Fundamental Of Personal Finance

Fundamentals of Personal Finance Participants - Team CTS Finerva Financial Wisdom 4 Young Indians

Learning Objectives
List the benefits of studying personal finance.
Summarize the key steps in successful personal financial engineering.
Understand the basic terms in personal finance
Assets Vs Liabilities
Savings Vs Investments
Understanding time value of money
Applying time value of money concept to
Wealth Creation
Retirement
Insurance

Financial Literacy
Financial literacy is knowledge of...
Facts
Concepts
Principles
Technological tools
...fundamental to being smart about money.

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”

Personal Financial Engineering
What is it?
Personal Financial Engineering is the development and implementation and monitoring of long-term plans to achieve Financial Freedom.
What are the steps in the financial engineering process?

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.

The Building Blocks of Financial Freedom

Important Personal Finance Terms
Asset – is one that gives a positive cash flow
Liability – is one that gives a negative cash flow
Examples?

… Important Personal Finance Terms…
Inflation– Steady rise in the general level of prices (reduces purchasing power)
Deflation –Falling prices.
Examples?

… Important Personal Finance Terms Savings Vs Investment Education, Marriage, Wealth creation, Large down-payments, Retirement Festivities, Gifts, Small down-payments, Religious purpose Purpose Long Term Short Term Term Cash Flow and Capital Appreciation Cash Flow only (if any) Types of Returns Higher, Variable, Risky Low, Fixed, Less Risky Returns Investment Savings Comparision

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.

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

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.

Calculating Future Values
Future Value (FV) – Value of an asset at the end of a particular time period.
Example: Wealth Creation

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%

Illustration: The Rule of 72

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:
Kaun Banega Crorepathi ?

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?

Present Value of an Annuity
Present value of a stream of payments to be received in the future.
Example: Retirement Planning

Risk Management
Insurance helps to transfer risk at low cost
How much insurance do I need?
Milestone Planning
Income Replacement Method

Golden Rules of Personal Finance
“ Pay yourself first” by spending less than you earn
Stay up-to-date about current economic conditions
Map your financial future by establishing goals and making realistic plans to achieve them
Insure your risks
Take advantage of tax benefits on investments
Develop expertise in financial matters
Remember that you are responsible for your own financial success.

Thank you
Questions Session
This training was delivered by FINERVA
www.finerva.com

Fundamental Of Personal Finance

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