the nature of losing working power. In this case, the result of the rule is the number of percentage of one’s assets that is appropriate to invest in high risk financial products. For example, if Person X now is 55 years old. He assumes that he could live till 90, then he could invest 35% of his assets in the high risk financial investment.

23. Diversification

24. Diversification Investing all the money in one type of investment, especially high risk investment, investors could lose it all at once. Diversification means including various investments in one portfolio, with different risks, return on investment, and market stability. There are two diversifying approach: based on the investment types, and invested industry. The diversification in terms on investment type is known as asset classes. The asset allocation in the asset classes is done in assets such as stocks, bonds, and cash. The other diversifying approach is to spread investment in diverse industries. For example, investors should not invest only in housing industry stocks in the stock part of portfolio, so that they lose everything in stocks if a major disaster happens to the housing industry.