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Middle income group financial planning
- 1. NEED FOR FINANCIAL EDUCATION Deteriorationof personal finances Proliferation of new and complex financial products
- 2. I M POSSIBLE 2 IM POSSIBLE Bibek Prajapati (FCMA, CS , MBA, M COM, ). My kind request for you Please like , subscribe ,comment and don’t forget to share Pray to God for the success in Life Thank You
- 3. Agenda Introduction Basicsof savings and investments Choosing the right investment options Asset allocation strategy Self portrait Savings and investment related products Protection related products Borrowing related products Advantages of financial education Investor protection and grievance redressal mechanism
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- 5. BASICS OF SAVINGSAND INVESTMENT Savings Short term Value remains stable Lower returns over long term Investing Long term Value moves up and down in short term Potentially higher returns over long term
- 6. Price of procrastination Twin brothers: Anil and Sunil Anil saved from the age 25 years till 35 years. He did not withdraw till 60 Sunil started saving at 35 years, but continued till 60 years Both saved Rs. 50,000 per year and earned 10% p.a. on their investments
- 7. Price of procrastination Twin brothers: Anil and Sunil Amount accumulated at 60 years Rs. 86 lacs Rs. 49 lacs
- 8. Ask yourself Canyou reduce your spending by 10% Put that money to work to fund your future financial goals
- 9. Path to achievefinancial freedom Setting goals Understand your net worth Budgeting Investing: making money work for you
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- 11. Retirement as agoal -No earning/ less earning but only expenses Retirement planning Will
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- 13. Balances to preventoverspending Unexpected need for funds Discipline Helps maintain standard of living Benefits of budgeting
- 14. STEPS FOR BUDGETPLANNING Calculate your income Determine your bill for essentials Note down your total debts Determine your bill for non-essentials Calculate your savings
- 15. WHAT U GETTODAY PRICE IT SHOULD NOT BE SAME PRICE IN TOMORROW WHAT IS INFLATION?
- 16. EFFECTS OF INFLATION ItemPrice in 2001-02 Price in 2009-10 Sugar (1 kg) Rs. 16 Rs. 40 Cooking oil (5 liters) Rs. 290 Rs. 500 Rice (1 kg) Rs. 14 Rs. 35 Petrol ( 1 liter) Rs. 33.46 Rs. 48.83
- 17. INFLATION EFFECTS ONINVESTMENTS Investment Initial investment Rs. 1,000 Interest on investment 5% p.a. Value after a year Rs. 1,050 Inflation 6% p.a. Your expenses after a year Rs. 1,060
- 18. RISK AND RETURN Riskand investing go hand in hand Risk increases as the expected potential return increases No-risk, what’s that? Manage the risks
- 19. TIME VALUE OFMONEY The value of the money today is not the same as it will be in the future
- 20. THE EIGHTH WONDER- COMPOUNDING Rs.1 lac invested @ 10% Year Simple interest @ 10% p.a. Compound interest @ 10% p.a. 1 1,10,000.00 1,10,000.00 2 1,20,000.00 1,21,000.00 3 1,30,000.00 1,33,100.00 4 1,40,000.00 1,46,410.00 5 1,50,000.00 1,61,051.00 20 3,00,000.00 6,72,749.99 25 3,50,000.00 10,83,470.59 30 4,00,000.00 17,44,940.23
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- 22. Choosing the right investmentoptions Safety ReturnsLiquidity
- 23. Asset allocation Time frame Risk tolerance Personal circumstances Assetallocation strategy`
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- 25. SAVINGS & INVESTMENTRELATED PRODUCTS Bank deposits Government Schemes Bonds / debentures Company fixed deposits Mutual funds Equity sharesDepository system
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- 27. PROTECTION RELATED PRODUCTS Insurance Lifeinsurance Term life insurance Endowment policies Annuities / Pension plans ULIPs Health insurance Comprehensive health insurance Hospitalisation policy Critical illness plan Specific condition coverage
- 28. BORROWING RELATED PRODUCTS Personalloans Home loans Reverse mortgage Loan against securities Credit card debt
- 29. Understanding ‘Ponzi’ schemes How to spot one? The ultimate unravelling of a Ponzi scheme Examples of Ponzi schemes
- 30. Investment philosophies Evaluaterisk of every investment Decide the investment based on needs Do not invest in any scheme that you do not understand Do not invest on trust. Have everything backed up by documents Take into account tax implication of every income Do not blindly follow market tips and rumours Anything that appears unnaturally high or low will have some “catch” disguised Do not follow schemes where you may protect the interest but lose the principal Invest with knowledge after understanding the product well
- 31. ADVANTAGES OF FINANCIAL EDUCATION Helpsbuild a secure financial future Prepared for financial emergencies Protection from marketing gimmicks Feeling a sense of accomplishment Disciplined approach to money Awareness of questionable practices Setting a good example for your family Benefit other aspects of your life
- 32. REGULATORS Various regulatorsin Indian financal markets are: ◦ Securities & Exchange Board of India (SEBI) ◦ Reserve Bank of India (RBI) ◦ Forward Markets Commission (FMC) ◦ Insurance Regulatory & Development Authority (IRDA) ◦ Ministry of Corporate Affairs (MCA) ◦ Ministry of Finance (MoF)
- 33. I M POSSIBLE 33 IM POSSIBLE Bibek Prajapati (FCMA, CS , MBA, M COM, ). My kind request for you Please like , subscribe ,comment and don’t forget to share Pray to God for the success in Life Thank You
Editor's Notes
- #2 The pressing need for financial education comes from two areas. Deterioration of personal finances. Living beyond means, Credit card debt, and Risky investments. Proliferation of new, and often complex, financial products that demand more financial expertise of consumers. Add to that the turbulent market conditions and changing tax laws
- #5 Financial planning is a process laid down to help an investor reach from the current financial position to the desired financial position. As we can see in this slide, the process, like any other process, has certain steps. These steps are: Determine current financial situation Develop financial goals Identify alternative courses of action Evaluate alternatives Consider: Life situation Personal values Economic factors Assess: Risk Opportunity cost Create and implement financial action plan Review and revise the financial plan
- #6 Your Parents were right: money doesn’t grow on trees. It actually grows on other money – which is where we get the old saying, “It takes money to make money”. Money does have an amazing ability to make more money. The good news is it doesn’t take much money to make this happen. Savings to investing Saving is what people usually do to meet short term goals. Your money is very safe in a savings account, and it is usually earning a small amount of interest. It’s also easy for you to get to your money when you need Investing means you’re setting your money aside for longer – term goals. There’s no guarantee that the money you invest will grow. In fact, it is normal for investments to rise and fall in value over time. But in the long run, investments can earn a lot more than you can usually make in a savings account For one, saving or investing money for your financial goals makes you less tempted to spend it. But the best reason for investing is that your money is actually making money for you. Any interest or investment gains get you that much closer to your financial goals. And you didn’t have to do anything for it! Start saving early and you'll be prepared when you need it, whether you're saving for a home, a child's education, or your retirement. If you start saving in your 20s, you'll be off to a great start. If you don't, you'll play catch-up for the rest of your life Youngsters have an advantage that older people don’t have: time. When they understand this concept and use time in their favour, young people have a much better chance of pursuing their dreams and reaching their financial goals
- #7 Anil and Sunil, twin brothers, started working in the same year. Anil started saving Rs. 50,000 every year from the age of 25 years till the age of 35. He did not save anything thereafter, but also did not touch the savings till his retirement age. Earning the average rate of return of 10% p.a., he accumulated a sum of over Rs. 86 lacs at the age of 60 years by saving Rs. 5 lacs. Sunil wanted to enjoy life and he spent all he earned. He did not save anything initially. He started saving Rs. 50,000 every year at the age of 35 years and continued this till 60 years. Earning at the rate of return of 10% p.a., he accumulated little over Rs. 49 lacs by saving Rs. 12.50 lacs. In spite of saving more money (Rs. 12.50 lacs against Rs. 5 lacs), Sunil ended up with less money at retirement. The earlier one starts, the better it is. As the popular saying goes, early bird catches the worm.
- #8 Anil and Sunil, twin brothers, started working in the same year. Anil started saving Rs. 50,000 every year from the age of 25 years till the age of 35. He did not save anything thereafter, but also did not touch the savings till his retirement age. Earning the average rate of return of 10% p.a., he accumulated a sum of over Rs. 86 lacs at the age of 60 years by saving Rs. 5 lacs. Sunil wanted to enjoy life and he spent all he earned. He did not save anything initially. He started saving Rs. 50,000 every year at the age of 35 years and continued this till 60 years. Earning at the rate of return of 10% p.a., he accumulated little over Rs. 49 lacs by saving Rs. 12.50 lacs. In spite of saving more money (Rs. 12.50 lacs against Rs. 5 lacs), Sunil ended up with less money at retirement. The earlier one starts, the better it is. As the popular saying goes, early bird catches the worm.
- #9 The key is discipline. Is it possible to cut your spending by 10% every year? Put that savings into some well planned diversified portfolio of investments. This portfolio will help you with funding your large financial goals like your retirement funding, purchase of a house, educating your children In order to decide how much is that 10%, you need to take the first step in financial planning
- #10 Exercise: List the five goals you have in life Ask the participants to write down their life’s goals. You need to explain what goals mean. Goals can be defined as things we want to achieve in life. Give some examples Goals are statements about where you want to end up.
- #11 Goals should be SMART: Specific Measurable Achievable Realistic Time bound Goals come from your values. What you believe is important, will lead you to choose certain goals. Write down your goals. You are more committed to goals when you write them down.
- #12 Retirement is a situation when your earning stops but the expenses continue. It is one of the most important goals in one’s life. Exercise: Ask the participants to list down 5 ways in which retirement planning was done 30 years ago Exercise: Ask the participants to list down 5 things that they need to do for their retirement planning
- #13 The first step in your financial planning is budgeting. Budgeting is a process for tracking, planning and controlling the inflow and outflow of income. It entails identifying all the sources of income and taking into account all current and future expenses, with an aim to meet an individual’s financial goals. The primary aim of a budget planner is to ensure savings after the allocation for spending. Realize that unexpected things come up in life. You may have to break your budget plan, or reconstruct it, occasionally. However try to avoid debt to cover the shortage and stick to your budget as much as possible.
- #14 Budgets may go off track at times due to some sudden unforeseen incident. However, by having budgets, we know where we should have been and where we are, so the corrective measures can be directed in that direction. Benefits of budgeting - It puts checks or balances in place in order to prevent overspending at various levels Takes into account the unexpected need for funds Helps discipline yourself Helps one maintain his/her standard of living post retirement
- #15 For budget planning, estimating income (net take home per month) becomes the starting point. From here on we look at various expenses (non-discretionary and discretionary), debt outstanding, etc. The difference between these is the savings. Ideally this should be positive and as high as possible! Steps for budget planning:- Step 1:- Calculate your income: This should include income from all sources, including your paycheck and interest from any investment Step 2:- Determine your bill for essentials: List out your essential expenses, which may include rent, grocery, clothing, telephone and electricity bills and fuel and car maintenance. Calculate the amount spent on each. Step 3:- Note down your total debts, including interest payments on the same. Step 4:- Determine your bill for non-essentials: Your list of non essentials may include vacations, gifts and trips to restaurants. Calculate the amount spent on each. Step 5:- Calculate your savings: This is done by subtracting the figure obtained by adding steps 2, 3 and 4 from the figure obtained in step 1.
- #16 When you are planning your investment, it is critical that you take into account the effects of inflation on your investments. At its most basic level, inflation is simply a rise in prices.
- #17 See how the prices of various household items have grown over the years Over time, as the cost of goods and services increase, the value of a rupee is going to go down because you won’t be able to purchase as much with those rupees as you could have in the last month or last year
- #18 Inflation is greatly feared by investors because it grinds away the value of your investment. Example:- If you invest Rs.1,000 in a one year fixed deposit that will return 5% over that year, you will be giving up Rs.1,000 right now for Rs.1,050 in 1 year. If over the course of that year there is an inflation rate of 6%, your expenses which were Rs.1,000 in the previous year will increase to Rs.1,060 at the end of the year. Thus even after investing your money for 1 year you are worse off compared to the previous year because the returns delivered by your investments has been below the inflation rate Steps that an investor can take to avoid the adverse effects of inflation:- Try to determine your “real rate of return” which is the return you can expect after factoring in the effects of inflation. In addition to being aware of the current rate of inflation, it is crucial to be aware of what inflation rate the experts are anticipating. Both the value of current investments and the attractiveness of future investments will change depending on the outlook for inflation. Also remember fixed income investments are particularly vulnerable to the effects of inflation. If you are locked into a particular interest rate, and inflation increases your earnings will not keep up and you will earn a negative return.
- #19 “High risk high returns” does not mean by taking high risks one is assured of high returns; it only means that the possibility of high returns exists. Conversely low risk low returns means that if one takes low risks….one should be satisfied with low returns! Risk and investing go hand in hand Risk increases as the expected potential return increases Even “no-risk” products such as savings accounts and government bonds carry the risk of earning less than the inflation rate It is crucial to manage your risk The phrase “high risk high returns” must be changed to “high risk high potential returns”
- #20 While talking about returns, it is important to understand the concept of “time value of money”
- #21 Explain how interest is earned on interest and how this effect will keep accumulating over longer period of time. Take he number in year 2. in case of simple interest, the investor earns Rs. 10,000 every year on his original investment of Rs. 1 lac. However, in case of compound interest, he also earns on the Rs. 10,000 earned in the first year and hence the difference. See how the gap between simple and compound interest widens as time goes. In case of equities there is no fixed interest earned as in case of FD, but the capital appreciation by way of change of prices can be used to calculate the rate at which money has grown, e.g. Nifty was @ 1000 in Nov ’95 and is @ 5000 in Jun ’10. That is in a period of 14.5 years, Nifty has grown 5x. Using the formula for compound interest, A = P * (1 + r) ^ n, where P = 1000, A = 5000 and n = 14.5, we can solve the equation for R, which will come to be ~ 12%
- #22 Ask the participants, “Do you know the rule of 72?” This rule tells you how much time is taken to double your money given the interest rate @ 9% per year, your money will double in roughly 8 years @ 10% per year, your money will double in approximately 7 years 72 divided by the interest rate = no. of years it takes to double your money
- #23 The choice of investment options will depend upon personal circumstances as well as general market conditions. Based on those two factors, one would like to strike a balance between the following three: Safety Liquidity, and Returns
- #24 Asset allocation involves tradeoffs among three important variables: your time frame your risk tolerance, and your personal circumstances Depending on your age, lifestyle, family commitments and financial goals, the asset allocation will vary
- #25 A self-portrait helps you know where exactly you stand financially. A self-portrait comprises of knowing the details of: Your financial goals Your assets Your liabilities Your estimate of future income, and Your estimate of future expenses While one has to take account of the assets and liabilities as it is in the present; the goals, income and expenses pertain to the future. One needs to assume the rate at which the three change in value. You need to assume at what rate do you think your long term income will grow as well as the rate at which you think the value of goals and the expenses change. Remember the discussion about time value of money and inflation earlier!
- #26 Let us start with the investment related products. Pages 12 to 18 of the booklet give elaborate explanation of each of the products Also mention that in order to invest in shares one needs to have a demat account. For this purpose, please explain dematerialisation of shares and the depository system as mentioned on pages 28 and 29. Do not spend too much time on the slide. Ask the participants to read the booklet at their convenient time
- #28 From investments, let us move on to protection related products. These products protect one against the adverse financial impact of uncertain eventualities of the future. Pages 19 and 20 of the booklet give elaborate explanation of each of the products Do not spend too much time on the slide. Ask the participants to read the booklet at their convenient time
- #29 While investments help us to meet our goals in future, there could be situations where you might need money right now, but have yet not accumulated enough to fund the goal. Here comes the role of borrowing related products. Pages 21 to 23 of the booklet give elaborate explanation of each of the products Do not spend too much time on the slide. Ask the participants to read the booklet at their convenient time
- #30 A Ponzi scheme is a fraudulent investment operation that promises high rates at little risk to investors. The scheme pays the promised return to old investors out of the money received from new investors. As long as new investors keep coming in, the cycle goes on. Refer pages 26 and 27 of the book.
- #32 The objective of this session was to impart knowledge about finances and financial planning. Lack of financial knowledge can affect an individual’s or family’s ability to save for long-term goals and make them vulnerable to severe financial crisis By incorporating contingencies in your financial plan you are ready to face unseen circumstances head on People who are financially literate are reluctant to buy financial products that they do not understand and thus do not fall for marketing gimmicks Financial education is effective at moving people closer to their goals Helps people from overspending and inculcates a habit of savings and investments You become more aware of questionable lending practices adopted by banks and other lenders to sell their products Improves various other aspects of life Give you better control over your financial life So, let us understand what financial planning means
- #33 There are various regulatory agencies that work for the interest of the investors. Page 31 in the booklet elaborates the SEBI framework for redressal of investor grievances. (Request the participants to read the same at their convenience.)