LEARNING ACTIVITY SHEET – QUARTER 4 -WEEK 3 & 4

BUSINESS FINANCE

TOPIC#1: Personal Finance and Money Management

What is Money Management?

Money management refers to the process of tracking and planning an individual or group’s use of capital. In personal
and corporate finance, money management usually includes budgeting, spending, saving, and investing.

Private banking financial advisors provide money management services to individual customers. Commercial banking
provides money management to corporate clients. In financial markets, money management also refers to portfolio
management and investment management. Financial professionals manage investments and make investment
decisions for pools of funds.

Money Management in Personal Finance

Money management is a broad concept. It refers to the strategies and techniques to determine the use of an
individual, company, or institution’s capital. In personal finance, money management covers budgeting, spending,
and saving (investing). Money management can be proactive with periodic or regular financial planning. It can also
be reactive to specific events without intuitive planning in advance.

As a result of different ages, lifestyles, family structures, and many other factors, financial plans for individuals are
different. However, the fundamental principles of budgeting can be commonly shared. For example, one simple
method of personal budgeting is the “50-20-30 Budget Rule.”

The 50-20-30 Budget Rule suggests an individual spends 50% of their after-tax income on essential expenditures. The
essentials include house mortgages or rents, transportation, groceries, utilities, and so on. 30% of their income
should be spent on the things that the person wants. It can include expenses on partying with friends, movie tickets,
and vacations. The remaining 20% should be saved or invested for future financial goals.

Money management with intuitive planning and budgeting helps to reduce inessential expenditures. Such
expenditures do not add value to an individual’s living standards. They can be saved or invested for better use in the
future. Money management also lowers the risk of running out of money. It helps individuals to achieve their
financial goals in the long term.

Financial advisors in private banks, insurance firms, and other financial institutes provide personal money
management services. Individuals can also process their money management needs through personal finance
applications.

Money Management in Corporate Finance

Similar to personal finance, money management for corporate finance also includes planning and budgeting.
However, the process of budgeting is quite different. A company’s budgeting is mainly shaped by its business
strategies. It is built upon the company’s historical financial statements and adjusted with forecasting estimates.

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In addition to the use of capital, corporate money management also considers the raising of capital – how much to
finance and how to finance should be determined. Money management for corporate finance is more complex than
for individuals. Companies need professional teams to provide financial analysis and planning.

Money Management in Financial Markets

In financial markets, money management also refers to investment management or portfolio management.
Investment companies manage a pool of capital from their individual and institutional clients.

Money managers invest the capital in different asset classes to generate returns. The assets include stocks, bonds,
private equities, real estate, commodities, and so on. The firms also offer brokerage, mutual funds, ETFs, investment
advice, retirement services, financial planning, and many other money management services.

Some of the world’s top money management firms include The Vanguard Group, BlackRock Inc., and Fidelity
Investments. Vanguard is the world’s largest mutual fund provider and second-largest ETF provider. BlackRock’s ETF
division is the biggest ETF provider in the world. Its iShares unit lists $1.9 trillion assets under management.

Different investment strategies are applied depending on many factors. The factors include investment philosophy,
client risk preferences, the size of the fund, and many others. For example, Bridgewater Associates, as a hedge fund
firm, applies a global macro investing strategy. It seeks investment opportunities from economic trends. On the
other hand, The Blackstone Group, the world’s largest alternative investment firm, invests a lot in private equity and
commercial real estate.

Stock portfolio management can either be passive or active. Passive portfolios invest in ETFs and mutual funds to
follow certain indices. Active portfolios are managed by management teams with particular strategies. The
management of a debt portfolio usually considers credit risk, interest rate risk, and reinvestment risk. Alternative
investments can further diversify a portfolio and lower the systematic risk.

Examples of alternative investments include private equities, venture capitals, commodities, and real estate.
Portfolio and investment management can be very complex and requires expertise. Professional money managers
apply different strategies effectively to reach a higher expected return at the given level of risk.

Investment risk is proportional to the return in an efficient portfolio. The main idea of money management is to
balance the risk and return to maximize investors’ utility.

Summary

Money management refers to the process of tracking and planning an individual or group’s use of capital. In personal
finance, money management includes budgeting, spending, saving, and investing.

In corporate finance, money management covers the raising and use of capital. A firm’s budgeting is mainly
influenced by its business strategies.

In financial markets, money management refers to portfolio management and investment management.
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Topic #2: Personal Finance and Its Cycle/Areas

What is Personal Finance?

Personal finance is the process of planning and

managing personal financial activities such as
income generation, spending, saving, investing,
and protection. The process of managing one’s
personal finances can be summarized in a budget
or financial plan. This guide will analyze the most
common and important aspects of individual
financial management.

#1 Income

Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their
family. It is the starting point for our financial planning process.

Common sources of income are:

Salaries

Bonuses

Hourly wages

Pensions

Dividends

These sources of income all generate cash that an individual can use to either spend, save, or invest. In this sense,
income can be thought of as the first step in our personal finance roadmap.

#2 Spending

Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is
consumable (i.e., not an investment). All spending falls into two categories: cash (paid for with cash on hand) and
credit (paid for by borrowing money). The majority of most people’s income is allocated to spending.

Common sources of spending are:

Rent

Mortgage payments
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Taxes

Food

Entertainment

Travel

Credit card payments

The expenses listed above all reduce the amount of cash an individual has available for saving and investing. If
expenses are greater than income, the individual has a deficit. Managing expenses is just as important as generating
income, and typically people have more control over their discretionary expenses than their income. Good spending
habits are critical for good personal finance management.

#3 Saving

Saving refers to excess cash that is retained for future investing or spending. If there is a surplus between what a
person earns as income and what they spend, the difference can be directed towards savings or investments.
Managing savings is a critical area of personal finance.

Common forms of savings include:

Physical cash

Savings bank account

Checking bank account

Money market securities

Most people keep at least some savings to manage their cash flow and the short-term difference between their
income and expenses. Having too much savings, however, can actually be viewed as a bad thing since it earns little
to no return compared to investments.

#4 Investing

Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over
time the individual will receive back more money than they originally invested. Investing carries risk, and not all
assets actually end up producing a positive rate of return. This is where we see the relationship between risk and
return.

Common forms of investing include:

Stocks

Bonds

Mutual funds

Real estate

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Private companies

Commodities

Art

Investing is the most complicated area of personal finance and is one of the areas where people get the most
professional advice. There are vast differences in risk and reward between different investments, and most people
seek help with this area of their financial plan.

#5 Protection

Personal protection refers to a wide range of products that can be used to guard against an unforeseen and adverse
event.

Common protection products include:

Life insurance

Health insurance

Estate planning

This is another area of personal finance where people typically seek professional advice and which can become quite
complicated. There is a whole series of analysis that needs to be done to properly assess an individual’s insurance
and estate planning needs.

The Personal Finance Planning Process

Good financial management comes down to having a solid plan and sticking to it. All of the above areas of personal
finance can be wrapped into a budget or a formal financial plan.

These plans are commonly prepared by personal bankers and investment advisors who work with their clients to
understand their needs and goals and develop an appropriate course of action.

Generally speaking, the main components of the financial planning process are:

Assessment

Goals

Plan development

Execution

Monitoring and reassessment

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**Assessment
ESSAY. Write your answer on the space below each question. (5 points each)

1. What do you think is the significance of studying Money/financial management for a student like you?

2. Do you agree that the lifestyle and age of a person affects his/her financial management capability? Why or
why not?

3. After studying the financial cycle, which among those areas do you find yourself more interested in? why?