Fundamentals of personal_finance

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Fundamentals of Personal Finance

Participants - Team CTS

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 Liabilities2. Savings Vs Investments

4. Understanding time value of money 5. Applying time value of money concept to

1. Wealth Creation2. Retirement3. 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 and

–Your 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.

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

Image credit: Dr. Thomas Garman

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

Comparison

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:

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 Method

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.

Fundamentals of personal_finance

Economy & Finance