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Chapter 1 PFP

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    Financial Literacy:

    • Financial literacy the term is strongly associated with theconcept saving, investment, financial services andretirement planning in most of the countries of the globe.

    • Urge for financial literacy has gained the attention ofwide range of entities like financial services,organization, community interest groups and educationinstitutes in recent years in developed as well as

    developing countries after the global financial crisis.

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    India continues to remain one of the highest saversamong the emerging market economies and Gross

    omestic !avings "G !# of the nation constitutes $$.%&of total 'ational Gross omestic (roduct "G (#.

    Financial literacy was one of the reason for crisis

    )part from this*• Increased risk in financial products• +ow return from financial markets• hange in pension landscape

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    Financial Literacy and Personal finance:

    - he processes, by which financial consumers/investorsimprove their understanding of financial products andconcepts and, through information, instruction and/orob0ective advice, develop the skills and confidence tobecome more aware of financial risks and opportunities, tomake informed choices, to know where to go for help, andto take other effective actions to improve their financialwell being1.‐

    23 , "4556, 7$#‐

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    Chapter: 1

    Personal FinanceBasics and the Time

    Value of Money

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    Topic Covered-

    (I) Awareness about the element ofPersonal nance

    (II) Setting of Personal inancial goals

    (III) Time !alue of mone"

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    Concept'

    Personal inancial Planning' Personal inancial Planning is a process of

    managing mone" to achieve personaleconomic satisfaction *Personal nancial planning denotes theprocess of determining whether and how anindividual can meet life goals through theproper management of nancial sources(C P +oard, ../)*Personal inancial Planning (P P) is theresult of nancial literac"*

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    Advantages of personal nancial planning'

    Increase e0ectiveness in obtaining, using andprotecting "our nancial resources*

    Increase control of "our nancial a0airs*

    Improve personal relationships*

    A sense of freedom from nancial worriesobtained b" loo1ing to the future*

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    The inancial Planning Process

    2) &etermine "our current nancial situation*) &evelop "our nancial goals*

    3) Identif" alternative courses of action*4) 5valuate "our alternatives*/) Create and implement "our nancial action

    plan*6) 7eview and revise "our plan*

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    Conse8uences of Choices' $pportunit" Cost

    $pportunit" cost - 9hat "ou give up when "ouma1e a choice The cost, or trade-of of a decision, cannot alwa"sbe measured in rupees* Sometimes the cost is "ourtime*

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    5ver" inancial &ecision Involves 5valuating T"pes of 7is1'

    In:ation ris1◦ 7ising prices cause lost bu"ing power*Interest-rate ris1◦

    50ect costs of borrowing and rate of return*Income ris1◦ The loss of a %ob*Personal ris1◦ ;ealth, safet", or costs*#i8uidit" ris1◦ ;igher return ma" mean less li8uidit" *

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    inancial Planning Information Sources'

    Printed materials* inancial institutions* School courses and educational seminars* The internet, online sources, computer

    software* inancial specialists*

    ◦ inancial planners, ban1ers, accountants,

    insurance agents, law"ers and ta< preparers*

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    &eveloping Personal inancial =oals

    inancial goals include those*** In:uenced b" the time frame in which "ou want

    to achieve "our goals*2* Short-term

    * Intermediate3* #ong-term

    In:uenced b" the nancial need that drives"our goals*

    4* Consumer product/* &urable product

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    =oal-Setting =uidelines'

    Goals must be SMART

    =oals should be stated in S peci c terms=oals should be Measurable=oals should indicate the Action to be ta1en=oals should be Realistic=oals should have a T ime frame

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    In:uences on Personal inancial Planning

    #ife situation and personal values

    Adult life c"cle stage*>arital status, household si?e, and emplo"ment*>a%or events*◦ =raduation, marriage, children, retirement, etc*!alues*◦ 9hat values are important to "ou@

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    5conomic actors

    =lobal in:uences

    Changing 5conomic Conditions

    Consumer The value of the dollar prices changes in in:ation*

    Consumer The demand for goods

    spending and services b" individuals and households*

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    Interest rates The cost of mone" cost of credit when "ou borrow return on "our mone" when "ou save or invest*

    >one" Suppl" The dollars available forspending in our econom" *

    Bnemplo"ment The number of individualswithout emplo"ment who arewilling and able to wor1*

    ;ousing starts umber of new homes beingbuilt*

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    &eveloping a le

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    Components of inancial Planning

    $btainingPlanningSaving+orrowingSpending>anaging ris1Investing

    7etirement and estate planning

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    Implementing Gour inancial Plan

    &evelop good nancial habits*

    ◦ Bse a well conceived spending plan to help "ousta" within "our income, while allowing "ou to

    save and invest for the future*◦ ;ave appropriate insurance protection toprevent nancial disasters*

    ◦ +ecome informed about ta< and investmentalternatives*

    ◦ Stud" personal nance*

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    Achieving "our nancial ob%ectives re8uires twothings*

    A willingness to learn*

    Appropriate information sources*


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