Date post: | 31-Oct-2014 |
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Economy & Finance |
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Fundamentals of Personal Finance
Participants - Team CTS
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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
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Financial Literacy
Financial literacy is knowledge of...• Facts• Concepts• Principles• Technological tools
...fundamental to being smart about money.
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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”
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Personal Financial Engineering
What is it?
Personal Financial Engineering is the development
and implementation and monitoring of long-term
plans to achieve Financial Freedom.
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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.
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The Building Blocks ofFinancial Freedom
Image credit: Dr. Thomas Garman
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Important Personal Finance Terms
Asset – is one that gives a positive cash flow
Liability – is one that gives a negative cash flow
Examples?
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…Important Personal Finance Terms…
• Inflation–Steady rise in the general level of prices (reduces purchasing power)
• Deflation–Falling prices.
• Examples?
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…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
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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.
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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
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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.
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Calculating Future Values
• Future Value (FV) – Value of an asset at the
end of a particular time period.
• Example: Wealth Creation
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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%
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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:
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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?
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Present Value of an Annuity
• Present value of a stream of payments to
be received in the future.
• Example: Retirement Planning
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Risk Management
• Insurance helps to transfer risk at low cost
• How much insurance do I need?
• Milestone Planning
• Income Replacement Method
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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.
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