Module -1

Introduction to Financial Planning

Dr. Devita Movaliya
SEBI,NCFE,NISM,CED
Resource Person
 Content
• Introduction to Financial Planning:
• The Financial Planning Process, Developing
Personal Financial Goals, Influences on
Personal Financial Planning. Financial Aspects
of Career Planning, Time Value of Money &
Applications, Personal Financial Statements.
 Financial Planning

• Financial planning is the process of estimating

financial needs of a person and implementing
a comprehensive plan to meet those financial
needs during his or her lifetime through
investment. For instance, birth of a child,
education, purchasing house, marriage,
meeting emergency situations like an illness,
to meet the impact of an accident, death, or
natural calamities like flood, etc.
Financial planning process
Set your financial goal
Identifying suitable investment
avenues

Safety

Liquidity Returns
 Evaluate strategies
• Regular Income

• Equity Investment: You get dividend when you buy and hold
equity shares of a company and units of equity mutual fund.

• Fixed Income Investment: In debt securities, you receive fixed

interest on interest bearing Investments

• Capital Appreciation
When the value of initial investment increases over a period of
time and the investor benefits by selling part or whole of the
investment at the increased value, it is called Capital
Appreciation.
Developing personal financial goals
• Develop Financial Goals
• Your financial goals can range from acquiring assets,
saving for emergency as well as making investments
for your future financial security. The financial goals of
an individual can be categorized as below:
– Basic financial goals (food, clothing, shelter, etc.)
– Secondary or advanced financial goals (education, house,
marriage, etc.)
– Retirement planning
– Estate planning
• Individuals can use a variety of investment, risk
management and tax planning strategies to meet their
financial goals. These goals change over an individual's
lifetime and accordingly the financial plan should be
reviewed on a regular basis for any modification as per
change in the circumstances
 Description Incorrect Approach Right Approach

Specific You need to know exactly what I need to set aside money for I need to set aside ₹ 10,000/- for
you want to achieve and when my grand daughter's birthday my grand daughter's birthday
you want next year. next year.
it.

Measurable A goal should be measurable so I will pay off most of my credit In the next six months, I will pay
that you know when you card dues soon. off all my credit card bills in full.
will achieve it.

Achievable Your goal should be within a I will save money. I will save ₹ 48,000/- every
reasonable reach. year by setting aside ₹ 4,000/-
every
month.

Realistic Your goals need to be By saving regularly, I will By saving regularly, I will be
based on become a millionaire. debt free by January next year.
resources and tasks that you If I continue saving regularly
can reasonably achieve. after clearing all my debt, by
next December I will be saving
the sufficient amount to fund six
months of my living
expenses.

Time-bound Goals with timelines allow you to I will save money for my I will save ₹ 50,000/- every year
track your progress and daughter's marriage. for next 10 years for my
encourage you to keep going daughter's marriage.
until you
reach your goal.
 Five-Step Approach to Achieve
Financial Goals
• STEP 1: Identify specific financial goals
• STEP 2: Classification into Short-term,
Medium term or Long term
• STEP 3: Decide upon asset-allocation
• STEP 4: Choose the right investments with
diversification (within asset classes)
• STEP 5: Review and revise financial plans
 Influences on Personal Financial
Planning
• Lifestyle
• Appetite for risk
• Time
• Level of Income
• Influence of Knowledge
• Number of dependents
External Factors Influencing Your Financial Plan
• Socio-Economic Circumstances
• Interest rates
• Inflation
• Global issues
Financial Aspects of Career Planning
Time Value of Money & Applications
 Time Value of Money Formula

1. Present Value (PV)

The present value is known as the current value of a
sum of money that we will receive in the future.
PV = FV / (1 + i)^n
2. Future Value (FV)
• As the name goes, the FV denotes the value of a sum
of money at some date in the future.
• This calculation is useful for investors and businesses
who want to know the future value of their potential
investments to make a good investment decision.
• FV = PV (1+i)n
 Application of time value of money

• Saving
• Investment
• Purchasing power
• Loan EMIs (Equated Monthly Instalments)
• Value of investments
 Personal Financial Statements
• What Is a Personal Financial Statement?
The term personal financial statement refers to a
document or spreadsheet that outlines an
individual's financial position at a given point in
time. The statement typically includes general
information about the individual, such as name
and address, along with a breakdown
of total assets and liabilities. The statement can
help individuals track their financial goals and
wealth, and can be used when they apply
for credit .
“A personal financial statement is a snapshot of
your personal financial position at a specific
point in time”

• There are two types of personal financial

statements:
1. The personal cash flow statement
2. The personal balance sheet
 Personal Cash Flow Statement

• A personal cash flow statement measures your cash inflows and outflows in order to
show you your net cash flow for a specific period of time.
• Cash inflows generally include the following:
Salaries
Interest from savings accounts
Dividends from investments
Capital gains from the sale of financial securities like stocks and bonds
• Cash inflow can also include money received from the sale of assets like houses or
cars. Essentially, your cash inflow consists of anything that brings in money.
• Cash outflow represents all expenses, regardless of size. Cash outflows include the
following types of costs:
• Rent or mortgage payments
• Utility bills
• Groceries
• Gas
• Entertainment (books, movie tickets, restaurant meals, etc.)
 Personal Balance Sheet

• A personal balance sheet provides an overall snapshot of your wealth at a specific

period in time. It is a summary of your assets (what you own), your liabilities (what
you owe), and your net worth (assets minus liabilities).
• Assets
1. Liquid Assets: Liquid assets are those things you own that can easily be sold or
turned into cash without losing value. These include checking accounts, money
market accounts, savings accounts, and cash. Some people include certificates of
deposit (CDs) in this category, but the problem with CDs is that most of them charge
an early withdrawal fee, causing your investment to lose a little value.
2. Large Assets: Large assets include things like houses, cars, boats, artwork, and
furniture. When creating a personal balance sheet, make sure to use the market
value of these items. If it's difficult to find a market value, use recent sales prices of
similar items.
3. Investments: Investments include bonds, stocks, CDs, mutual funds, and real
estate. You should record investments at their current market values as well.
• Liabilities
• Liabilities are merely what you owe. Liabilities include current bills, payments still
owed on some assets like cars and houses, credit card balances, and other loans.
 Net Worth
• Your net worth is the difference between what you
own and what you owe. This figure is your measure of
wealth because it represents what you own after
everything you owe has been paid off. If you have a
negative net worth, this means that you owe more
than you own.
• Two ways to increase your net worth are to increase
your assets or decrease your liabilities. You can
increase assets by increasing your cash or increasing
the value of any asset you own. One note of caution:
Make sure you don't increase your liabilities along
with your assets.
 When Do You Need a Personal
Financial Statement?
• When you’re seeking a business loan or other outside financing, you may
need to share information about your personal financial data with the
financing source. If you’re pledging any of your personal assets as
collateral for a loan, lenders want to see details about those assets.
• Financing sources may also want to assess your personal financial
situation to see how well you manage your finances. For instance, if you
have few assets and a lot of outstanding debt, it can indicate you might
have trouble repaying a loan.
• You might also need a personal financial statement if you’re buying an
existing business. The business broker and the business owner will want to
see evidence that you’re financially able to purchase the business.
• If you’re planning to lease commercial office, retail or other types of
business space, the landlord may request a personal financial statement
before they approve your tenancy.