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UNIVERSITY OF CAGAYAN VALLEY
School of Business Administration & Governance

Balzain Hi-Way, Tuguegarao City
THE SIX FINANCIAL PLANNING COMPONENTS

1. Cash-Flow Management
2. Tax Planning
3. Insurance Planning
4. Investment Planning
5. Retirement Planning
6. Estate Planning
Cash-Flow Management
-Cash Flow management aims to achieve a balanced or even surplus cash flow.
-A balanced or surplus cash flow means that there is always efficient cash to pay for one’s needs
and wants.
-Cash flow is the change in the balance of the cash and cash equivalents.
Budgeting Principles
1. The purpose of a personal budget is similar to a corporate budget
2. The analysis must be forward-looking.
3. The budgeting process must be well organized
4. .The budget must be clearly presented.
5. The budget must be used to compare with the actual expenses for evaluation.
6. The budget should be used as a tool for improvement.
Cash flow Management Techniques
Aims to control matters relating to income and expenditure so that there is a surplus of income
over expenditure to meet unexpected need such as unemployment.
1. Cash flow statement

-cash flow statement is an account of the cash receipt and cash disbursement during a period.
The purpose of preparing a cash flow statement is to evaluate the ability to generate positive cash
flows to meet cash disbursement obligations and to see if there is a need for financing.
2. Cash Budget
-The cash budget is a record of future cash inflow and cash outflow. Past performance of cash
flows provides a good reference for making decisions and analysis for the future. A cash
budget is good for controlling the inflow and outflow of cash.
3. Financial Ratio analysis
-Financial planners employ financial ratios to help analyze the financial status of clients. The
interpretation of ratios is based on both cross-sectional and time series analyses. Financial
ratios are simple mathematical expressions of the financial relationship between the items on the
various financial statements of clients.
Financial Ration Analysis
1. Solvency Ratio
2. Debt-To-Total Assets Ratio
3. Debt-To-Income Ratio
4. Liquidity Ratio
5. Savings Ratio
6. Investment Assets-To-Net Worth Ratio
4. Constructing a Family Budget
-The family budget incorporates the income from the working couple and expenses for all family
members including children
Key family budgeting items:
Family vacation
Medical expenses
Educational expenses
Financial discipline is very important in implementing a family budget it can be attained when an
individual has a proper financial values system.
5. Family budget
- Can be a great tool to establish financial discipline for children and to help them to take part in
achieving family financial goals
Theory of Consumption Smoothing by Friedman (1957)
-Financial planners can estimate the appropriate amount of consumption for their clients.
-In the other words, there is a tendency in human behavior to adjust and smooth consumption
base on lifelong expected income.
Tax planning
-is one of the planning areas in a personal financial plan. However, it should not be treated as a
separate component.
-The objective of a tax plan should be long term rather than short term.
-Tax planning is an arrangement of taxation affairs in a legal and commercially realistic manner.
-The objectives of tax planning are to maximize the tax burden defer tax payment, and shift tax
liability, while utilizing legal means to do so.
Tax Planning Principles

1. Lawfulness
2. Prearrangement
3. Timeliness
4. Cost-effectiveness
5. all roundness
6. Selectivity.
1. Lawfulness
It should be stressed that tax planning is a legitimate means to reduce or to defer tax liability. All
tax planning techniques implemented should be within the legal limits.
2. Prearrangement
Prearrangement means that the strategies in the tax plan must be executed before transactions are
carried out.
3. Timeliness
The tax plan should be implemented on a timely basis. Financial planners should note
the potential difference in the timing of the financial benefits and costs of the tax plan.
4. Cost-effectiveness
The outcome of the tax planning process should be a tax arrangement which is the least costly. in
the evaluation process, financial planners should offer alternative methods for their clients and
discuss with them the feasibility of the choices financially and technicallyiming
5. All-roundness
A good tax plan should not involve tax elements only as tax planning is part of the overall
financial plan of clients.
Tax Planning Strategies
Tax planning aims to minimize the tax liability of taxpayers.
Four basic strategies to do this:
1. decrease the taxable income,
2. Increase the allowable deductions,
3. Reduce the tax rate applicable, and
4. Defer the tax payment.
GENERAL STRATEGIES
1. Income And Profit Splitting
Most taxing authorities charge different categories of taxpayers.

 Unmarried Taxpayer
 Joint return for married taxpayer
 Separate return for married taxpayer
 Head of household taxpayer
2. Property Tax
Property tax is a tax paid on property owned by an individual or other legal entity, such
as a corporation.
3. Profit Tax
Profit tax is the amount of taxes on profits paid by the business

4. International Tax Planning’
-The market becomes more and more globalized.
-It is very likely that financial planners would have local clients having investments overseas or
clients oversea trying to make investments domestically. Therefore, it is important for financial
planners to have some knowledge of issues relating to international tax planning.
Type of tax
1. Circulating tax- Charges on the turnover rate of commodity
2. Consumption duty- Charges on the sales of commodity
3. Value-added tax- Charges on the value added to the commodity in the production
or operation process.
4. Stamp Duty
5. Act tax- Charges on certain prescribed acts in some activities such as
consumption, investment, or entertainment: examples of act tax are betting duty and
stamp duty
6. Resources tax- Charges on the income derived from exploration and development
of natural resources
Risk Management and Insurance Planning

Financial planners is to conduct effective risk management for clients through insurance
planning.
Risk management can go beyond insurance to employ advanced financial instruments such as
options and futures to hedge the risk of investment and financial assets, but we will limit
discussion here to life and asset protection through insurance products.
Role of Financial Planners
-Financial planners can help their clients to spot all the potential risks that can prevent them from
achieving their financial goals.
-The job for financial planner in managing pure risk is to prevent pure risk from occurring or risk
is to obtain insurance coverage.
Risk Management Techniques

Methods for treating risks. Traditional risk management techniques for handling event risks

1. Risk Control- means using every possible way to minimize risk.
2. Risk Avoidance -refers to utilizing all means to prevent risk or to keep away from
all causes of risk.
3. Risk Diversification- is a risk management strategy that mixes a wide variety
of investments within a portfolio.
4. Risk Retention- is a kind of self-insurance
5. Risk Transfer- means shifting the risk and the loss of the risk to others.
There are three conditions affecting the insurability of risk:
1. The risk must be no speculative
2. The risk must be unscheduled and accidental
3. The probability for the risk to take place is predictable mathematically and actuarially
INSURANCE PLANNING
Insurance planning is to protect yourself, your family and loved ones, your home, your assets, or
your business against unexpected events. The idea behind insurance is to get a group to
contribute financially to a fund specifically designed to help individuals recover in the case of an
unexpected loss.
Financial planner must be aware of the following factors that affect the insurance needs of their
clients:
 Age - a client’s age also affect his ability to buy insurance product.
 Number of dependents and marital status - The number of dependents increases, need for
insurance also increases.
 Level of income and personal financial ability – no insurance need can be fulfilled if
there is no income.
Principles of Insurance
-Insurance is defined as the pooling of accidental and unexpected losses by transferring risk to
the insurer.
Insurance includes
1. Social Insurance service provided by the government.
2. Private insurance provided by the Commercial firms.
Functions of Insurance
The functions of insurance are categorized into basic function and derivative function:
1. Basic function
 To share
 To shift
 To identify the insurable risk of the insured.
2. Derivative Function
 Financing and Investing
 Function of Preventing Disaster and loss
INSURANCE PRODUCT
The purpose of insurance is a provide funds to compensate for the various type of financial
losses when necessary.
Insurance product can be categorized by the type of financial loss on the insurance subject.
Example-Property and economic value of the property
Life Insurance
Life Insurance can be defined as a contract between an insurance policy holder and an insurance
company, where the insurer promises to pay a sum of money in exchange for a premium, upon
the death of an insured person or after a set period.
1. Term of life insurance -Term life insurance is an insurance policy for a specific time
period of at least five years up to 25 or 30 years.
2. Insurance premium – the amount of money an individual or business pays for an
insurance policy. Insurance premiums are paid for policies that cover healthcare, auto,
home, and life insurance.
3. Cash value (Accumulated fund) – the amount of the savings element in the insurance
policy.
4. Death protection- refers to the pure amount of insurance provided which is equal to the
difference between the death benefit and the cash value.
5. Surrender/Lapse – Refers to the termination of the insurance policy.
6. Face amount – the state amount of the insurance in the contract.
7. Policy loading – loading refers to the policy expenses and can be in the form of back-
end loads, front- end loads or both.
8. Dividends- a life insurance policy which pays dividends is called a participating policy
while one which does not pay is called a non-participating policy.
Factors that need to be considered before deciding on an appropriate life insurance policy
include the following:
1. Duration of the insurance contract – (term or whole life).
2. Inclusive of investment element – (cash value for non-cash value).
3. Responsibility to make investment decision and willingness to bear investment risk
4. Universal life or variable life
5. Tax implication – (life insurance proceed for the beneficiary for free from income tax).
INSURANCE PRODUCTS
1. Whole Life Insurance

2. Endowment Insurance
3. Universal Life Insurance
4. Variable Life Insurance-
5. Health Medical Insurance
6. Disability Income Insurance
7. Property Insurance
8. Liability Insurance
INVESTMENT PLANNING
Investment planning is the process of aligning your financial goals with your investment
resources. It is the main component of financial planning which puts to use your savings and
ensures you earn more money through investment. -Investment planning is known to be a subset
of financial planning. - Investment planning focuses only on how you will grow your savings
through different investment vehicles. Your investment planning is a key determinant of
how successful your financial plan will be.
Benefits of Investment Planning
1. Family Security: Investment planning is important from the point of view of family

security. If anything happens to the working member in the family then the
other members of the family will be financially secure by the investment.
2. Savings: One should invest in those investment vehicles which are highly liquid. Funds
can be easily taken out from those investments in the case of emergency
3. Financial Understanding: Investment planning helps in understanding about our current

financial situation. It becomes easy for an individual to evaluate investment or retirement
plan by having financial understanding.
Objectives Of Investment Planning
1. Safety- Safety, income, and capital gains are the big three objectives of investing.

But there are others that should be kept in mind when they choose investments.
2. Income- Investors who focus on income may buy some of the same fixed-income assets
that are described above. But their priorities shift towards income. They're looking for
assets that guarantee a steady income supplement. And to get there they may accept a bit
more risk.
3. Growth Of Capital- capital growth is achieved only by selling an asset. Stocks are capital
assets. Barring dividend payments, their owners have to cash them in to realize gains.
4. Tax Minimization- Some investors pursue tax minimization as a factor in their choices.
A highly-paid executive, for example, may seek investments with favorable tax
treatment to lessen the overall income tax burden.
5. Liquidity- Investments such as bonds or bond funds are relatively liquid, meaning they
can in many cases be converted into cash quickly and with little risk of loss.
RETIREMENT PLANNING
Retirement planning means preparing today for your future life so that you continue to meet all
your goals and dreams independently. This includes setting your retirement goals, estimating the
amount of money you will need, and investing to grow your retirement savings.
5 STEPS TO BUILD A RETIREMENT PLAN

1. Understand Your Time Horizon
Your current age and expected retirement age create the initial groundwork of an
effective retirement strategy. The longer the time from today to retirement, the higher the
level of risk that your portfolio can withstand.
2. Determine Retirement Spending Needs
Having realistic expectations about post-retirement spending habits will help you define

the required size of a retirement portfolio. Most people believe that after retirement, their
annual spending will amount to only 70% to 80% of what they spent previously.such an
assumption is often proven unrealistic, especially if the mortgage has not been paid off or
if unforeseen medical expenses occur.
3. Calculate After-Tax Rate of Investment Returns
Once the expected time horizons and spending requirements are determined, the after-tax
real rate of return must be calculated to assess the feasibility of the portfolio producing
the needed income. A required rate of return in excess of 10% (before taxes) is
normally an unrealistic expectation, even for long-term investing.
4. Assess Risk Tolerance vs. Investment Goals

Whether it’s you or a professional money manager who is in charge of the investment
decisions, a proper portfolio allocation that balances the concerns of risk aversion and
return objectives is arguably the most important step in retirement planning.
5. Stay on Top of Estate Planning

Estate planning is another key step in a well-rounded retirement plan, and each aspect
requires the expertise of different professionals, such as lawyers and accountants, in that
specific field. Life insurance is also an important part of an estate plan and the retirement
planning process.
ESTATE PLANNING
Estate planning is the preparation of tasks that serve to manage an individual's asset base in the
event of their incapacitation or death. The planning includes the bequest of assets to heirs and the
settlement of estate taxes. Most estate plans are set up with the help of an attorney experienced
in estate law. Estate planning involves determining how an individual’s assets will be preserved,
managed, and distributed after death
5 KEY ELEMENTS OF GOOD ESTATE PLAN
1. Will- a will is a legally binding document that directs who will receive your property and
assets after your death.
2. Trust- a trust is a legal arrangement through which a trustee holds legal title to property
on behalf of a beneficiary or beneficiaries. The person setting up a trust can dictate how
and when beneficiaries receive the assets in the trust.
3. Power-of Attorney- a Power of Attorney is the person you designate to step in
and manage your affairs, should you become ill or incapacitated. The person
you designate, known as your agent, has the power to make financial decisions on
your behalf.
4. Health Care Directive- A health care directive is similar to a power of attorney in that it
designates someone you choose to make healthcare decisions for you if you are unable to
do so yourself
5. Beneficiary Designations-Beneficiary designations dictate who will receive

benefits when you pass.
RISK PROFILING
Risk Profiling- The Process of determining a person’s risk tolerance level using utility-based or
psychometric methods.
RISK PROFILING METHODS

Utility-Based Survey- Employs the utility to construct a series of questions to determine the
client’s equilibrium point which indicates his or her risk aversion.
Psychometric Survey- Employs life events and investment gamble involving various levels of
risk in order to assess client’s risk tolerance.
Asset Allocation- Refers to how investors spread their investment funds among various financial
instruments.
Validity- A measure of how successful the instrument is in assessing outcomes.
Reliability- A measure of how persistent an outcome is generated by the instrument.
LIFE-CYCLE ANALYSIS
Life cycle analysis (LCA) - is a method used to evaluate the environmental impact of a product
through its life cycle encompassing extraction and processing of the raw materials,
manufacturing, distribution, use, recycling, and final disposal.
- is a method which the energy and raw materials consumption, different types of emissions
and other important factors related to a specific product are being measured, analyzed and
summoned over the products entire life cycle from an environmental point of view.
LIFE- CYCLE STAGES

A life cycle - is defined as the developmental stages that occur during an organism's lifetime.
- ends when an organism dies
- can be comprised of more than the three basic stages depending on the species.
- the life of an individual is divided into several life cycle stages. The exact number of life
cycle stages differs among individuals. There is also no theoretical consensus on how many
stages should be used in financial planning. As financial planning focuses on clients who have
income or wealth that they can use and control,, we normally excluded the childhood stage and
start with the young single. In general, five to six stages can be identified for the purpose of
financial planning.
YOUNG SINGLE
The young single individual should have insurance protection against disability due to sickness
and injury, which will affect their earning ability. As they are still young and their parents have
not reached retirement stage, there I little need for financial protection against early death. In
addition, if they have excess funds, they can also think about making investment and pension
plans.
NEWLY MARRIED
- When young single individual marry, their needs become substantially different. The needs and
financial planning priorities of the newly married couple depend on their employment status. If
both parents work, they would have more surplus funds to fulfill their financial planning needs.
If the couple have surplus funds, they may start making savings for retirement, emergency funds
for food and investment plan. If only one parent works, the top priority is to protect against the
financial consequences of early and accidental death of the breadwinner, so life insurance is
important.
MARRIED WITH YOUNG CHILDREN

With the addition of children to the family, expenditure goes up, and the needs for
financial protection increases. The couple will have to provide for both the present physical
needs and future education needs of their children. When there is a change in the employment
status of the couple, the availability of funds for family expenditure may be affected. If there is
surplus fund, the family may use it for investment and pension plans.
MARRIED WITH OLDER CHILDREN

The couple should be in the middle of their careers by time their children are older. This is the
stage where the couple should have more surplus funds to invest. Investment income can be used
to repay loans, to finance the educational expense of children, to pay for leisure, and to
prepare retirement.
COUPLE AT PRERETIREMENT
In the preretirement stage, the children should have grown up. Therefore, the need for
life insurance to protect the children against the financial consequences of early and
accidental death of the parent is reduced. When the children become financially independent, the
parents can put their first priority on retirement. They should try to maximize their investment
income to supplement their retirement income.
RETIRED COUPLE
- At this stage, the objective of the retired couple is to maintain their living standard. If there is
a shortage of funds, they may have to invest more in order to generate additional income. If there
is a surplus of funds, they may consider making arrangements for the disposal of their estates
upon death. While tax planning should be done throughout the different life cycle stages during
retirement, the objective of tax planning is to minimize the tax liability of the deceased when the
estates have to be passed to the children. We can see then that financial planning is important at
every life cycle stages of the individual.
COMMON FINANCIAL GOALS AND ACTIVITES

1. Obtain appropriate career training
2. Create an effective financial recordkeeping system
3. Develop a regular savings and investment program
4. Accumulate an appropriate emergency fund
5. Purchase appropriate types and amounts of insurance coverage
6. Create and implement a flexible budget
7. Evaluate and select appropriate investments
8. Establish and implement a plan for retirement goals
9. Make a will and develop an estate plan
THE ROLE OF FAMILY IN THE LIFE CYCLE

Family life cycle
- Theory suggests that successful transitioning may also help to prevent disease and emotional or
stress-related disorders.
- is a series of stages through which a family may pass over time.
- emphasizes the effects of marriage, divorce, births, and deaths on families, as well as changes
in income, expenses, and assets.
- It is a common assumption that an individual will get married and form a family. Therefore,
many decisions in the financial planning process made throughout the different stages of the
family life cycle. The key elements in the family life cycle include the marital status of the
individual, and the number and age of children. The family life cycle is especially
important when dealing with Asian clan because of the importance of family values and the
extended definition of family which includes noncore relatives
THE FINANCIAL LIFE CYCLE

The lifetime pattern of financial position and earning power of an individual is referred to as the
financial life cycle. One of the critical determinants of the earning power of an individual is the
investment in human capital. The investment in human capital already exist during the dependent
stage. The financial life cycle commences when an individual leaves his or her parents and start
to be independent.
In the very early stage of the financial life cycle, the consumption level of an individual is more
likely to exceed the income level, particularly when the individual is making an investment in
human capital. At this stage, financial help comes primarily from the parents
and/or students loans.
When individual has worked for certain number of years, his or her net worth begins to grow as
earning power grows. The individual may have started a family by this time. The income earned
by the individual at this stage would then be needed to cover the consumption expenses of the
family unit, to pay off debt, to save, and to invest. As most of the income earned is used to cover
the expenses of the family unit, the individual’s net worth grows more slowly during the stage.
Once the children become independent financially and most of the debt is paid off, the individual
should have surplus income and savings. The ability to save should be the highest at this stage of
the life cycle. Consequently, there is a significant increase in the individual’s net worth at this
age. When the individual retires, the earning power becomes very low or zero. The retired
individual starts to draw upon his or her pension and to consume the accumulated savings. In the
retirement stage, the savings rate is zero or negative and the individual’s net worth declines.
The financial life cycle- based on age consists of three stages, namely the stage of accumulating
wealth, namely the age of 20-40 years, the stage of multiplying wealth, namely the age of 41-50
years and the stage of distributing wealth which is 51 years and above.
These three stages are:
1. Wealth Accumulation - This is where you embrace the daily grind and put in all your work.
- is all about your savings.
2. Wealth Preservation - This stage is when you start thinking about retirement planning after
years of accumulation in your work life.
3. Wealth Distribution - This is where all that money you’ve saved and all the investments
you’ve made finally pay off.
THE ROLE OF WORK IN THE LIFE CYCLE

Works plays an important role as it affects both financial and nonfinancial aspects of the life
cycle. Work is the single most important factor in one's financial life as works creates income.
We need income to be self-sufficient financially and to provide the necessities and luxuries at
different stages of the life cycle.
LIFE CYCLE MODEL-Is the standard framework which economists use to think about the inter-
temporal allocation of time, money, and efforts.
ASSUMPTIONS AND LIMITATIONS OF APPLYING THE LIFE-CYCLE

MODEL TO FINANCIAL PLANNING
The life-cycle model is very useful in providing some generalizations of clients' needs in

financial planning. However, there are certain assumptions and limitations that financial
planners have to consider when using life-cycle analysis for their clients.
CULTURAL EFFECTS- the consumption and savings behavior are dependent on the culture of
a people. The influence of cultural values in people's behavior throughout their life cycle.
COHORT EFFECTS- are due to different generations being subject to
different economic conditions and potentially different pensions and tax systems, so financial
planner should be careful in comparing consumption and savings behaviors of consumers in the
same category but from different generations. The effect of generation specific values on
people's savings behavior throughout their life cycle.
WEALTH AND INCOME EFFECTS – assumption that the wealth and income of an
individual are limited resources, and the individual has to make an effort to earn an income and
save for the future.
UNCERTAINTY ABOUT THE FUTURE - one assumption of the permanent-
income hypothesis is that we have a reasonable idea of the expected income of the individual.
UNIQUE CHARACTERISTIC OF INDIVIDUALS - every client has his
own unique background and timing of different life stages.

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UNIVERSITY OF CAGAYAN VALLEY

School of Business Administration & Governance

THE SIX FINANCIAL PLANNING COMPONENTS

1. Cash flow statement

Theory of Consumption Smoothing by Friedman (1957)

-Financial planners can estimate the appropriate amount of consumption for their clients.

Tax Planning Principles

1. Income And Profit Splitting

Most taxing authorities charge different categories of taxpayers.

Profit tax is the amount of taxes on profits paid by the business

Risk Management and Insurance Planning

Risk Management Techniques

Methods for treating risks. Traditional risk management techniques for handling event risks

1. Whole Life Insurance

Benefits of Investment Planning

1. Family Security: Investment planning is important from the point of view of family

3. Financial Understanding: Investment planning helps in understanding about our current

Objectives Of Investment Planning

1. Safety- Safety, income, and capital gains are the big three objectives of investing.

5 STEPS TO BUILD A RETIREMENT PLAN

Having realistic expectations about post-retirement spending habits will help you define

4. Assess Risk Tolerance vs. Investment Goals

5. Stay on Top of Estate Planning

5. Beneficiary Designations-Beneficiary designations dictate who will receive

RISK PROFILING METHODS

LIFE- CYCLE STAGES

MARRIED WITH YOUNG CHILDREN

MARRIED WITH OLDER CHILDREN

COMMON FINANCIAL GOALS AND ACTIVITES

THE ROLE OF FAMILY IN THE LIFE CYCLE

THE FINANCIAL LIFE CYCLE

THE ROLE OF WORK IN THE LIFE CYCLE

ASSUMPTIONS AND LIMITATIONS OF APPLYING THE LIFE-CYCLE

The life-cycle model is very useful in providing some generalizations of clients' needs in

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