Personal Financial Planning ebook

Personal Financial Planning

Foundation Course on Insurance & Takaful Based Personal Financial Planning

By Azmy SalihBA (Cey), M.HRM (Colombo), AII (India), AITD (SL), MCPM (CPM), Dip. Islamic Studies (Islamic Online University), Dip. Modern HRM, Dip. Translation Studies (CPA),Certified HR Auditor, Certified NLP Practitioner, Certified Life Coach


Compiled By Azmy Salih 2


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?


http://www.123rf.com/photo_8141541_3d-human-sitting-on-a-pile-of-coins.html

http://www.123rf.com/photo_8141541_3d-human-sitting-on-a-pile-of-coins.html


There are only 3 major components in the Financial Planning process:

Current Resources (CR)

Investment Options (IO)

Financial Goals (FG)

The Financial Planner first makes a note of your financial goals

and its priorities. Then the planner analyses your current financial

situation, recommends the right plan with proper asset allocation,

monitoring it regularly, rebalance your portfolio from time to time

based on your changing life style and investment opportunities.

Let us first know - what is Financial Planning?

Financial Planning: CR + IO = FG

What does a Financial Planner do?


http://www.123rf.com/photo_3265468_office-files-on-white-background.html

http://www.123rf.com/photo_3265468_office-files-on-white-background.html


Ideal Foundation

Wealth Creation

Emergency & Debt

Planning

Protection/Risk Management

Foundation of

Planning

Investment

Debt Reduction

Emergency Fund

Insurance (protection)

Net worth, Cash Flow, Risk Tolerance

Goal

Insurance (Savings + Protection)

Investment

Risky Foundation

The following process is important in

Financial Planning:

• Protection Planning ( Insurance )

• Emergency Cash Flow Planning

( Emergency Fund )

• Debt Reduction Planning ( Loan )

• Investment Planning

( Achieving Goal )

The Financial Pyramid



Steps for setting

Financial Goals:

1. Write your goals and be specific:

2. Identify your time-specific goals:

Short -Term Goals: The goals which you want to achieve within

1 year. For example: your child’s play school admission.

Medium–Term Goals: You want to achieve these goals within 5

years. For example: your child’s school admission.Long–Term Goals: Goals that you want to achieve after 5 years. For example:

Retirement, Child’s Education and Marriage.

3. Priority

.

When you write your financial goals it will help you to visualize

them. It should be specific and realistic.

After listing your Financial Goals, it’s time to number them

according to your priority.


http://www.123rf.com/photo_9238253_write-on-note-book.html

http://www.123rf.com/photo_9238253_write-on-note-book.html

Personal Financial Planning4. Analysis of your Current Financial Situation

It will give you the full information of your income and expenditure.

Net Worth is an overall statement of your assets and liabilities.

Net Worth = Asset – Liabilities

Cash Flow Statement

Net Worth

Both the Cash Flow and Net worth Statements will give you a real picture of your present situation and help you make

realistic financial goals. Update it regularly. These two vital documents do not replace each other; but they are supportive

documents to each other.

In financial planning, budgeting plays a very vital and important part. Budgeting

will give you the exact picture of your expenses and spending habits. This will help

you to plan your expenses and spending habits more efficiently. If you do not know

where you are spending your money just keep a track on your spending habits on a

monthly basis. This sounds ridiculous, but believe us, this will definitely help you to

reduce your unnecessary spending.

Budgeting

Importance of Cash Flow Statement and Net Worth in Financial Planning

Proper usage of credit card:

It’s an unique tool for cash free purchase payment for interest-free grace period with

redemption points.



Time Value of Money



Time Value of Money (TVOM)

• What will Rs.500 placed in a savingsaccount earning 3% return be worth in 5 or 10 years?

5 years

Rs.579.64

10 Years

Rs.671.96



Why so much more?• Because our return will earn return

Rs. today

x(1+ Growth rate %)5

=

Rs. tomorrow



Okay: This can work backwards too

Think of a goal:

• Say I want to have Rs.1000 in five years and Ican earn 5%, how much do I have to put intoday?

Rs.783.53How did we get this?

1000/(1.05)^5(fv)/(1+%)(years)



Two Key Concepts

(Discounting)

Present

Value

(Compounding)Future

Value

Increases in an amount of money as a

result of interest earned



Two Key Concepts• Compounding

– When something earns interest the interestthen earns interest

– This increases the value exponentially

• Discounting– The fact that the interest earned interest needs

to be factored into determining the past valueof an item

– Assume we know something is compounded– Exponential function must also be considered



Three Types of Amounts• Lump Sum

– One time payment– Put something in, get something out

• Annuity– Fixed, recurring payment– Adding Rs regularly, receive regularly– Payment is always same

• Series of Cash Flows– Recurring, but not fixed



Timeline: FV/PV of Lump Sum

FV

N I/Yr

PV



How do we do this?

The relationship can beshown algebraically:

FV(LS) = PV(1+r)n PV (LS) = FV/(1+r)n

n=number of periods

r =Profit rate



Timeline: FV of Annuity

FVN I/YR

PMT



Timeline: PV of Annuity

PMT

N I/Yr

PV



How do we do this?• The relationship can be shown

algebraically:

n=number of periods

r = Profit rate

FV (Pmt) =PMT[(1+r)n-1]/r PV (Pmt) =PMT[1-1/(1+r)n]/r



However, we can use afinancial calculator

• N= the number of periods

• I/Y = interest rate per year

• PV = present value or value in thepast (investment amount)

• Pmt=payment, recurring investment orannuity amount

• FV=future value

www.zenwealth.comTVM Calculator

I am going to usethe TI BA II +


http://www.zenwealth.com/


Others to check out

www.ultimatecalculators.com

Compound Interest Calculator

www.investopedia.com

Calculator


http://www.ultimatecalculators.com/

http://www.investopedia.com/


Tips on TVOM Problems

• Draw a cash flow chart

• Break the problem into one of four types orinto variations of them

• Figure out what information you have

• Determine what you are solving for



Rule of 72

• Can be used to determine the length oftime it will take for an investment todouble

– Given the rate of return

– An approximation

• Formula

Years to double = 72 / interest rate



Rule of 69• Can be used to determine the length of

time it will take for an investment todouble

– Given the rate of return

– An approximation

• Formula

Years to double = 0.35+69/r



Example

• If Sufyan can earn 6.5% annually, how longwould it take for his Rs.10,000 investmentto double?

Could do10000 +/- PVN= 11

6.5 I/Yr 20000 FV

OR72/6.5 = 11



Ratios of financial stability

1. Basic Liquidity RatioIndicates the ability to cover monthly expenses in an emergency. Eg. Job LossCash & Near Cash/Monthly ExpensesRecommended Value – 3 - 6




2. Liquid Assets to Net Worth RatioIndicates the ability to cover emergency funding like hospitalization.Cash & Near Cash/Net WorthRecommended Value – 15%




3. Savings RatioIndicates the ability to fund for future capital and retirement goals.Savings/Gross Income (annual)Recommended Value – 15% - 20%




4. Debt to Asset RatioIndicates the ability to meet the liabilities.Total Liabilities/Total AssetsRecommended Value – 50% (Max)




5. Solvency RatioIndicates the ability to meet the liabilities and indicates whether the person has borrowed excessively.Total Net worth/Total AssetsRecommended Value – 50% (Min)




6. Debt Service RatioIndicates the ability to service debt repayments.Total Annual Debt Repayment/Annual Take Home IncomeRecommended Value – 35% (Max)




7. Debt Service Ratio - 2Indicates the ability to service lifestyle related debt repayments.Total Annual Non Mortgage Debt Repayment/Annual Take Home IncomeRecommended Value – 15% (Max)




8. Net Investment to Net Worth RatioIndicates how well investment assets have been accumulated for retirement and other needs.Total Invested Assets/Net WorthRecommended Value – 50% (Min)




9. Net Worth RatioStarting point to set up a financial plan and help determine how much insurance coverage is required to protect ones assets.Total Assets-Total LiabilitiesThe Net Worth Thumb Rule = Age X Gross Annual Income/10



Retirement Planning – Case StudyClient : Mr.MubarakAge : 47Requirement : 70% of the salary as pensionExpected Salary Growth : 5%Current Monthly Salary : Rs.65,000/-

How much does he need as pension for a year at the age of 60?How much he has to invest from now onwards?



Retirement Planning – Case Study CalculationFuture Value = Present Value (1+r)nX70%

Future Value = Present Value (1+r)nX70%Future Value = (65,000X12)(1+0.05)13X0.7Future Value = (65,000X12)(1+0.05)13X0.7Future Value = (780,000)(1.05)13X0.7Future Value = (780,000)X(1.885)X0.7Future Value = 1,029,564.43 (Pension Per Annum)

What is the monthly pension ?1,029,564.43 / 12 = 85,797.00

How much he has to invest from now onwards?



Insurance Needs Assessment – Human Life Value

Client : Mr.FaizerAge : 40Planning to retire at the age : 60Expected Salary Growth : 5%Earning Per Annum : Rs.2,000,000/-Expected Return from Investment : 8%Existing Life Cover : Rs. 500,000/-

How much additional Cover He Needs?



Insurance Needs Assessment – Human Life Value

PV = C X {1 – (1+g)n }( r – g ) { (1+r)n }

PV = 2,000,000 X {1 – (1+0.05)20 }( 0.08 – 0.05 ) { (1+0.08)20 }

PV = 2,000,000 X {1 – (1.05)20 }( 0.03 ) { (1.08)20 }

PV = 2,000,000 X {1 – (1.05)20 }( 0.03 ) { (1.08)20 }



Insurance Needs Assessment – Human Life ValuePV = 2,000,000 X {1 – (1.05)20 }

( 0.03 ) { (1.08)20 }

PV = 66,666,666 X {1 – (2.653)(4.660)

PV = 66,666,666 X {1 – (2.653)(4.660)

PV = 66,666,666 X {1 – (2.653)(4.660)

PV = 28, 712, 446.06



Insurance Needs Assessment – Human Life ValuePV = 28, 712, 446.06

Human Life Value = PV of All Future Net Income + Liabilities + Funeral Expenses –Current Assets

Human Life Value = 28, 712, 446.06 – 500,00028, 212, 446.06



Insurance Needs Assessment – Multiple Approach

Client : Mr.CaderAge : 40Planning to retire in : 20 yearsEarning Per Annum : Rs.2,000,000/-Expected Return from Investment : 8%

What is the amount of Life Cover he needs at present?



Insurance Needs Assessment – Multiple Approach

Life Insurance Required by him will be = 2,000,000 / 8%= 2,000,000 / 0.08= 25,000,000

If you invest = 25,000,000For return rate of = 8%Amount of return = 25,000,000 x 0.08

= 2,000,000




Date post:	15-Apr-2017
Category:	Education
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