4. Chapter 1
Background
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1.1 Executive Summary
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Al is a single man, 30 years old and worked in a private company in Jakarta as an assistant manager with an income of IDR 15
million net per month. Currently Al lives in an area around his office with a cost of IDR 2.5 million per month. Al has a car made in
2009 with the current value of about IDR 120 million. Al has always found time to hang out in cafes and going to the movies at
least once a week with friends who spent a total cost of IDR 165,000. Additionally Al regularly visits fitness gym that requires a
monthly fee of IDR. 300,000.
Al's decided to do personal financial planning. Currently he has a savings at Mandiri Bank, IDR 30 million and deposits at BCA Bank
with a total nominal value of IDR 150 million. He has a credit card debt amounting to IDR 16 million and he have to pay with
installments of IDR 1.25 million per month. Al has monthly expenses such as: communication costs of IDR 230,000, gasoline, parking
and car maintenance is IDR 600,000; clothes IDR 300,000; food IDR 800,000 and other personal purposes of IDR 750,000. Al also
spent his money to contribute to his parents expenses for IDR 500,000.
Besides that he also wanted to replace her car with Honda Brio vehicle in the next four years with current value of IDR 150 million.
Al has a girlfriend, and he want to marry her two years from now and the wedding will cost IDR 80 million, now. He also plans to
have honeymoon with his wife to the Bali Island with the current cost of IDR 7 million. Ten years from now, Al want to buy a house
with a current price of about IDR 400 million.
Since Al does not get any pension fund from the company his working for, he thought he needs to build his pension fund. He
anticipated retiring at age 50 years old and considering surviving up to age 75 years. He estimated to live during his pension time
with IDR 8 million per month today’s value. Al has not insurance yet and do not know whether if he needs one.
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5. 1.2 Literature Review
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FINANCIAL PLANNING
Financial planning is the process of setting, planning, solving financial problems and achieving financial goals by developing and
implementing a financial plan which takes into account a person or family’s current situation and future goals.
Life goals include buying a home, getting married, raising children and planning for their education, insuring yourself and your
family, setting aside money for retirement and investing it, estate and tax planning, etc.
EMERGENCY FUND
To estimate how much money should be set aside to pay for financial emergencies. It depends on factors such as:
Ψ Stability of income:
If you are salaried, the size of your fund will be smaller than if you own a business, especially a start-up.
Ψ Outstanding loan/EMIs:
The size of the emergency fund depends on your expenses, which include loan repayments. Thus, if you have outstanding
loans on which you pay EMIs, you need a bigger fund.
Ψ Number of dependents:
If your spouse is not working and you have dependent parents and children, the size of the fund has to be bigger.
Ψ Size of liquid assets:
Many people invest a majority of their savings in non-liquid assets such as real estate, Employee Provident Fund, Public
Provident Fund and long-term fixed deposits.
Ψ Medical insurance:
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6. One of the objectives of building an emergency fund is to take care of unexpected medical expenses. Buying health
insurance with cashless facility provides protection on this front. If you do not have medical insurance, you may have to set
aside a bigger amount for medical exigencies.
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BASIC CONSIDERATIONS OF SAVING FOR RETIREMENT
Ψ What kind of retirement do you want?
To a large extent, maintaining financial independence in retirement depends upon the lifestyle you want.
Ψ When do you want to retire?
The earlier you retire, the shorter the period of time you have to accumulate funds, and the longer the period of time those
dollars will need to last.
Ψ How long will retirement last?
Keep in mind that life expectancy has increased at a steady pace over the years, and is expected to continue increasing.
For many of us, it's not unreasonable to plan for a retirement period that lasts for 25 years or more.
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1.3 Assumptions
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The assumption used for this case are
• risk profile: conservative to moderate
• inflation: 10%, The inflation remains the same
• target return: 15%
• Al’s salary is considered constant
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• The expense of living after marriage remains the same
• The income from the future wife is not included in the
calculation
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7. Chapter 2
Al’s Financial Goals
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2.1 Al’s Timeline
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2.2 Balance Sheet Before Financial Planning Process
ASSETS LIABILITY
CURRENT ASSETS Debt 16,000,000
Deposit 150,000,000
Saving 30,000,000 CAPITAL
FIXED ASSETS Net Worth 284,000,000
Car 120,000,000
TOTAL ASSETS 300,000,000 TOTAL LIABIBILITY AND CAPITAL 300,000,000
30 32 34 40 50 75
Timeline
Age
0 2! ! 4! ! 10! ! ! 20! ! ! ! ! 45
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8. 2.3 Cash Flow before Financial Planning Process
Monthly (IDR) Yearly (IDR)
Income
Salary 15,000,000 180,000,000
TOTAL 15,000,000 180,000,000
Expenses
Food 800,000 9,600,000
House Rent 2,500,000 30,000,000
Gym 300,000 3,600,000
Entertainment 660,000 7,920,000
Credit Card Installment 1,250,000 15,000,000
Communication Cost 230,000 2,760,000
Car maintenance, gasoline, parking
cost
600,000 7,200,000
Clothes 300,000 3,600,000
Parents Expenses 500,000 6,000,000
Other Personal Purposes 750,000 9,000,000
TOTAL 7,890,000 94,680,000
Saving (Income-Expenses) 7,110,000 85,320,000
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9. 2.4 Al’s Wants and Needs
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2.4.1 Emergency Funds
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Emergency Fund is a fund allocated separately for the emergency purposes, such as medical needs etc. this fund can
help to support the lifestyle of its owner when the regular income is cut or no longer received.
Calculation :
• Al income : Rp15,000,000
= 3 x 15,000,000
= Rp45,000,000
From the measurement above shows that Al should spend his money of 45 million for Emergency Fund. We make the
emergency fund based on the income because income is more stable than the expense.
2.4.2 Credit Card Debt
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Previously, Al has already had a credit card debt
• Al’s Debt : Rp16,000,000
Debt is the first priority to be paid above all because it is a liability that Al must responsible for.
2.4.3 Wedding
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Al planned to get married in the next 2 years. Calculation :
• Wedding cost in one year later
Wedding Cost in present : Rp80,000,000
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10. Inflation : 10%
FV (one year later) = 80,000,000 x FV (1, 10%)
= 80,000,000 x 1.100
= Rp88,000,000
• How much Al should save in a month from now?
Future value of wedding cost : Rp88,000,000
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Saving amount per month = 88,000,000 / FVIFA (1, 15%)
= 88,000,000 / 1
= 88,000,000 / 12 months
= Rp7,333,333 or equal to Rp7,350,000 per month
From the calculation above shows that Al should save his money of Rp7,350,000 pe month for his wedding cost.
Actually Al’s plan got merried in 2 years later but usually the Wedding Organizer wants to be paid one year earlier
before the event, so we calculate it for next 1 year.
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2.4.4 Honeymoon
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Al wanted to spend his honeymoon in the next 2 years. calculation :
• Honeymoon cost in two years later
Honeymoon in present : Rp7,000,000
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11. Inflation : 10%
FV (two years later) = 7,000,000 x FV (2, 10%)
= 7,000,000 x 1.210
= Rp8,470,000
• How much Al should save in a month from now?
Future value of honeymoon cost : Rp8,470,000
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Saving amount per month = 8,470,000 / FVIFA (2, 15%)
= 8,470,000 / 2.150
= 3,939,534.884 / 12 months
= Rp328,298 or equal to Rp330,000 per month
From the calculation above shows that Al should save his money of Rp330,000 per month for his honeymoon cost. His
honeymoon cost is not included to his wedding cost so we calculate it for next 2 years not next 1 year.
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2.4.5 Car
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Al wants to buy Honda Brio vehicle in the next four years with current value of IDR 150,000,000. With the Inflation rate 10%, fhe
future value of the car’s price will be at IDR 219,615,000.
Here the calculation:
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12. !
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Now, Al currently has a car made in 2009 with the current value of about IDR 120,000,000. This car will depreciate, and the
future value of the car’s price will be at IDR 78,732,000 with the Inflation rate of 10%,
Here the calculation (using the Straight Line Method):
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In the next four years, Al wants to replace his car with Honda Brio. However, Al is only going to pay the down payment in the
fourth year, i.e. 30% of the future price. Thus, the down payment will be around IDR 65,884,500.
Here the calculation:
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Fortunately, Al just wants to pay the down payment in the fourth by using the money from the sale of his old car, and then the
rest of the money in year four is IDR 12,847,500.
Here the calculation:
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13. 2.4.6 House
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Al targeted to have his own house by paying the down payment for the house at the next 10 years. Calculation :
• House price in 10 years later
House price in present : Rp400,000,000
Inflation : 10%
FV (ten years later) = 400,000,000 x FV (10, 10%)
= 400,000,000 x 2.594
= Rp1,037,600,000
In the next 10 years, Al is only going to pay the down payment which is 30% of the future price
• How much Al should save in a month from now for 30% of down payment?
Future value of house price : Rp1,037,600,000
30% of house future price : 311,280,000
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Saving amount per month = 311,280,000/ FVIFA (10, 15%)
= 311,280,000/ 20.304
= 15,330,969.27/ 12 months
= Rp1,277,580.772 or equal to Rp1,280,000 per month
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14. From the calculation above shows that Al should save his money of Rp1,280,000 per month for his house down payment in
the next 10 years.
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2.4.7 Pension Fund
Al already thinking about his retirement recently and had already targeted how he wanted to live his retirement life. Al
Planned to retire at the age of 50 which is 20 years from now. And wanted to receive 8 million per month (today’s value)
during his retirement life.
Projec'ng Re'rement Income and Investment Needs
1 EsJmated Household Expenditures in ReJrement
A Approximate number of years to reJrement 20
B current level of annual household expenditures, excluding savings 94,680,000
C
EsJmated Household Expenses in ReJrement as a percent of current
expenses
101%
D EsJmated annual household expenditures in reJrement 96,000,000
2 EsJmated Income in ReJrement
E social security, annual income 0
F company / employer pension plans, annual amounts 0
G other sources, annual amounts 0
H total annual income 0
I addiJonal required income, or annual shorYall 96,000,000
3 inflaJon factor
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15. So, the amount that Al should prepare from now is IDR 5,260,000 per month for the next 20 years, to be able to have a
retirement life he dreamt of.
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J expected average annual rate of inflaJon over the period to reJrement 10%
K
inflaJon factor : based on 20 years to reJrement and expected average
annual rate of inflaJon of 10%
6.727
L size of inflaJon -‐ adjusted annual shorYall 645,792,000
4 funding the shorYall
M anJcipated return on assets held ader reJrement 10%
N amount of reJrement funds required -‐ size of nest egg 6,457,920,000
O expected rate of return on investments prior to reJrement 15%
P
compound interest factor : based on 20 years to reJrement and an expected
rate of return on investments of 15%
102.444
Q annual savings required to fund reJrement nest egg 63,038,538
monthly saving needed for Pension Fund 5,253,212
*assuming the anJcipated return on assets held ader reJrement is 10%
Note : part 1 and 2 are prepared in terms of current (today's) rupiahs
Projec'ng Re'rement Income and Investment Needs
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16. Chapter 3
Suggestions
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3.1 Suggestion for allocating fund
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In this suggestion, we didn’t intend to change Al’s habits at all neither his lifestyle. These suggestions are made adjusting
with Al’s usual habit, works, expenditures, and dreams. We didn’t encourage him to find side jobs or lessen his expenses. Al
can implement this plan with his current habits.
• Paid by Deposit
1. Emergency Fund
As important as its name, this fund is critically important to be fulfilled as soon as possible to provide more sense of safety
and security. We suggest that Emergency fund should be paid from deposit because in order to fulfill it soon since it is so
important and Al’s deposit has plenty money available in it.
Calculation :
= Deposit – Emergency Fund
= IDR150,000,000 – 45,000,000
=IDR105,000,000 as the remaining amount of Al’s Deposit
2. Wedding Cost
Wedding Cost must be prepared fast (in the range of 1 year) with its big amount. In order to avoid more burdens to pay it
monthly in the future, we choose to suggest to pay the wedding cost at once, from deposit available, instead of monthly
payment. We didn’t use savings because the funds needed for wedding cost is bigger that the Al’s savings.
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17. Calculation :
= Remaining amount of Deposit – Wedding Cost
= IDR105,000,000 – 88,000,000
= IDR17,000,000
So, the final amount of Al’s Deposit left is IDR17,000,000
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• Paid by Saving Account
1. Credit Card Debt
We know that debt should be paid first before anything else. So we suggest Al to pay the debt first, from his saving
because saving is the most liquid of financial instrument and the amount of debt can be covered with it.
Calculation :
= Saving – Credit Card Debt
= IDR30,000,000 – 16,000,000
= IDR14,000,000 as the remaining amount of Saving
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• Paid by Mutual Fund with return 15% (moderate risk profile)
The rest of Al’s dream requires a lot of money that Al doesn’t have now. So we suggest Al to use mutual funds with the
target return 15% that’s suitable with Al’s moderate risk profile. With this instrument, Al can prepare the funds monthly and
put it in the mutual fund in order to prepare the funds needed for his dreams.
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18. !
The total investment allocation per month will be paid by Al’s monthly salary left after paying the all of his expenses.
Calculation :
= Monthly salary after expenses – Total investment allocation per month
= IDR8,360,000 – 6,870,000
= IDR1,490,000
After paying the investment, Al still have IDR1,490,000 left from his monthly salary. So, we suggest Al to put the remaining
monthly salary amount into his saving account.
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Target
Return
Investment
Allocation
per
Month
Honeymoon 15% 330,000
House 15% 1,280,000
Pension 15% 5,260,000
Total
6,870,000
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19. !
3.2 Balance Sheet after Financial Planning Process
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ASSETS LIABILITY
CURRENT ASSETS Debt 0
Deposit 17,000,000
Saving 15,490,000 EQUITY
CURRENT
INVESTMENT
Net Worth 159,360,000
Mutual Fund 6,870,000
FIXED ASSETS
Car 120,000,000
TOTAL ASSETS 159,360,000 TOTAL LIABIBILITY AND EQUITY 159,360,000
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20. 3.3 Cash Flow after Financial Planning Process
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Income Monthly (IDR) Yearly (IDR)
Salary 15,000,000 180,000,000
TOTAL 15,000,000 180,000,000
Expenses (IDR.) (IDR.)
Food 800,000 9,600,000
House Rent 2,500,000 30,000,000
Gym 300,000 3,600,000
Entertainment 660,000 7,920,000
Communication Cost 230,000 2,760,000
Car maintenance, gasoline, parking cost 600,000 7,200,000
Clothes 300,000 3,600,000
Parents Expenses 500,000 6,000,000
Other Personal Purposes 750,000 9,000,000
Allocation for mutual fund 6,870,000 82,440,000
TOTAL 13,510,000 162,120,000
Saving (Income-Expenses) 1,490,000 17,880,000
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21. 3.4 Conclusion
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As a 30 year old man, Al already started to think about his dreams and goals for the future. With his current situation Al wishes to make
sure that his dreams are achievable by financial planning. Al has deadlines for all his dream and this financial plan make sure that Al can
attain his dream by the deadlines. After doing all the calculation, we creates suggestions and plan that Al must do in order to make all
of his dreams come true in time. As Al’s financial planner, we didn't encourage Al to find side job or additional income. We also didn't
suggest him to cut his expenses. The plan that we made for Al can be achieved with Al’s current situation and even, with this plan, Al still
has money left each month for saving. This plan is attainable and reasonable for Al because he already has sufficient funds and by
implementing this plan, Al only has to do what he usually does. There is no need for Al to change his lifestyle so we are sure that it’s easy
for Al to implement this plan in his life.
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3.5 References
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References (access on February 26th, 2014):
Ψ http://www.rit.edu/ntid/personalfinance/system/files/financial-planning-101_0.pdf"21
Ψ http://en.wikipedia.org/wiki/Average_propensity_to_consume
Ψ http://www.rochepartners.com/files/What_You_Should_Know_About_Financial_Plannning.pdf
Ψ http://www.ifphk.org/pdf/Publications/Con_Bro_FP_in_Nutshell.pdf
Ψ http://www.theamericancollege.edu/assets/pdfs/fa262-class1.pdf
Ψ http://businesstoday.intoday.in/story/financial-planning-tips-to-save-money-for-emergencies/1/189358.html
Ψ http://www.moneysense.gov.sg/~/media/Moneysense/Guides%20and%20Articles/Guides/The%20MoneySENSE%20guide%20to
%20planning%20for%20your%20familys%20financial%20futureEnglish.pdf
Ψ http://bizfinance.about.com/od/interestrates/f/How-To-Calculate-The-Present-Value-Of-A-Single-Amount.htm
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