Fundamental Of Personal Finance

1

Fundamentals of Personal Finance

Participants - Team CTS

FinervaFinancial Wisdom 4 Young Indians

FINERVA www.finerva.com 2

Learning Objectives1. List the benefits of studying personal finance.

2. Summarize the key steps in successful personal financial engineering.

3. Understand the basic terms in personal finance

1. Assets Vs Liabilities

2. Savings Vs Investments

4. Understanding time value of money

5. Applying time value of money concept to 1. Wealth Creation

2. Retirement

3. Insurance


Financial Literacy

Financial literacy is knowledge of...

Facts Concepts Principles Technological

tools

...fundamental to being smart about money.


Financial Responsibility

Financial responsibility is being accountable for:

Your financial decisions andYour own financial well-being.

“If it is to be, it is up to me”


Personal Financial Engineering

What is it? Personal Financial Engineering is the development and implementation and monitoring of long-term plans to achieve Financial Freedom.

What are the steps in the financial engineering process?


Financial Planning Benefits Financial planning helps you

achieve: Financial Success – achievement of

financial aspirations. Financial Security – being able to

fulfill any needs and most wants. Wealth – an abundance of money and

other financial resources. Financial Freedom – the state where

work is an option, you choose. Not compelled to opt.


The Building Blocks ofFinancial Freedom


Important Personal Finance Terms

Asset – is one that gives a positive cash flow

Liability – is one that gives a negative cash flow

Examples?


…Important Personal Finance Terms…

Inflation–Steady rise in the general level of prices (reduces purchasing power)

Deflation–Falling prices.

Examples?


…Important Personal Finance Terms

Comparision

Savings Investment

Returns Low, Fixed, Less Risky

Higher, Variable, Risky

Types of Returns Cash Flow only (if any)

Cash Flow and Capital Appreciation

Term Short Term Long Term

Purpose Festivities, Gifts, Small down-payments, Religious purpose

Education, Marriage, Wealth creation, Large down-payments, Retirement

Savings Vs Investment


Opportunity Costs and Trade-offs in Decision Making

Opportunity Cost – Value of the next best alternative that must be foregone.

Opportunity cost reflects the best alternative of what one could have done instead of choosing to spend, save, or invest money. Examples?

Trade-offs occur when you give up one thing for another.


The Time Value of Money in Financial Decision Making

The Time Value of Money compares:

value in the future of a Rupee received today (FV)

value today of a Rupee amount to be received in the future (PV)

Key factors: Time, Interest, Principal

Annuity - a series of payments/deposits


Compound Interest

Compound Interest – interest earned on interest.

Compounding – the process of earning compound interest – is the best way to to build wealth over time.


Calculating Future Values

Future Value (FV) – Value of an asset at the end of a particular time period.

Example: Wealth Creation

?


Easy Thumb Rule - The Rule of 72

Calculates the number of years it takes for principal to double

Years = 72 divided by interest rate. Example: 72 divided by 8% = 9 years

Calculates the interest rate it takes for principal to double

Interest rate = 72 divided by number of years

Example: 72 divided by 10 years = 7.2%


Illustration: The Rule of 72


Future Value of an Annuity What lump sum will be got over time if a

series of deposits are made (assuming same amount is deposited each time)

Example: Power of Compounding:

Kaun Banega Crorepathi?


Present Value of a Lump Sum

Present Value (PV) - Today’s value of an amount to be received at a future date.

Example: How much should I deposit?


Present Value of an Annuity

Present value of a stream of payments to be received in the future.

Example: Retirement Planning


Risk Management Insurance helps to transfer risk

at low cost How much insurance do I

need? Milestone Planning Income Replacement Met

hod


Golden Rules of Personal Finance

1. “Pay yourself first” by spending less than you earn

2. Stay up-to-date about current economic conditions

3. Map your financial future by establishing goals and making realistic plans to achieve them

4. Insure your risks

5. Take advantage of tax benefits on investments

6. Develop expertise in financial matters

7. Remember that you are responsible for your own financial success.


Thank you

Questions Session

This training was delivered by FINERVAwww.finerva.com

Economy & Finance

Fundamental Of Personal Finance