Fundamentals of personal_finance

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Fundamentals of personal_finance

  1. 1. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Fundamentals of Personal Finance Participants - Team CTS
  2. 2. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Learning Objectives 1. 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 Liabilities 2. Savings Vs Investments 4. Understanding time value of money 5. Applying time value of money concept to 1. Wealth Creation 2. Retirement 3. Insurance
  3. 3. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Financial Literacy Financial literacy is knowledge of... • Facts • Concepts • Principles • Technological tools ...fundamental to being smart about money.
  4. 4. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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”
  5. 5. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Personal Financial Engineering What is it? Personal Financial Engineering is the development and implementation and monitoring of long-term plans to achieve Financial Freedom.
  6. 6. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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.
  7. 7. www.finerva.com | support@finerva.com | +91-9787-11-11-66 The Building Blocks of Financial Freedom Image credit: Dr. Thomas Garman
  8. 8. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Important Personal Finance Terms Asset – is one that gives a positive cash flow Liability – is one that gives a negative cash flow Examples?
  9. 9. www.finerva.com | support@finerva.com | +91-9787-11-11-66 …Important Personal Finance Terms… • Inflation–Steady rise in the general level of prices (reduces purchasing power) • Deflation–Falling prices. • Examples?
  10. 10. www.finerva.com | support@finerva.com | +91-9787-11-11-66 …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
  11. 11. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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.
  12. 12. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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
  13. 13. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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.
  14. 14. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Calculating Future Values • Future Value (FV) – Value of an asset at the end of a particular time period. • Example: Wealth Creation
  15. 15. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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%
  16. 16. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Illustration: The Rule of 72
  17. 17. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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:
  18. 18. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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?
  19. 19. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Present Value of an Annuity • Present value of a stream of payments to be received in the future. • Example: Retirement Planning
  20. 20. www.finerva.com | support@finerva.com | +91-9787-11-11-66 Risk Management • Insurance helps to transfer risk at low cost • How much insurance do I need? • Milestone Planning • Income Replacement Method
  21. 21. www.finerva.com | support@finerva.com | +91-9787-11-11-66 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.
  22. 22. www.finerva.com | support@finerva.com | +91-9787-11-11-66
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