2 (Planning) Financial Management Fred Fonda ACCA (Financial Engineer)
3 Planning Concept Approach PERSONAL FINANCIAL MANAGEMENTFred Fonda ACCA
4 Contents Introduction on Financial Management – Meaning and ImportanceSaving Habits & Personal Planning Investment Options Insurance Dos & Don’ts Mutual funds Housing Fred Fonda ACCA
5 Financial Management : Meaning and Importance“Financial management is nothing but to manage cash out flow by considering the cash inflow and future obligation towards family.” Why is Financial Planning Required Long term and short term objective. Secure the future of yourself and family. Unpredicted events. Family future protection Peaceful retired life Discharge of family obligation Fred Fonda ACCA
6 People don’t plan to fail….. they fail to plan!Only 18% of households have a comprehensive financial plan Only 10% express an interest in having a financial plan Don’t understand the value Don’t know what a comprehensive plan is Believe the cost of having such a plan developed by a financial professional is high -- in fact the true high cost is in avoiding building a solid financial foundation -let’s have a look at this and overcome the fear factor! Fred Fonda ACCA
7 Normally, people always think it is not really possible to fulfill all their goals or dreams without having a High Salary or belonging to a rich family. But it is not the truth. With the help of Financial Planning you can achieve all your life goals or dreams. DO YOU WANT TO KNOW HOW? Fred Fonda ACCA
8 What is financial planning?Where you are today? Examine your personal finances Where you want to go? Define short and long-term goals Creating the plan to get you from today into tomorrow Action steps to reach those goals Where you are today Where you want to go Creating the plan to get you from A to B Fred Fonda ACCA
9 Steps for setting Financial Goals: ( Your goals must be SMART)1. Write your goals and be specific: When you write your financial goals it will help you to visualize them. It should be specific and realistic. 2. Identify your time-specific goals: Short -Term Goals: The goals which you want to achieve within 1 year. For example: your child’s pays school admission, have at least 3 A grades in the first semester Medium–Term Goals: You want to achieve these goals within 5 years. For example: your child’s school admission into the medical school Long–Term Goals: Goals that you want to achieve after 5 years. For example: Retirement, Child’s Education and Marriage. 3. Priority. After listing your Financial Goals, it’s time to number them according to your priority.
10 Major Financial Planning AreasRisk appetite of investor is influenced by various financial planning areas which are as follows: Consumption and Savings Planning Debt Planning Insurance Planning Investment Planning Retirement Planning Estate Planning Income Tax Planning Career Planning Fred Fonda ACCA
11 Savings Habits A proverb says “Money saved is the money earned”. So we have to save our money which increases our income. It's not only how much money you make, it's how much you keep. As cash flow comes in, you have to be watchful not to spend it as fast or faster than you make it. Track and control your finances. Take Home: Do not spend money you are yet to earn Fred Fonda ACCA
12 Saving Habits: Money saving tipsEverybody in the world wants to earn and enjoy good money. But most of the people may not know how to save money for future. Always try to save 30 % or more of your earnings. First try to satisfy yourself that you have not earned that 30 % money. Only then will you be able to save money. Fred Fonda ACCA
13 Savings Habits (Cont’d)1. Pay yourself first: - Saving is your first source of capital, so pay yourself first. Spending means you pay others first. 2. 70 / 30 Rule :- Active Income - (Earned Income) 70% to fund your needs and living expenses 30% to build your wealth Passive Income – (Unearned Income) Income from “rental activities” and “trade & business activities in which you do not materially participate or really can not influence its time”. Fred Fonda ACCA
14 Personal Budget To prepare the personal budget is most important for every individual because it helps to manage cash & investment in order to meet short term and long term objective of your family. Category % of net spendable Annual Amount Monthly Amount Net Income Less: - Saving (save up to 30% of Income) Net Spendable Less: - Various Expenses Residual Income Fred Fonda ACCA
15 Putting money to work ( group work)Who Has More at 65? Investor “A” invests 1,000,000/year from age 40 to 50 and stops to let it grow or Investor “B” invests 1,000,000/year from age 50 to 65? One of the primary goals of a financial plan is to make your money work for you. Earning a living doesn’t come easy for anyone. It takes dedication to your family to get up each day and go to work. Most people spend more hours providing for their loved ones than they do playing with them. It’s clear that the harder you can get your money to work for you, the better you can provide your family with the quality of life you want for them. Balancing safe investments with quality return at every stage of life -from your first investment through retirement -is the foundation of growing your savings. Both investors invested in an RRSP investment fund which has easily averaged 7% growth over the past 10 years and expects to continue to exceed this in the future. Investor “A” lays out 10 X $1,000 = $10,000 over 10 years and leaves it untouched for the remaining 15 years until age 65. Investor “B” lays out 15 X $1,000 = $15,000 over the 15 years to age 65. Even though “A” only invested $10,000, her fewer dollars worked longer and she ends up with more money at age 65 than “B” who had $15,000 working for him! Why? “A” had her smaller amount compounding for a longer period ( years). A little goes a long way.
16 2. Unit Linked Insurance PlanInvestment Options Long Term Income Assets FD Growth Assets 1.utual Fund 2. Unit Linked Insurance Plan 3. Investment in Shares Short Term 1. Short Term FD 2. Recurring Deposits Retirement 1. Pension Plan Investment Options Fred Fonda ACCA
17 Investment Options (Cont’d)1. Mutual Fund: - is an investment trust that collects money from investors having a common financial goal. Types of Mutual Fund :- a) Fixed Income b) Growth 2. Bank Fixed Deposit :- i) The tenure can vary from 7, 15, 30, 45 days to 3, 6 months, 1 year, 1.5 years and 5 years. ii) Investors also have the flexibility to take the interest income as a lump sum amount on its maturity, monthly & quarterly. iii) interest income earned on fixed deposit is taxable. iv) It is also possible to get loans. Fred Fonda ACCA
18 Assessment of Risk AppetiteRisk appetite of a person depends on the person’s attitude. One principle is to be born in mind no Risk no High Return. Younger persons can take calculated risks to build their corpus to beat Inflation. Otherwise the corpus will not grow at higher rate. History has proved that only equity class of assets has given Higher returns in past. However direct exposure of equity should be avoided & MF route is better option. Fred Fonda ACCA
19 Rebalancing The answer is :Market is continuously going up I am happy . Market is continuously going down I am worried. Market is tremendously volatile I am confused. What should I do in these 3 different situations? Rebalancing The answer is :
20 What is Rebalancing? It’s the ultimate art and science of wealth creation. Rebalancing is the periodic adjustment of your portfolio to protect your current gain with effective risk management to achieve your financial goal. Why is rebalancing important to my asset allocation? The market may move up and down in different situations, which is quite natural. The main reason for rebalancing is to protect the current equity valuation when the market rise and buy equity when the market fall based on the market conditions. If you apply this strategy, you might achieve your goal before the actual time. Rebalancing your portfolio on a regular basis maintains the desired return in your investment strategy - it is one of the important key for effective risk management. When to consider Rebalancing? You can rebalance your portfolio in the following situations: 1. When you reach your target return. Say for example, when you have achieved your target return of 15% per annum from your equity investment, and then switch partially or your full investment to debt to protect your target returns. Then use the amount to buy equity when market falls at a lower price. 2. When equity market gives you an unexpected return. As was seen on when SENSEX jumped to from 8160 on , then you should encash this life time opportunity. 3. If you see that the market might fall for a longer period, then switch from equity to debt with small loss to protect your investment from a bigger loss with higher opportunity to enter in equity.
21 Life-Cycle & Financial PlanningLife-Cycle Phases Financial Planning Areas Young adult (18–25) Consumption and savings; career Family formation (26–35) Consumption and savings; career; debt; insurance; income taxes Family development (36–49) Investment; retirement; income taxes Family maturity (50–60) Investment; retirement; estate Retirement (60–?) Estate; income taxes Fred Fonda ACCA
22 Group Work What are your optionsYou have just graduated from the university with a degree in computer engineering. You have conceived an idea of a wonderful APP to help pregnant women for which there is a ready market. Unfortunately you lack the necessary capital requirement to achieve this dream. What are your options Fred Fonda ACCA
23 Now it’s time to implement the plan.5. Set-up a plan towards your financial goals. Now you know your needs, your time frame and resources to reach your financial goals. All these informations are crucial. Without the above steps it is really impossible to set up a plan. Now it’s time to implement the plan. Categories of Financial Goals 1. Protection: The main purpose of insurance is to provide protection against any unseen eventuality or financial replacement. So you need adequate Life, Disability, Accidental, Hospitalization and Critical Illness Insurance. Without proper protection, your whole financial plan is at risk, because it is the foundation of the Financial Pyramid. Can you build your dream house in a weak foundation? What types of Protection do my family and I need? Life Insurance: The purpose is to maintain at least normal life style in your absence. So you need to have right amount of protection for your family. Always remember that life insurance is never an investment or tax-saving instrument. Critical Illness Insurance: It is also called as the Living Death. Now-a-days due to the very hectic life style chances of suffering from cancer, heart attack, stroke and other major illnesses are increasing. And with the help of modern medical benefit, the survival rate has also increased.
24 Hospitalization Insurance:It will take care of you and your family’s hospitalization cost at the time of any medical emergency otherwise you have to pay from your savings or you have to borrow from someone for which your financial planning might get hampered. It is also advisable to go for an annual health check-up for your family. This will not only help in creating wealth but also if fewer claims are done then the premium might get reduced. Disability Insurance:. The purpose is to get financial assistance when one is disabled. Household Insurance: You should have it for your entire household assets. Do I need to have all of them? The answer is obviously YES. Each and every insurance plan has a different purpose and you need all to protect your financial plan. How much Insurance do I need? This is the most vital and important question in financial planning when it comes to purchasing insurance. It depends on your Assets, Liabilities and your Future Goals. As most of the employers are not providing complete family health insurance, and not only that, if you do not buy it now, then it will be very difficult for you to buy a new policy at the requirement time or after retirement. If you want to buy it at the time of your retirement, you will not get all the benefits and the premium will also be very high.
25 Contingency Planning When do I need to establish my willContingency plan should be made in order to secure our emergency cash outflows. Amount kept aside for contingency should be at least 1 yr. annual income. It should be kept in liquid FD or any other liquid source of investment. When do I need to establish my will Fred Fonda ACCA
26 Buying Dream Home 8 Things to Be Kept In Mind before Buying a House:-Conduct your own Survey Find out the current market rates Make your own Budget Get the best rates Security Check on the surrounding infrastructure Keep an eye for hidden costs Check on the property Ensure it hasn’t been used as a collateral else where Fred Fonda ACCA
27 CREDIT FONCIER DU CAMEROUNRent Vs. Buy Decision Immovable Asset owned must be utilized & not a better option of investment unless person has enough surplus. Immovable asset purchasing decision should be based upon ratio of the “Return of Rent vs. Value of Asset” basis. Take home: stop investing on Liabilities and start investing on Assets CREDIT FONCIER DU CAMEROUN What is it all about? Duration: 15 to 30 years Interest rate: 5% to 7% Down payment (20%) Collateral (perfected mortgaged deed) Fred Fonda ACCA
28 Things to be kept in mind while taking Home LoanHow much are you expected to pay upfront? How much EMI you can afford? What are the tax benefits? When is the EMI date? How is the rate of interest calculated? Insure your property Don't hesitate to switch Fred Fonda ACCA
29 Periodical Review of Investor’s ProfileInvestor should periodically review his profile & accordingly make changes to his portfolio. He should maintain track sheet of all his budget as well as investment portfolio. Master track sheet sample is provided for all your personal, investment & documentary records. Fred Fonda ACCA
30 Analysis of current situationFinancial Planning is an on-going process….. Pre-work Goal Setting Analysis of current situation Risk Profiling Asset Allocation Implementation Regular Monitoring Rebalancing And it secures you and your family’s future.
31 Thank You & Happy InvestingFred Fonda ACCA