PERSONAL FINANCIAL PLANNING
By Group 4 Section AMohammad Arshad Islam 41Saba Rais 59Mitesh Parmar 75Danish Haidar 95Sakshi Khurana 145
Definition Personal financial planning is the process of
managing your money to achieve personal economic satisfaction.
It is the process of systematically planning your finances towards achieving your short-term and long-term life goals.
Financial planning is the process of developing a personal roadmap for your financial well being.
The inputs to the financial planning process are:
your finances, i.e., your income, assets, and liabilities,
your goals, i.e., your current and future financial needs and
your appetite for risk.
The financial planning process
Step 1: Identify your current financial situation
Step 2: Identify your goals Step 3: Identify financial gaps Step 4: Prepare your personal financial
plan Step 5: Implement your financial plan Step 6: Periodically review your plan
Benefits of financial planning Helps monitor cash flows and reduces
unnecessary expenditure. Enables maintenance of an optimum
balance between income and expenses. Helps boost savings and create wealth. Helps reduce tax liability. Maximizes returns from investments.
Contd… Creates wealth and ensures better
wealth management to achieve life goals.
Financially secures retirement life. Reviews insurance needs and therefore
also ensures that dependents are financially secure in the unfortunate event of death or disability.
Lastly, it also ensures that a will is made.
Helps achieve peace of mind
Age
Income
10 20 30 40 50 60 70 80
Income Stream
Personal Financial Planning Lifecycle
Retirement/Estate
TaxSavings/Investment
Asset Acquisition
Liability/Insurance
Benefits
Case Study
Building your financial plan Dave and Sharon Thompson are 30 years old They have 2 children who are 5 & 6 years old Dave’s salary is currently $48000 per year They have not been able to save any money
as Dave’s income is just enough to cover their expenses
Sharon has just taken up a part time position at a local department store at a salary of $12000 per year
Assess their current financial position
CURRENT FINANCIAL POSITION
Major Assets Amount
Savings (High, Medium, or Low) nil
Money Owed $100000
Salary $60000
Financial Goals
Goal 1. Purchase new car for Sharon this year
Goal 2. Pay for children's college education in 12-17 years from now
Goal 3. Set aside money for retirement
How to Achieve the Goal
save $500 each month
save $300 each month
consult a financial advisor
Cash Inflows This Month Salary after taxes per month $4,000 Total Cash Inflows $4,000 Cash OutflowsRent/Mortgage $900 Cable TV 60Electricity and water 80Telephone 70Groceries 500Health care insurance and expenses 160Clothing 180Car expenses (insurance, maintenance, and gas) 300Recreation 1,000Credit card minimum payments 20Other 100Total Cash Outflows 3,370Net Cash Flows $630
Personal Cash Flow Statement
AssetsLiquid AssetsCash $300 Checking account 1,700Savings account Total liquid assets $2,000
Household AssetsHome $1,00,000 Car 9,000Furniture 3,000Total household assets $1,12,000
Investment AssetsStocks Bonds Mutual Funds Total investment assets
Total Assets $1,14,000
Balance Sheet
Liabilities and Net WorthCurrent LiabilitiesLoans
Credit card balance 2,000Total current liabilities $2,000
Long-Term LiabilitiesMortgage Car loan 100,000Total long-term liabilities $100,000
Total Liabilities $102,000
Net Worth $12,000
Savings for child education Their oldest child is 6 years old and will
begin college in 12 years They are investing $300 per month in
the savings account earning 5% p.a. interest
They wonder how much will they accumulate at an interest rate of 7% p.a.
They also want to know the accumulated savings if they invest $400 per month
Savings Accumulated Over the Next 12 Years (Based on Plan to Save $3,600 per Year)Amount Saved Per Year $3600 $3600
Interest Rate 5% 7%
Years 12.00 12.00
Future Value of Savings $57,302 $64,398
Savings Accumulated Over the Next 12 Years (Based on Plan to Save $4,800 per Year)
Amount Saved Per Year $4800 $4800 Interest Rate 5% 7%Years 12.00 12.00
Future Value of Savings $76,402 $85,865
If the Sampsons set a goal to save $70,000 for their children's college education in 12 years, how much would they have to save by the end of each year to achieve this goal, assuming a 5 percent annual interest rate?
Calculator: Savings Needed Each Year
Future Value $70,000
Interest Rate 5%
Years 12
Savings Needed Each Year $4,397.78
Tax Planning Dave’s earnings are $48000 Sharon’s earnings are $12000 Child tax credits are currently $1000 per child The Sampsons will pay $6300 in home mortgage They will pay $1200 in real estate taxes They will make charitable contributions of $600
per year They file for tax jointly and income tax rate is
15% Assess their income tax liability
Gross Income $60,000
Retirement Plan Contribution
Adjusted Gross Income $60,000
DeductionsInterest Expense $6,300
Real Estate Taxes 1,200
Contributions 600 $8,100
Exemptions ($3,200 each)
Taxable Income $51,900
Tax Rate 15%
Tax Liability Before Tax Credits $7,785
Child Tax Credit(s) 2,000
Tax Liability $5,785
Calculating Tax Liability
Managing credit The Sampsons have by now saved
$2000 They are currently earning an interest of
5% on their savings. They have been carrying a balance of
$2000 on their credit card The credit card is charging them 18% They want to evaluate the return they
are receiving from their savings versus the interest expenses they are accruing on their credit card
Savings
Interest rate earned on savings 5%Savings balance $2,000
Annual interest earned on savings $100.00
Paying Off Credit Balance
Interest rate paid on credit 18%Credit balance $2,000
Annual interest paid on credit $360.00
Suggestion The interest owed on credit card exceeds
the interest earned on deposits by $260 He should use the available balance to
pay off his credit bill immediately He would lose the opportunity to earn
$100 but will also be able to avoid the liability of $360
Thus his wealth would be higher by $260
Personal Loan The Sampsons have saved $500 a month for
10 months to be used as down payment for the purchase of their new car
The car is priced at $25000 plus 10% sales tax They shall receive $1000 trade-in credit on
their existing car They would like to allocate maximum $500
per month towards loan payment of the new car
The annual interest rate is currently 7%
Three-Year (36-month) Periods
Four-Year (48-month) Periods
Five-Year (60-month) Periods
Interest rate 7% 7% 7%
Total finance payments $20,250 $20,250 $20,250
Total payments including the down payment and the trade-in $25,250 $25,250 $25,250
Monthly payment $625 $485 $400
Purchasing and financing a home The Sampsons have bought a home for
$90000 at a 30 years mortgage The interest rate is 9% After 1 year the interest rates have fallen
to 8%. The cost of refinance is $1400 They are in the 25% tax bracket Should they refinance the loan?
Mortgage loan $90,000
Interest rate 8%
Years 30
Loan payment $660.39
Mortgage loan $90,000
Interest rate 9%
Years 30
Loan payment $724.16
Current Mortgage Payments
Mortgage Payments after Refinancing
Current mortgage payment $724.16
New mortgage payment $660.39
Monthly savings $63.77
Annual savings $765.26
Marginal tax rate 25%
Decrease in taxes $191.32
Annual savings after-tax $956.58
Years in house after refinancing 29
Total savings $27740.28
Savings on refinancing
Investment Decision The Sampsons save $300 per month for
their children’s education They are currently investing this amount
in bank CDs earning an interest of 5% Investment in a particular stock shall
yield 2% in weak market conditions and 9% in strong market conditions
What should they do?
Savings Accumulated Over the Next 12 Years
CD: Annual
Return Weak Stock Strong Stock
= 5%Market
ConditionsMarket
ConditionsAmount invested per year $3,600 $3,600 $3,600
Annual return 5% 2% 9%
FVIFA (n=12 years) 15.9171 13.4121 20.1407
Value of investments in 12 years $57,301.66 $48,283.52 $72,506.59
Investment in bondsType of Bond Bond Yield offered Risk premium
within bond yield
Treasury bonds 7% 0.0%
AAA rated corporate bonds
7.5% 0.5%
A rated corporate bonds
7.8% 0.8%
BB rated corporate bonds
8.8% 1.8%
CCC rated corporate bonds
9.5% 2.5%
Suggestion Out of all the bonds only the Treasury
bonds are risk free The other bonds have a risk premium
which is subject to change over time The Sampsons should prefer either
Treasury bonds or AAA rated bonds They should be risk averse and the risk
premium is not enough compensation for the risk
Retirement Planning Dave Sampson shall contribute $7000 of
his salary per year The employer shall contribute $3000 The retirement funds will be invested in
mutual funds The expected return is 7% and he hopes
to retire after 30 years
Future Value of Annuity
Contribution $10,000
Years 30
Annual rate of return 7.00%
Future value $9,44,607.86
Monthly cash flows
Future Value $9,44,607.86
Rate of interest 7.00%
Cash Flows per month $5510
References www.moneycontrol.com Tata McGraw Hill Case Study- Personal Finance by Jeff
Madura, Pearson Publication
Top Related