Personal Financial Planning

Personal Financial Planning: The Mantra of Managing Money

Dr. Ashok Kumar Panigrahi

M.Com.,MBA,ACMA,Ph.D.

Associate Professor in Finance

NMIMS University, Shirpur.

Ask yourself… Does your wallet always carries a heavy amount?

Do you have a credit card?

Do you like shopping?

Do you go to grocery shop without a list?

Don’t you take lunch box to your office?

Don’t you like bargaining?

Do you pay your bills after due date?

If the answer to any one of the above questions is “YES” then, probably you are spending more than the required.

Personal financial planning is the process of managing your money to achieve personal economic satisfaction.

What is personal financial planning?

Maintain and improve our standard of living - the necessities, comforts and luxuries that we have or desire.

Rewards of Financial Planning

The Role of Personal Financial Planning

To manage income and expenses.

To create an awareness of your current financial status.

To plan for the future by developing goals and devising ways to achieve those goals.

To provide a system of evaluation and revision for your financial progress.

Why Do You Need a Personal Financial Plan?

For most people it is easier to spend than save.

To track your expenses, so you don’t spend more than you think you’re spending.

To retire someday.

Why Should You Develop a Personal Financial Plan?

It helps you achieve your financial goals.

It helps you achieve financial independence.

It helps you understand where all your money is spent.

It may even help you support those that have supported you.

Benefits of Financial Planning A financial plan helps people:

live within their income

identify financial priorities

allocate funds to meet expenses

meet financial emergencies and reduce credit use

reduce uncertainty and conflict about financial affairs

gain a sense of financial independence and control

save and invest to reach financial goals

What Can You Accomplish ?

Manage the unplanned.

Accumulate wealth for special expenses.

Save for retirement.

“Cover your assets.”

Invest intelligently.

Minimize your unnecessary payments.

The Personal Financial Planning Process

Step 1: Evaluate Your Financial Health

Step 2: Define Your Financial Goals

Step 3: Develop a Plan of Action

• Flexibility, Liquidity, Protection, Minimization of Taxes

• Consider Your Goals

Step 4: Implement Your Plan

Step 5: Review Your Progress, Reevaluate, and Revise Your Plan

Step 1: Evaluate Your Financial Health

Evaluate your current situation: income, spending, wealth

Assess your whole financial picture

Step 2: Define Your Financial Goals

Specifically define and write down your financial goals to reflect your financial and life situation.

Attach a cost to each goal.

Set a date for when the money is needed to accomplish the goal.

What Are the Time Horizons for Financial Goals?

Short-term goals can be accomplished within a 1-year period .

Intermediate-term goals take 1-10 years to accomplish.

Long-term goals take more than 10 years to achieve.

Goals: The Cornerstone of a Financial Plan

Goals keep the future in mind by reminding you of the rewards.

Goals entice you to keep the plan in effect.

Goals provide tangibility for the question, “Why?”

Goals should be “SMART”.

Think of your goals as what you want to be, do or have – in other words where you want to GO.

“SMART” GoalsSpecific – “I want a Laptop of DELL and not

of any other brand.”

Measurable – I need Rs.50,000 to purchase the laptop. Not I need some money for my laptop.

Attainable – I’ll save Rs.20,000 a month to purchase the laptop. Not I’ll save money for laptop cost.

“SMART” Goals – contd.

Realistic – I will work at the City mall all summer to make money for laptop. Not I’ll get a job this summer.

Time-bound – I plan to purchase the laptop before the college reopen after the summer vacation. Not I’ll plan to purchase the laptop.

Step 3: Develop a Plan of Action

Flexibility -- The ability for your plan to change as your situations or goals change.

Liquidity -- Your ability to convert noncash assets into cash with relative ease and speed.

Step 3: Develop a Plan (cont’d)

Protection -- Your ability to meet the unexpected large expenses without destroying your plan.

Minimization of Taxes -- Your ability to pay as little as possible towards taxes.

Step 3: Develop a Plan (cont’d) Consider future needs:

• Create a budget

• Determine investment strategies

• Plan for big-ticket purchases

• Plan for managing debt

• Plan for insurance

• Plan for the expense of children and college

• Plan for retirement

• Plan for estate transfer

Step 4: Implement Your PlanUse common sense and moderation;

don’t force yourself to track every penny.

Remain positive about your plan; use it as a roadmap.

Stay on track after the detours; rewards await you.

Step 5: Revise Your Plan

Periodically review your progress to see if any fine tuning needs to be done.

Make sure that your plan still matches your goals.

Be prepared to start over if your plan no longer meets your needs.

The Life Cycle of Financial Planning

Stage 1: The Early Years -- A Time of Wealth Accumulation

Stage 2: Approaching Retirement -- The Golden Years

Stage 3: The Retirement Years

Stage 1: The Early Years -- A Time of Wealth Accumulation

Develop your savings plan.

Set your initial goals of all lengths.

Establish your long-range investment strategy.

Stage 2: Approaching Retirement -- The Golden YearsRealize intermediate-term

goals that were established during Stage 1.

Re-evaluate the plan to match current goals.

Plan for retirement.

Stage 3: The Retirement Years

Reduce investment risk

Concentrate on preservation rather than growth of assets

Plan for the transfer of your estate

Practical Tips in Personal Financial

Planning

Knowing Where Your Money Goes

Determine your expected monthly income from all sources, including:

Financial aid (paid directly to you)

Wages (after tax, take home pay)

Family contributions

Establishing a spending planDetermine your expected monthly

expenses:

Housing

Food

Loan/credit card payments

Savings

Utilities

Transportation

Other

Know where your money goes

Keep a daily spending diary.

Use a monthly payment calendar to be sure you are able to cover your expenses as they are due.

Use a computer program to help you track income and expenses

Getting organizedOrganize your financial records and keep

copies of important documents, e.g.ReceiptsBank account recordsCertificates and transcriptsPay stubsInsurance formsInvestment logsLoan documentsTax returnsLegal decrees

Needs

Food

Housing

Utilities

Tuition

Books

Clothes

Child care

Transportation

Wants

Eating out

Cable TV

MP3 player

Vacation

Movies/music

Video games

Wireless Internet

Distinguishing between Needs and Wants

Ways to reduce expenses

Carry only small amounts of cash in your wallet so you won’t spend it.

Use direct deposit. You will be less likely to spend money if it goes straight into your account.

Control your use of credit cards. Don’t go shopping just for fun. Take your written savings goals with

your as a reminder. Buy only what you need, don't buy

things just because they are on sale.

Ways to reduce expensesUse coupons to save money.

Use a grocery-shopping list to prevent impulse buying.

Take your lunch to work.

Shop around to get the best deal for big-ticket items like cars and appliances.

Pay your bills on time to avoid late fees, extra finance charges.

Minimize your Debt

“The only reason that none of us don’t own an e lephant because we have never been off ered an e lephant on credit

and easy monthly payment bas is .”

When should you buy on credit?

What goods and services can you pay for while you use them?

• homes

• automobiles (depending on lifespan)

• Education

Some assets even generate income or further service even after you finish paying for them…these can enhance your net worth!!!

Spend less than you earn.Begin a regular

savings program now.

SAVE MONEY……..

• Saving is necessary to accumulate the capital needed to produce wealth.

• This is just as true for individuals as for nations.

• The most effective way to begin saving is by identifying and eliminating some discretionary spending.

Rainy Days & the Real World

Life is full of surprises, and they’re usually expensive!

The surprise is only in the timing…So it IS possible to plan for these surprises!

Purchase “peace of mind” by building a cushion…Make this a regular and mandatory expense!

Don’t Wait!!!

If you don’t exert the willpower to save now, it is unlikely that you will do so later.

If you wait to save until your income goes up, it is extremely costly in terms of the amount of money you will end up with at retirement.

Savings is deducted from your taxable income, thereby reducing your taxable income. Pay yourself first! Make saving a regular

expense. “Just do it!”

Don’t finance anything for

longer than its useful life.

Financing Consumption

Why continue to pay for something- a car, a vacation, a television- that you are no longer able to use and enjoy?

Purchase on credit only when buying a long-lasting asset with short-lasting financing.

Avoid credit card debt and consider

purchasing used items.

Credit Card Convenience

Paying with a credit card is NOT spending your own money, but borrowing someone else’s.

Interest charged on credit cards outstrips returns that could be earned on investments!!!

Think of your credit card as an extension of your checking account…Use your credit card only to access those funds.

It Pays to Buy Used!Can a used item satisfy you as well as a new

item?

Balance the time it takes to search for these items with the value of your time.

There are savings to be had without having to sacrifice consumer satisfaction!

Invest !

Invest !! Invest !!!

Before investing…….You Have To Decide Where To Save Or Invest

Your Money To Reach Your Goals and Needs.

How Much Risk Are You Willing To Take?

How Much Are You Willing To See Your Investments Fluctuate?

How Much Time Do You Have Before You Will Need That Money To Purchase Your Goal?

We Must Choose An Investment That Has An Interest Rate Equal To Or More Than The Inflation Rate

Investment % Rate => Inflation Rate

Tips for Avoiding Investment Fraud

1. If it looks too good to be true, it probably is.

2. Deal only with parties that have a reputation to protect.

3. Never purchase an investment solicited by telephone or email.

4. Do not allow yourself to be forced into a quick decision.

5. Do not allow friendship to influence an investment decision.

6. If high-pressure marketing is involved, grab your checkbook and run!!!

Teach your children how to earn money and spend it wisely.

Teach Your Children Well

Teach children money is earned …It doesn’t grow on trees!

Money both helps us get what we want, AND helps others get what they want.

Success in general is realized by setting goals and working hard to achieve them…Financial success is no different!

SummaryBuild your financial future around this text

and a financial plan:

• Manage the unplanned -- financial planning withstands minor setbacks

• Accumulate wealth -- financial planning maps out strategies for meeting your goals

• Save for retirement -- financial planning helps you determine the costs of retirement

Summary (cont’d)• “Cover your assets” -- financial planning

includes protecting your assets with insurance

• Invest intelligently -- financial planning helps you understand the principles of investing

• Minimize taxes -- financial planning helps you keep your assets where they should be, in your own pocket

Summary (cont’d)Develop a personal financial plan

• Evaluate -- know where you are today

• Define -- know where you want to go

• Develop a plan -- draw the map

• Implement -- follow the plan with action

• Review progress-- check the map to ensure you are on course

Summary (cont’d) Don’t overlook the financial life cycle

• The Early Years• Approaching Retirement• The Retirement Years

Manage your career to ensure personal and financial success.

People Don’t Plan To Fail,

They Fail To Plan!

The End