How to plan your finance

1. PERSONAL FINANCE
BASIC SKILL
FINANCIAL MANAGEMENT

2. IS A COLLEGE CLASS WORTH ITS COST?
• ACROSS ALL INSTITUTIONS, THE AVERAGE COST OF A THREE-CREDIT COLLEGE
CLASS IS APPROXIMATELY $1500. SUPPOSE THAT, BETWEEN CLASS TIME,
COMMUTE TIME, AND STUDY TIME, THE AVERAGE CLASS REQUIRES ABOUT 10
HOURS PER WEEK OF YOUR TIME. ASSUMING THAT YOU COULD HAVE HAD A JOB
PAYING $10 PER HOUR, WHAT IS THE NET COST OF THE CLASS COMPARED TO
WORKING? IS IT A WORTHWHILE EXPENSE?

3. COLLEGE ATTENDANCE OPPORTUNITY COSTS
• A TYPICAL COLLEGE SEMESTER LASTS 14 WEEKS, SO YOUR “LOST” WORK WAGES FOR THE TIME
YOU SPEND ON THE CLASS COME TO
• ADDING THIS TO THE $1500 THAT THE CLASS ITSELF COSTS GIVES YOUR TOTAL NET COST OF
TAKING THE CLASS RATHER THAN WORKING: $2900. WHETHER THIS EXPENSE IS WORTHWHILE
IS SUBJECTIVE, BUT REMEMBER THAT THE AVERAGE COLLEGE GRADUATE EARNS NEARLY $1
MILLION MORE OVER A CAREER THAN A HIGH SCHOOL GRADUATE. AND ALSO REMEMBER
THAT, ON AVERAGE, STUDENTS WHO DO BETTER IN COLLEGE ALSO DO BETTER IN TERMS OF
THEIR CAREER EARNINGS.

4. COMPOUNDED AND SIMPLE INTEREST
Simple interest means if your principal investment is $10,000 and you get 10% profit in year 1, then your p
In the second year if your get another 10% return, then you will get another $1,000 profit.
Under compound interest, if you get 10% return in the first year, then your principal investment will go up b
to become $11,000. You second year return is $1,100.

5. SIMPLE INVESTMENT PROGRAM

6. TARGET INVESTMENT RETURN
• A = ( P * (1 + APR)Y
• A - TARGET RETURN
• P – INITIAL INVESTMENT - $10,000
• APR – APPROXIMATE PROFIT RATE – 8% P.A.
• Y – THE NUMBER OF YEARS OF INVESTMENT – 20 YEARS
• WHAT CAN YOU EXPECT INVESTING $10,000 FOR 20 YEARS AND EXPECTING AN
AVERAGE RETURN OF 8% P.A. ?
• A = ( 10,000 * ( 1 + 0.08 )20
• A = 10,000 * (1.08)20
• A = $46,609.50

7. DEBTS OUTSTANDING CALCULATION
• HOW MUCH IS THE OWING ;
• P - PRINCIPLE DEBT - $384
• APR – 5% P.A.
• Y - 1461 – 1996 ( 500 YEARS )
• KING EDWARD IV HAD OWED OXFORD UNIVERSITY ON TUTION FEE $384. HE PAY $160 AND NEVER PAID THE REMAINING $224. IT HAS BEEN 140 YEARS.
AT 5% INTEREST RATE, HOW MUCH THE PALANCE NEED TO PAY NW ?
• A = P X ( 1 + APR )Y
• WHERE
• A = ACCUMULATED BALANCE AFTER Y YEARS
• P = STARTING PRINCIPAL
• APR = ANNUAL PERCENTAGE RATE A AS A DECIMAL B
• Y = NUMBER OF YEARS
• BE SURE TO NOTE THAT THE ANNUAL INTEREST RATE, APR, SHOULD ALWAYS BE EXPRESSED AS A DECIMAL RATHER THAN AS A PERCENTAGE
• DEBT = $224 * ( 1 + 0.05) 500
• = $ 290 BILLIONS

8. OUTSTANDING COST OF MOTHER’S
BREASTFEEDING TO EACH CHILD
• IF YOU HAVE BEEN BREASTFEED FOR 2 YEARS, AT $20 PER SESSION, AND YOU HAVE NEVER PAID
BACK TO YOUR MOTHER THAT COSTS AND YOU ARE NOW 50 YEARS OLD,
• $20 X 365 X 2 = $ 14,400
• A = P X ( 1 + APR )Y
• $ 14,400 * ( 1 + 0.10 ) 50
THIS IS HOW MUCH YOU OWE YOUR MOTHER :
• $14,400 * 1.1050
• $1,690,428

9. LIBYAN GOVERNMENT PENSION FUND
FEASIBILITY STUDY
• YOU CONTRIBUTE 11% PER MONTH FOR 40 YEARS
• 11% X $5,000 X 12 = $ 6,600 – CONTRIBUTION PER ANNUM
• FOR 40 YEARS - $6,600 X 40 - $ 264,000 – TOTAL CONTRIBUTION FOR 40 YEARS
• THE NET SAVING AFTER 40 YEARS
• HOW MUCH ANNUITY PAYMENT THAT YOU GET AT RETIREMENT ?
• 80% OF SALARY - $5,000
• 0.80 X $5,000 X 20 YEARS X 12 - $960,000
• WHAT RATE OF PROFIT ARE YOU GETTING HERE ?
• $960,000 - $ 264,000
• ------------------------------- = 17,400
• 40 YEARS
• 17,400
• RATE OF RETURN = --------------------- X 100 = 13.18%
• 264,000 / 2

10. OVERDRAFT FINANCING COSTS –
COMPOUNDING EFFECT
• OVERDRAFT FACILITIES
• PRINCIPAL $ 10,000
• THE APR – 18% PER ANNNUM
• THE MONTHLY RATE IS 1.5% PER MONTH
• THE DAILY RATE IS 0.05% PER DAY
• IF YOU OVERDRAWN BY $10,000 FOR 60 DAYS
• COMPOUNDING EFFECT ON OVERDRAFT INTEREST CALCULATED DAILY :
• DAY 1 - $10,000 X 0.0005 = $ 5.00 PER DAY
• DAY 2 - $ 10,005 X 0.0005 = $ 5.0025
• DAY 3 - $ 10,010.0025 X 0.0005 = $ 5.00500125

11. COMPOUNDING EFFECT OF OVERDRAFT
FACILITIES
• THE BANK RATE IS 18% PER ANNUM
• IT IS 18/12 = 1.5% PER MONTH
• IT IS 1.5 / 30 = 0.05% PER DAY
• IT IS A COMPOUNDING RATE
• BALANCE OWED - $10,000
• APR – 0.05%
• PERIOD – 2 MONTHS - 60 DAYS
• A = P X ( 1 + APR )Y
A = $10,000 * ( 1 + ( 0.05 / 60 ))60
= $ 10,000 *
= $ 10,512.50
FOR TWO MONTHS THE FINANCE COSTS IS $512.50
AVERAGE COSTS IS = 512.50 / 10,000 = 5.125%
THE RATE IS 5.125% FOR 2 MONTHS.
PER MONTH IS 2.5625%
RATE PER ANNUM = 2.5625 X 12 = 30.75%

12. COMPOUNDING RETURN ON MONTHLY
INVESTMENT
• COMPOUND INTEREST FORMULA FOR INTEREST PAID N TIMES PER YEAR
• APN
• A = P 1 ( 1+ ---------- ) NY
• N
• Y IS NOT NECESSARILY AN INTEGER; FOR EXAMPLE, A CALCULATION FOR THREE AND A
HALF YEARS WOULD HAVE Y 5 3.5.
• WHERE :
• A = ACCUMULATED BALANCE AFTER Y YEARS
• P = STARTING PRINCIPAL
• APR = ANNUAL PERCENTAGE RATE ( AS A DECIMAL )
• N = NUMBER OF COMPOUNDING PERIODS PER YEAR
• Y = NUMBER OF YEARS

13. COMPOUNDING INVESTMENT RETURN
• YOU DEPOSIT $5000 IN A BANK ACCOUNT THAT PAYS AN APR OF 3% AND COMPOUNDS INTEREST
MONTHLY. HOW MUCH MONEY WILL YOU HAVE AFTER 5 YEARS? COMPARE THIS AMOUNT TO THE
AMOUNT YOU’D HAVE IF INTEREST WERE PAID ONLY ONCE EACH YEAR.
• THE STARTING PRINCIPAL IS P = $5000 AND THE INTEREST RATE IS APR = 0.03. MONTHLY
COMPOUNDING MEANS THAT INTEREST IS PAID N = 12 TIMES A YEAR, AND WE ARE CONSIDERING A
PERIOD OF Y = 5 YEARS.
• WE PUT THESE VALUES INTO THE COMPOUND INTEREST FORMULA TO FIND THE ACCUMULATED
BALANCE, A.
• A=PX (1+ APR) NY
• A = $5,000 X (1+ 0.03/12 )(12 X 5)
• A = $5,000 X (1.0025)60
• A = $5,808.08

14. YOUR EPF SAVING COMPOUNDING EFFECT
• YOU INVEST 24% ( OWN - 11% + EMPLOYER – 13% ) OF YOUR SALARY EVERY MONTH ( ASSUME YOUR AVERAGE SALARY IS $5,000 ). = $1,200 PER MONTH.
• EPF PAY A DIVIDEND AT 6% PER ANNUM
• YOU INVEST FROM THE AGE OF 25 TO 60 YEARS OLD ( 35 YEARS )
• WHAT WILL YOU HAVE AT RETIREMENT AGE ( 60 ) :
• APN
• A = P X ( 1+ -------- - 1 )NY
• N
• -------------------
• APN / N
• A = $ 1,200 ( 1+ 0.06/12 )12 X 35 - 1
• -----------------------------------------------
• 0.06/12
• A = $ 1,200 ( 1+0.05 ) 420 - 1
• ----------------------------
• 0.005
• A = $1,200 X (1.005)420
• -----------------
• 0.005
• A = $1,200 X 7.1235514938 / 0.005
•
• A = $ 1,709,652

15. IF YOU ARE GIVEN A CHOICE EPF OR PENSION
?
• EPF YOU HAVE TO SAVE $500 PER MONTH FOR 35 YEARS
• OR… RECEIVE A PENSION OF 50% OF YOUR LAST DRAWN SALARY…
• WHICH WILL YOU CHOOSE ?
• $ 500 X 12 X 35 = $ 210,000
• YOU WILL RECEIVE $ 505,000 AT 60 YEARS OLD.
• OR .. YOU RETIRE AT THE SALARY OF RM 7,000 PER MONTH AND HENCE RECEIVE A
MONTHLY PENSION OF $3,500 PER MONTH.
• LET SAY YOU LIVE UNTIL 80 YEARS OLD
• SO YOU RECEIVED = $ 3,500 X 12 X 20 = $ 840,000

16. SAVING PLAN
• SAVINGS PLAN FORMULA (REGULAR PAYMENTS) WHERE
• Y = NUMBER OF YEARS
• N = NUMBER OF PAYMENT PERIODS PER YEAR
• APR = ANNUAL PERCENTAGE RATE ( AS A DECIMAL) - RATE OF RETURN
• PMT = REGULAR PAYMENT
• A = ACCUMULATED SAVINGS PLAN BALANCE
• ( 1 + (APR / N)NY -1 )
• A = PMT X ----------------------------------
• ( APR / N )

17. • USE THE SAVINGS PLAN FORMULA TO CALCULATE THE BALANCE AFTER 6
MONTHS FOR AN APR OF 12% AND MONTHLY PAYMENTS OF $100.
• SOLUTION
• WE HAVE MONTHLY PAYMENTS OF ANNUAL INTEREST RATE OF APR = 0.12, N =
12
• BECAUSE THE PAYMENTS ARE MADE MONTHLY, AND BECAUSE 6 MONTHS IS A
HALF YEAR. USING THE SAVINGS PLAN FORMULA, WE CAN FIND THE BALANCE
AFTER 6 MONTHS:

18. • PMT - MONTHLY PAYMENT – $1,000
• Y - NUMBER OF YEARS – 20 YEARS
• APR - RATE OF RETURN – 12% PER ANNUM
• N - NUMBER OF INSTALLMENT – 12 TIMES A YEAR
• ( 1 + (APR / N)NY -1 )
• A = PMT X ----------------------------------
• ( APR / N )
• (1 + 0.12 / 12 )12 X 20 ( 1 + 0.01 )240 - 1
1.01240 - 1
• A = 1,000 ( -----------------------------) = 1,000 ---------------------
---- = 1,000 X -----------------
• ( 0.12 / 12 ) 0.01
0.01
• 10.89 - 1

19. • YOU HAVE A TARGET SAVING BALANCE OF $2,000,000
• RATE OF RETURN IN 12% P.A.
• SAVING PERIOD 20 YEARS
• 12 INSTALLMENT PER ANNUM
• $2,021.70 PER MONTH

20. TARGET INVESTMENT AND THE CORPORATE
PLANNING
• AS AN EMPLOYER OF 500 WORKERS IN AN FACTORY, YOU WANT TO CREATE A
GRATUITY SCHEME FOR ALL YOUR EMPLOYEES TO BE PAID AT THEIR RETIREMENT. THE
AMOUNT IS EQUIVALENT TO 10 YEARS OF THE LAST DRAWN SALARY.
• THE AVERAGE SALARIES IS RM 7,000 PER MONTH.
• YOU CAN INVEST IN AN INVESTMENT SCHEME THAT PAY 7% COMPOUNDING RATE OF
RETURN
• ON AVERAGE YOUR EMPLOYEES WILL BE WORKING FOR 30 YEARS IN YOUR COMPANY.
• QUESTION :
• HOW MUCH MONTHLY CONTRIBUTION SHOULD YOU MAKE TO MEET THE ABOVE
OBLIGATION ?

21. SOLUTION
• AVERAGE SALARY IS RM 7,000 PM
• GRATUITY AMOUNT – RM 7,000 X 12 X 10 YEARS = RM 840,000
• TOTAL GRATUITY – RM 840,000 X 500 = RM 420,000,000
• THERE WILL BE 10% OF THE WORKERS THAT WILL BE RETIRING EVERY YEAR.
• CASHFLOW REQUIRED IS – RM 840,000 X 50 – RM 42,000,000
• YOU WANT TO CREATE AN ENDOWMENT SCHEME TO HAVE RM 42,000,000 RETURN EVERY YEAR.
• AT 7% PER ANNUM RETURN, YOU NEED A PRINCIPLE OF RM 42,000,000 / 0.07 = RM 600,000,000
• WITH THE RM 600,000,000, EVERY YEAR THE RETURN ON INVESTMENT IS RM 600,000,000 AND THAT IS SUFFICIENT TO PAY THE GRATUITY FOR THE 10% WORKERS THAT GO FOR RETIREMENT.
• LET SAY THAT THE FIRST BATCH OF WORKERS WILL RETIRE IN 10 YEARS TIME. HO MUCH SHOULD YOU INVEST EVERY YEAR FOR THE NEXT 9 YEAR TO PREPARE FOR THE EMPLOYEES RETIREMENT SCHEME.
• ( 1 + RR/N )N X Y - 1
• A = PMT X -------------------------
• RR /N
• ( 1 + 0.07/12 )12 X 9
• RM600,000,000 = PMT X ----------------------------
• 0.07 / 12
• ( 1.0005833333 ) 108 - 1 )
• RM 600,000,000 = PMT X ------------------------------------
• 0.00583333
• 1.0650072733 - 1 0.0650072733
• RM 600,000,000 = PMT X --------------------------- = PMT X ------------------------- = PMT X 11. 1447408366
• 0.005833333 0.00583333
• RM 600,0000,000
• PMT = ---------------------------- = RM 58,837,052.72
• 11.1447408366

22. PLANT SINKING FUND PROGRAM
• YOU JUST REPLACE A SET OF PLANT THAT WILL HAVE A USEFUL LIFE OF 10 YEARS.
• YOU ESTIMATE THAT IN THE 11TH YEARS YOU WILL HAVE TO REPLACE IT WITH
ANOTHER PLANT THAT WILL COT YOU RM 120,000,000.
• YOU FOUND THIS INVESTMENT PROGRAM WITH AN INVESTMENT BANK THAT ENSURE
A RETURN AT 8% PER ANNUM.
• REQUIRED :
• HOW MUCH YOU MUST INVEST IN THE SINKING FUND PROGRAM EVERY YEAR FOR
THE NEXT 10 YEARS TO HAVE THE FUND READY ?
• ( 1 + 0.08/12 )12 X 10 - 1 )
• RM 120,000,000 = PMT X -----------------------------------
• 0.08 / 12