PERSONAL

PERSONALFINANCIAL
FINANCIAL
PLANNING
PLANNING
By
ByGroup
Group44Section
SectionAA
Mohammad Arshad Islam
Mohammad Arshad Islam 41 41
Saba Rais
Saba Rais 59
59
Mitesh
MiteshParmar
Parmar 75
75
Danish
DanishHaidar
Haidar 95
95
Sakshi
SakshiKhurana
Khurana 145
145
Definition
 Personal financial planning is the process of
managing your money to achieve personal
economic satisfaction.
 It is the process of systematically planning your
finances towards achieving your short-term and
long-term life goals.
 Financial planning is the process of developing a
personal roadmap for your financial well being.
The inputs to the financial planning process are:
 your finances, i.e., your income, assets, and

liabilities,
 your goals, i.e., your current and future financial

needs and
 your appetite for risk.
The financial planning process

 Step 1: Identify your current financial situation

 Step 2: Identify your goals
 Step 3: Identify financial gaps
 Step 4: Prepare your personal financial plan
 Step 5: Implement your financial plan
 Step 6: Periodically review your plan
Benefits of financial planning
 Helps monitor cash flows and reduces unnecessary
expenditure.
 Enables maintenance of an optimum balance
between income and expenses.
 Helps boost savings and create wealth.
 Helps reduce tax liability.
 Maximizes returns from investments.
Contd…
 Creates wealth and ensures better wealth
management to achieve life goals.
 Financially secures retirement life.
 Reviews insurance needs and therefore also ensures
that dependents are financially secure in the
unfortunate event of death or disability.
 Lastly, it also ensures that a will is made.
Helps achieve peace of mind
 Personal Financial Planning Lifecycle
Income

Income Stream

Retirement/
Estate
Tax
Benefits
Savings/
Investment
Liability/Insurance
Asset Acquisition

10 20 30 40 50 60 70 80
Age
Case Study
Building your financial plan
 Dave and Sharon Thompson are 30 years old
 They have 2 children who are 5 & 6 years old
 Dave’s salary is currently $48000 per year
 They have not been able to save any money as Dave’s
income is just enough to cover their expenses
 Sharon has just taken up a part time position at a local
department store at a salary of $12000 per year
 Assess their current financial position
 CURRENT FINANCIAL POSITION

Major Assets Amount

Savings (High, Medium, or Low) nil

Money Owed $100000

Salary   $60000

Goal 2. Pay for

Goal 1. Purchase children's college Goal 3. Set aside
new car for Sharon education in 12-17 money for
 Financial Goals  this year years from now retirement
save $500 each save $300 each consult a financial
month month advisor
How to Achieve the
Goal
 Personal Cash Flow Statement
Cash Inflows This Month
  Salary after taxes per month $4,000
     
     
     
Total Cash Inflows $4,000
Cash Outflows
Rent/Mortgage $900
Cable TV   60
Electricity and water 80
Telephone 70
Groceries   500
Health care insurance and expenses 160
Clothing   180
Car expenses (insurance, maintenance, and gas) 300
Recreation 1,000
Credit card minimum payments 20
Other   100
Total Cash Outflows 3,370
Net Cash Flows $630
 Balance Sheet
Assets
Liquid Assets
Cash $300
Checking account 1,700
Savings account  
Total liquid assets $2,000

Household Assets
Home $1,00,000
Car 9,000
Furniture 3,000
Total household assets $1,12,000

Investment Assets
Stocks  
Bonds  
Mutual Funds  
Total investment assets  

Total Assets $1,14,000

Liabilities and Net Worth
Current Liabilities
Loans  
Credit card balance 2,000
Total current liabilities $2,000

Long-Term Liabilities
Mortgag
e  
Car loan 100,000
Total long-term liabilities $100,000

Total Liabilities $102,000

Net Worth $12,000

Savings for child education
 Their oldest child is 6 years old and will begin
college in 12 years
 They are investing $300 per month in the savings
account earning 5% p.a. interest
 They wonder how much will they accumulate at an
interest rate of 7% p.a.
 They also want to know the accumulated savings if
they invest $400 per month
Savings Accumulated Over the Next 12 Years (Based on Plan to Save $3,600
per Year)
Amount Saved Per Year $3600 $3600
Interest Rate 5% 7%
Years   12.00 12.00

Future Value of Savings   $57,302 $64,398

Savings Accumulated Over the Next 12 Years (Based on Plan to Save $4,800
per Year)

Amount Saved Per Year   $4800 $4800

Interest Rate 5% 7%
Years   12.00 12.00

Future Value of Savings   $76,402 $85,865

If the Sampsons set a goal to save $70,000 for their children's
college education in 12 years, how much would they have to
save by the end of each year to achieve this goal, assuming a 5
percent annual interest rate?

Calculator: Savings Needed Each Year

Future Value   $70,000

Interest Rate   5%

Years   12

Savings Needed Each Year   $4,397.78

Tax Planning
 Dave’s earnings are $48000
 Sharon’s earnings are $12000
 Child tax credits are currently $1000 per child
 The Sampsons will pay $6300 in home mortgage
 They will pay $1200 in real estate taxes
 They will make charitable contributions of $600 per
year
 They file for tax jointly and income tax rate is 15%
 Assess their income tax liability
Calculating Tax Liability
Gross Income $60,000
Retirement Plan Contribution  
Adjusted Gross Income $60,000
Deductions
Interest Expense $6,300
Real Estate Taxes 1,200
Contributions 600 $8,100
Exemptions ($3,200 each)  
Taxable Income $51,900
Tax Rate 15%
Tax Liability Before Tax Credits $7,785
Child Tax Credit(s) 2,000
Tax Liability $5,785
Managing credit
 The Sampsons have by now saved $2000
 They are currently earning an interest of 5% on
their savings.
 They have been carrying a balance of $2000 on
their credit card
 The credit card is charging them 18%
 They want to evaluate the return they are receiving
from their savings versus the interest expenses they
are accruing on their credit card
Savings    

Interest rate earned on savings   5%

Savings balance   $2,000

Annual interest earned on savings   $100.00

Paying Off Credit Balance    

Interest rate paid on credit   18%

Credit balance   $2,000

Annual interest paid on credit   $360.00

Suggestion
 The interest owed on credit card exceeds the
interest earned on deposits by $260
 He should use the available balance to pay off his
credit bill immediately
 He would lose the opportunity to earn $100 but
will also be able to avoid the liability of $360
 Thus his wealth would be higher by $260
Personal Loan
 The Sampsons have saved $500 a month for 10
months to be used as down payment for the
purchase of their new car
 The car is priced at $25000 plus 10% sales tax
 They shall receive $1000 trade-in credit on their
existing car
 They would like to allocate maximum $500 per
month towards loan payment of the new car
 The annual interest rate is currently 7%
 Three-Year (36- Four-Year (48- Five-Year (60-
  month) Periods month) Periods month) Periods

Interest rate 7% 7% 7%

Total finance
payments $20,250 $20,250 $20,250

Total payments
including the down
payment and the
trade-in $25,250 $25,250 $25,250

Monthly payment $625 $485 $400

Purchasing and financing a home
 The Sampsons have bought a home for $90000 at a
30 years mortgage
 The interest rate is 9%
 After 1 year the interest rates have fallen to 8%.
 The cost of refinance is $1400
 They are in the 25% tax bracket
 Should they refinance the loan?
 Current Mortgage Payments
Mortgage loan $90,000

Interest rate 9%

Years 30

Loan payment $724.16

Mortgage Payments after Refinancing

Mortgage loan $90,000

Interest rate 8%

Years   30

Loan payment   $660.39

 Savings on refinancing

Current mortgage payment $724.16

New mortgage payment $660.39

Monthly savings $63.77

Annual savings $765.26

Marginal tax rate 25%

Decrease in taxes $191.32

Annual savings after-tax $956.58

Years in house after refinancing 29

Total savings $27740.28

Investment Decision
 The Sampsons save $300 per month for their
children’s education
 They are currently investing this amount in bank
CDs earning an interest of 5%
 Investment in a particular stock shall yield 2% in
weak market conditions and 9% in strong market
conditions
 What should they do?
Savings Accumulated Over the Next 12 Years
CD: Annual
    Return Weak Stock Strong Stock
Market Market
    = 5% Conditions Conditions
Amount invested per
year $3,600 $3,600 $3,600

Annual return 5% 2% 9%

FVIFA (n=12 years) 15.9171 13.4121 20.1407

Value of investments in
12 years $57,301.66 $48,283.52 $72,506.59
Investment in bonds
Type of Bond Bond Yield offered Risk premium within
bond yield

Treasury bonds 7% 0.0%

AAA rated corporate bonds 7.5% 0.5%

A rated corporate bonds 7.8% 0.8%

BB rated corporate bonds 8.8% 1.8%

CCC rated corporate 9.5% 2.5%

bonds
Suggestion
 Out of all the bonds only the Treasury bonds are
risk free
 The other bonds have a risk premium which is
subject to change over time
 The Sampsons should prefer either Treasury bonds
or AAA rated bonds
 They should be risk averse and the risk premium is
not enough compensation for the risk
Retirement Planning
 Dave Sampson shall contribute $7000 of his salary
per year
 The employer shall contribute $3000
 The retirement funds will be invested in mutual
funds
 The expected return is 7% and he hopes to retire
after 30 years
Future Value of Annuity

Contribution   $10,000

Years   30

Annual rate of return 7.00%

Future value   $9,44,607.86

Monthly cash flows

Future Value $9,44,607.86

Rate of interest 7.00%

Cash Flows per month $5510

References
 www.moneycontrol.com
 Tata McGraw Hill
 Case Study- Personal Finance by Jeff Madura,
Pearson Publication