VAC 1: FINANCIAL LITERACY 0 ks Credit distribution, Eligibility and Pre-requisites of the Course© Digitisation of financial trans. ihe tions: b Net banking and UPI, digital wate Cebit Cards (ATM Cards) and Credit Card © Security and precautions against Ponzi sck 5 Onzi schemes and online frauds UNIT—IIl_ Investment Planning and Management (4. Weeks) jecks} * Investment opportunity and financial products ¢ Insur nin i surance Planning: Life and non-life including medical insurance schemes UNIT-IV Personal Tax (4. Weeks) @ Introduction to basic Tax Structure in India for personal taxation © Aspects of Personal tax planning Exemptions and deductions for individuals © e-filing Note: Some of the theoretical concepts would be dealt with during practice hours Ib Practical component (if any) - ‘© Regular class activities to enhance students’ understanding of topics and the application of concepts. The case study method may be followed as a teaching pedagogy. ‘© Numerical questions pertaining to each unit wherever applicable should be "(15 Weeks) Practiced. © For the second unit, students may be assigned a project wherein they can log on ta ct an in-depth analysis con oF the website of various bank: various financial products offered. buss SADR EIEOUES CET ee: a Project related to building a dummy portfolio of stocks and tracking + © For Unit Ii en to the students to select investment options their iven. ‘© An investment budget may be giv stment budget may be given to he ee sis auenlze tie retiimand molokale eae aaa © For the last unit, students may also filea dummy IT return. te ge! hands-on ith e-filiny ’@ Students may conduct a financial literacy survey among at least 25 respondents to measure the level of financial literacy and share the findings in the awareness 1h the form of a report. * Any other Practical/Practice as decided from time to time NN " Essential/recommended readings 7 # Introduction to Financial Planning (4th Eeition 2017) ~ Indian institute of Banking . , roan 27CONTENTS 1, FINANCIAL LITERACY —~ 11 Introduction. — 1.2 Benefits of Financial Literacy — 13 Key Concepts in Personal Financ Review Questions. 2. INCOME, EXPENSES AND BUDGETING 2.1 Introduction 3. SAVING AND MANAGEMENT OF SPENDING 3.1 Introduction .. 3.4 How to Save! 3.5 Where to Save?... 3,6 Management of Spending, 3,7. Steps Followed for Managing the bpendingAi Flnancid Literacy 38 Financial Discipline Case Study . : 39 Smart Tp eget abot ana Aiscipline Review Question’ xv 4. TIME VALUE OF MONEY ay 441 Inroducton reer 42 How te Time Value of Maney Works 43. Reason for Time Vale of Money. 444 Importance of Tie Valve Money... 45 Components of Tne Vale of Money 5. FINANCIAL GOALS Pa eticten $52 Meaning of Financial Gol nn 53 Why Financial Goal are Needed? oan $4 Types of Financ 60 onenn nn nn ‘55 Financial Goal You Mast Achieve before You 4s... [56 Develop Financial Gal Char. 57 Stepsto Set Financial Goa... 58 How Finacial Goal canbe Achieved? 59 Significance of Financial Goals. Reve QU 08 on 6. FINANCIAL PLANNING 611 Introduction. 62 Financial Planning... 63 Why should we do Financial Panning... (64 How to do Financial Planning?.u.namns 65 Why to Maintain a Financial Diary? ‘ Contents|) iti 6.6. Steps in the Financial Planning Process. 47 Preparing Financial Plan ~ racial Consdertions.. 64 65 k Review Questions... a uN ITI | BANKING AND DIGITAL PAYMENT 7. SECURITY AND MODES OF DIGITAL PAYMENTS 73 7A Tatroduction non ee iit: 72. Reserv BankofInda- Role and Importance. 73 National Payments Corporation of lai (NPCD) 74 Digital Payments 7.61 Benefits Digtal Peyments 7.62 Modes of Digital Payments... 77 Vato Channel for Aceptance of Car based Digital Payments 7221 Point of Sale (PoS) 122 mPoS.. 17.3 Soft PS. 734 E-commerce Payment 7.25 ‘Rutomated Teller Machines ata) 76 Cash REESE nnn an 7 Modes of Digital Payments ~ Blomettc Bata ennwwe-nannronn 212 7.81 Unique identification Authority of India (UIDAN) eae TN 7482 Aadhaar Enabled Payment Syste (REPS) nnn AS 783 Micro ATMS.. ee 79. Modes of Digital Payments... 79. Internet Banking. 792 Beech Behg an 7.10 Others - National Automated Clearing HOU. sn, an Danae ein Prodcand Se New ewdomennxiy || Financial Literacy 8 SECURITY AND PRECAUTION AGAINST FINANCIAL AND ONLINE FRAUDS. 8.1 9.174 Portfolio Rete 8.1 Introduction nn 9175 Portfolio Rsk a po ‘3 9.176 Poni Divesication. 3. Types of Fraud or Seams, Practical Prolems. 84 Ponti Scheme : eee 85 Phishing... 86 Crit Car Gn Sing sa ee - t 102 Net Asset Value. -- - 87 Avoiding Frauds and Scams. Ee ‘88 Preventive Measure to Secure Online Payment and Avoid Cyber Fraud 89 Dos and Donits to Protect Yourself from Online Banking Fraud... Review Questions. 103 Different Types of Mutual Fands Schemes 104 Systematic Investment Pan (SIP) — Cita LIFE INSURANCE SCHEME INVESTMENT PLANNING AND MANAGEMENT LIFE INSURANCE AND NON: 9.1 Introduction. 3 i 114 Introduction 9.2. Investing Goal. 112 Life Insurance... 93 Key Factorsin Investment 113 Need for Life Insurance. 1.4 Principles of Life Insurance. 115 Need for Insurance Panning. 118 How to Decide on the Best Life Insurance Plan that Suits 117 ‘Types of Life Insurance Policies 12 Term Life Insurance. 1172. Whole Lif Insurance. 1173 Unit Linked Plans (ULIPS). 1.74 Endowment Pans. 1175 Retirement Plan. 1148 Other Types of Life Insurance. 4181. Group Lif Insurance. 1,82 Life Insurance for Senior Citizens. 119 Claim Setlement Process... 1,10 Life Insurance Companies in Indi... LLL NonlifeEnsurance ns enomnnnn 1112 ilferent Type of Risk included in Insurance... e Revlew Questions... te,al Panay pie, | \LLOWANCES 15. INCOMETAX ALLOWANCES AND Al 12, HEALTH INSURANCE ex 2S ae ° a 15.1 Introduction. 122 Need of Hea Insurance... a | 18.2 Meaning of Alwance and Deductions. a-ommo-—————™ 123 Importance of Buying Heat Insurance in Indi. | iesitiaieiese . 153 Deductions. : a = | 154 Deduction and Exemption on 15.5 TaxPlanning by Avaling Relief of Tax 15.6 Income Tax Exemptions Claimed in Specific Cases 157 Deduction with "Market linked” Instruments 4 188 Toxable,Non-Toxabe and Partially Taxable Allowances AY YOU -B2 ana 189, Deductions, Exemptions Not Arailblein Proposed New Tx Regime === ‘Practical Problems 7 Review Questions. 16. INCOME TAX RETURN 16.1 introduction 0 E-FliNgemm 162 Who can El... = 1633 Ways todo E-Fling..—-~ 164 Benefits of Fling Income Tax Returns. 165 Steps to Register for E-Filing, | 166 Steps todo E-Fing in Init vo 167 Documents Required for -Fiing 124 Heath insurance Policies 125 Goverament Sponsored Scheme. 126 Coverage of Health Insane nn nmnnenn 127 Documents Required to Process Claims 1 Present and Future Valve Table nrnnennnnnnnns FATA 147 Tax Manage... Practical Problems. Review QuestoChapter-1: Chapter-2: Chapter-3: Chapter-4: Chapter-5: Chapter-6: Ul Financial Plartning and Financial Product Financial Literacy . Income, Expenses and Budgeting Saving and Management of Spending Time Value-of Money Financial Goals*” Financial PlanningFinancial Literacy Learning Outcomes Aer studying this chaper, You shouldbe able tounderstand > the basic knowledge of financial literacy; > key concepts in personal finance; > benefits of financial literacy. > 1.) Introduction tn the modern society financial literacy has a significant role, Every person should be taught financial literacy as a life skill to handle their personal finances. The complexity of financial goods, the prevalence of fraud and Ponzi schemes, the need for money to atfain a better quality of life after retirement, etc. are just a few of the problems people deal with. These problems have created a demand for betier personal financial management, including proper control of income and expenditure. People who recive financial education become more aise Heats and ciprs taper iad toward managing their income, expenses, assets, and Tables, wich wl ied te prove er nano a eee For every household, financial planning is a necessity. Savings alone are not enough for financial planning. It is @ financial commitment with a goal. Budgelirig should be done properly since it is a Strategy to conserve and spend money from future income, With the help of this literatiire, readers * can gain a basic understanding of personal finance, including information on financial planning, key financial literacy concepts, different investment opportunities, wealth creation components, Inslirance r and pension products, retirement planning, warnings against Ponzi schemes, tax-saving strategies, investor protection measures, dos and don'ts of investing, etc, The student will have a better grasp of andaa ability to manage their personal finances in order to improve theit financial well-being by understanding financial literacy, Definition of Financial literary Funan plern fo Inset frraminl Gons gout PARrrvncianesacy i the cogohive undervanding of Bnancial components and skills such as budgeting’ investing, borrowing, taxation, and personal financial ib " cial management. The absence of such sills i= referred to as being financially illiterate. Financial literacy makes individuals becor that financial stability can be accomplished. Those who understand finances should | questions concerning transactions, such as whether an item is requised,'whether it is accessible, and whether it is an asset or a liability. Managing your money is a personal slall that benefits you throughout your life ~ and not obe that everybody learns. Tomes ; , 1.2 Benefits of Financial Literacy Being financially literate can improve the standard of living for individuals through an increase in financial stability. Listed below are the Beiciaentoftenclieet being francally Bee —+ Ability to make better financial decisions. ~+ Effective management of money and debt. —« Greater equipped to reach financial goals. _-+ Reduction of expenses through better regulation. — « Less financial stress and anxiety. — « Increase in ethical decision-making when selecting insurance, loans, inves stmenis; and using @ credit card. __. « Effective creation of a structured budget. 4 is an important component of life that can ensure Making steps to becoming financially literate P financial solidity, reduce anxiety, and stimulate the achievement of financial goals. 1.3 Key Concepts in Personal Finance ‘The following are a few crucial personal finance ideas that a person should be aware cof when managing their finances: (i) What are savings? iE Ss ‘The difference between income and expenditutes is savings. + Income: Cash received from a variety of sources, including salaries, wages, etc. . Most people i hases. « Expenditure: The amount of money spent on both essential and optional purchases. use their savings to achieve their short-term objectives. Money kept in a banks savings account earns a little amount of interest and is simple to access whenever needed. People can save money in savings accounts at banks, post offices, et. ‘By _Financial Literacy \\ 1.5 (ii) What are Investments? The act ing i of investing involves putting money from savings into financial or non-financial products with the he f generating | h 4 feturns over time, Investments ¢ nad — f an be made in a variety of ite ke ee like fixed-rate bank deposits, stock market purchases, mutual fund oniert icin wn nancial ones like the acquisition of real estate, precious metals, such as gold and sily ents can be made for short-, medium, or long.term goals. 1 . nd : 5 + or long-term goals. One should constantly keep in mind when investing that returns on investments may change over time and that is very sama i => Difference between Savings and Investments is mentioned in the table below. [ ge ta Ban Ackinte "Tvestmentin Fited Deposits and D> Leaning A portion of one’s income which is not used | Putting your money in various investment for expenses products to make money grove - a™ Purpose Savings are made to maintain liguidity to | Investments are made to make the money meet short term or urgent requirements grow by creating assets that can generate income in the future/increase value of assets Q Risk Low or negligible Depends upon the asst in which investment Or is done Liquidity | Highly liquid C20 Converted ie| Comparatively less liquid eek (iii) What is the importance of saving and investing? 1u, Any rise in the investment’s value over time, or investment When you invest money, it grows for yo income or returns that you receive, brings you one e step closer to achieving your financial objectives. _ Early in life, one should begin to.invest and save. The earlier you get started, the higher your chances are of achieving your objectives, like as owning a home, paying for your child's education, saving for retirement, etc. (iv) What are ossts ond lables? oF whereas your liabilities are things you owe (© _ assets are thi own and have economic value, ’ t pepe sa Tre otbersItis your asst, for instance, i you save and then invest ina fxed depos ‘ ane her Pand: iF you Borrow money or take ou aloan from abank or another person, you are able for the loan. (v) What is Debt? (horrrvsol mony ) Money borrowed to meet shortfall of money when expenses are more than, the funds available in hand iscalled debt. :(vi) Whats the Time Volue of Money? (nfterion) ‘As time goes on you'll learn thatifyou could afford to buy uy a whole lunch fora certain amount of moe nee could probably afford to buy only a fraction of the meal forthe same amount aaa today Tiina ht St Rape ft wel Be worth or nov tit wel inf ye. Een is the same, if you have the money now, you can accomplish much more with ibecause over time, you can make it grow by earning interest. on it By investing the 7500 you receive now and earning {Restor capital growth over tine you can enhance the amount of money you will ie future. ume value of money proves that time truly is money a mos fundamental level. the vale of your money todays diferent from wha be tomorow and vice versa {i)_Who is Inflation and its Efec on Investments? Price increases for products and services are refered to as inflation, The ability ofa unit of money, soch ‘one rupee, to buy goods and services ove time decreases as the price of goods and services rss, other words, the lorthe degre to which i can be used to purchase anything, declines, When making financial plans it’s critical to consider how inflation may affect your investments Sine ination lowers the ale of an investor invest ivestr ar extremely afr oi (sii) Hordes iflaion fed my nesimet Decor? ‘© Five years ago. 3 Vada Pav costing Rupees 2 would today cost Rupees 1. Tis price increase is due 0 ‘inflation, which hasan effec on the prices ofthe ingredients and ultimately the inal product, rather than {ix) Whot ore the steps thot you con take fo avoid the adverse eHecs of inflation? cs iecliare (ai) The Rule of 72 wpe ‘Aecording 10 oe, aie ciate he 1 uke to double our nae ly ow log aouinen “| 10 786 a J - addijon ofthe revurn received “atheendofeach yen the prinpl amount isadusted tefl than eine 7 40 years. You earn > uriog that part he principal The turn earned on growing rina re Ree ample coe tit rina of € G00 Bcomes aes IAT Ys a acady ered when irene and ofOT I or ee Ca unt say oS. forte whol a0-expevod athe amoot ony increases 1074 pated Note: Principal + Return from the first year colle 1 collectively becomes the princi Principal + Return from the second yea ‘anc soon. Tor the second year. Fy Becomes the principal forthe som pal for the third year whtk 4 tit diding 7 by theinterest rat. Lets say that for your birthday, a the mone To reas 400 ou deposit an count hat oer 6 percent) ierest anual? : Time = FL 1750. in 12 years, yourmoney wil hive doubled to 8400/- re = 72) 6% interest = 12 years v (ai) Rupee Cost Averaging Sint ord saP) bg amas aera ted inchoate Trytocalelateyour “galzatzalisturn or the return you may anticipate afer accounting for inflationary effects. You can ives the money you have now ata rate that seal elie ante aicoTaDao the ate of inflation Tessa the chance that it willose value. i (x) What is Power of Compounding? ‘Simple interest simply allows you to earn interest on the principal, or the amount you initially invested; compound nee, however, al you to cam intrest on Boh he principal md reousy ermed spew ° sit cost averaging, invest a set sum of money at wt my Fe soooe rasta rices and fewer units atMonth | Amount paid [Coster unit | Number of waits bought (Amount pald/ Cost) a ad 2000 40.00 50 ‘aug [2000 “war JT Sep. 2000 48.45 “4 casio ae Tass 2 : Now 2000 5555 36 Dec 2000 50.00 40 sett ee Cea From the above, it can be seen that with * etl laeem af DUAN. a pod oon ‘months, an investor received 466 unity of Mut indie segs i ee eae ~TE724,000/466 » 751.50/). OS ee me ete eee + Los of growth OPPORTUNITIES — Loss of interest income." + Unsafe Money can be Stolen or Lost Due to Natural Calamites + Noo Ce gb: Deposts in Banks Cree lg for Bowing Cs ‘Asareslt, itis advantageous to hold cash in banks rather @ (xiv) Banking an than at home. ‘Since comggmercial banks deal with public funds sind trust, they are financial institutions. “The Reserve Bank of India oversees i regula times, banks must ‘mandated audits and inspections. The Reserve Bank of India also conducts an ann Trvestments with a reduced risk profile include bank savings. Depending on the demands of the en eras i nd yeh Poahinieasiee! ether fee Addons fae eso er Fos ats on sae pie SSC ‘ofthe deposit’ value “A depoats are covered by the government ender tne Centrl Govimmen Depost ‘Scheme, up toa maximum of?5 lakhs per client in that specific ‘that even in the event ofa bank failure, the Government will intervene and recover up to 75 lakhs of thie ‘fandsin that bank “One may ocaoaly gto he Reserve Bank fad weber dale Gal eailson thescheme wesc ‘bank Depositors are therefore promised (xv) Know Your Client (KYC) Norms for the Account Opening Process "The goal of KYC is to help hota «document for evdence of dentifa a ur address 0 banks beter know and understand their ‘The KYC documents that bank typically a (suchas a copy ofa PAN card or an ‘as acopy ofan electricity bill, a driver's ‘Customers must go through the KYC process in order to open any form of bank account. “KYC" is an ‘seronym for “Kao (vi Types of Bank Recounts a pO whend “Types of Bink Deposit and their Key Features x |. Savings Bank (SB) Baborryed i Fe ee ag Tae Ln cpus tcc poprt tn ma mn Ter Mates (ATI ramnang Neat dec Souee (DS) on inter on 58 zum bens a tele hn | wiser + Account can be opened i name of joint names. In the case of joint account, the seme aat caterer bare . Maen a cress era tak ca Gem th mr Mine roe naan See ugof yo cn dn oral en brn cs Sr rae eng aan apart P ahieag ibaa am 00S Eyres atonement mc tay sew amy een a ial epost cn be opened aca oe en (ang perl SpA ceshioa Greabs cL ceec ends moel ‘+ ATM Card, passbooks are issued free of charge. 4. BSDBA account holders are not eligble for opening any other savings bank deposit accoun that bank. 4. Pond Deen OD) Acoust \ ‘© Involves placing funds with the bank for 2 cenain rate. | 4 interest accrued or earned on ED is subject to Tax Deducted at Source (TDS) beyo stipulated amount. ‘© Senior citizens may get extra benefits on the interest rate. ‘© Tenure and rate of interest on FDs varies from bank to bank. ‘ 4 Recurving Deposit (RD) Account a Be ‘© A fixed amount is deposited at monthly intervals for a predetermined term, vos + Earns higher interest than savings bank account. TDS appiable om interestacruedor eared beyond a stiplated amount «+ Senior ctzens may ge extra benefits onthe intrest rate «Tenure and rate of interest om RDs varies fom bank to bank 5, Special Bank Term Deposit Scheme (s&ras) 4 Tax savings scheme avaable with banks. «+ Relief under Section 80C of the Income Tax Act, 1961. + Term deposit with 5 yeas lock in period, ‘+ No premature withdrael/ioan allowed.(avi Digital Banking “——_ ' Nae In the gl aera as ne ed ed god take place on 48 mobile phones. Castomers an perform transactions fom anyplace. _Thevarious digital modes of transferring funds areas flows Mode of Transfer and Key Features [EFT (National Electronic Fund Transer) = SX4 + Transfer of funds rom one Bank account wo abot. lo + No restr mE rcton onthe minimum/maximum amount for ransfet ss + Transfer is done using beneficiary account number and IFSC Code (Indian Financial Sytem code a unique code assigned to each bank branch) + Changes for transfer may dif frm bak to bank + Transfer of funds can be intitd anytime during the day and it takes few hours o get created inthe Deneciary acount pasa omen er d |® | clara io | pps | Key Features Shania Cony done det ne ene esbt 9 ' «eons oS ng hgh it ———— 2 ns Fe a nds primase do re amount 10 sa «+ Beend loans of smal = cept ‘small and marginal farmers Title Payment Bank account fa ant carte it cards 11 business units, micro and small identities in the unorganized sectors. who goes o customers (osally in emote locations! ea tee «Can provide services like opening Can or depos bursa small vase credit collecton opm ) + Used to make high value transactions «Transfers done ‘sing beneficiary's account number and IFSC Code (Indian Financial System Code, nig code assigned to each Bank Bratch) oe + Charges for transfer may differ from bank o bank. + Tanfrf fans from one Bank account a Sien accldat of aoter bank ona el tine BL POA * fees ey wat sare ard and aDebit Card pee es ae na eeent eee Wh acedi cad, the cardholder can make payment Time, A debit card onthe other hand, credit for a limit cee ard transactions. This benefit of wsing credit poner ee ia card sued Toa bal ide for. zi rawing Sea ee or ansaien element atl a eaten: Bah ai haa ithdrawal for ear rads can be sed or online prchases aswell at cash withdrs From ATM wna creditcard and a debit card are listed as below: + Transer of funds canbe intated during the speied period on working day and iscompleted instant overcame acl dit ae + ‘Comparison betwee D) mrs immediate Poment Serve) Particles Creit Card ess Deed \ + Transfer of funds from One Bank account to another facilitating instant fund transfer. Source offunds | Lending bank provide the credit facility. | Linked to one’s own savings/curent WT]. For fund transfer through ioternet banking, bneidarys account number and IFSC Code (Indian ® ‘ account maintained withthe same bank Financial Services Code, a unique code aged to cach bunk branch) ae needed. o Interest Tf outstanding amount i not paid on | Not applicable ; + For fund transfer through mobile banking, beneiciary’s MMID (Mobile Money Identifier is a7 digit time, interest is levied. ) umber issued by bank to the customer) is needed y a D Credit History Relevant for issuing a creditcard. [Not relevant for isfuance of the debit Unified Payment interface (UPL) - card. b + Instant transfer of ands Relationship withthe | No compulsion to have account with| Having an account with the isuing through any smart phone using VPA (Virtual Payment Address). @ hese aa ce + 2407 fand transfer facility ona realtime basis + One needs to download UPI- enabled bank app and login using bank detail. f [New categories of banks and business correspondents: RBI has introduced certain new Portas TLL be the PIN. + Immediately after receiving the card from the bank, ise eta lr aes fab: Kone Ton i Seneca «+ This preferable to use an ATM on bank property or on property where a security guards on duty around-the clock. Useit for youre a+ When utilizing the virtual keyboards for online transactions, the bank isnot responsible if the ATM card has been given to someone other than the account holder for a transaction. + Sign up with your bank to receive SMS notifications of transactions. Banks, however, have the right to charge clients for sending them email or SMS warnings about their accounts. + Change your PINs as often as practical + Notify the bank right away if the card is missing. + Don't let anyone use or access your card, (xix) Customer Liability for Unauthorized Banking Transactions According to the RBI, if an unlawful transaction occurs because of fraud, contributory carelessness, or a failing on the part of the bank, the consumer is not responsible. In a similar vein, even in cases where neither the customer nor the bank is at fault but instead another component of the system is at fault, the customer is exempt from liability as long as they notify the bank of any unauthorized or ‘illegal activity within three days of receiving a notice from the bank. Additionally, the bank must immediately credi the customer's account with the sum involved in the transaction. However, in situations when such & occurs due to the negligence of the client, the customer will be responsible for paying all losses up until the date that the unlawful transaction is reported. The RBI has made it clear to banks that | iey must instantly notify consumers via SMS and email when a transaction occurs in their account. In ofder fora . custmer to report any such fraud right away, they have been told to make-sure that such messages can also convey the client’s reply. (x0) Reserve Bank of india (RBI) ‘The Reserve Bank of India Act authorized the establishment of the Reserve Bank of India (RBI), the nations central bank, on April 1, 1935. The Reserve Bank of India is responsible for overseeing the nation’s monetary and credit systems and implements monetary policy io establish financial s“ability in India. The primary objective of the RBI is to perform comprehensive supervision of the Indian financial ‘sector, which consists of commercial banks, financial institutions, and non-banking financing firms. It develops, enacts, and oversees India’s monetary policy. Maintaining price stability and ensuring that credit is flowing to productive economic sectors are the central bank’s management goals. The RBI governs ahd regulates the entire banking system in addition to serving as the government of India’s banker. All commercial banks’ lender of last resort is the RBI. Review Questions: - 1, What do you mean by Financial Literacy with reference to investmentiin India? _ 2. Write the difference between Saving in Banks and Investment in Securities? - 3. Know Your Customer (KYC) does is it important for the bank to know their own customer? Explain. ite the di i ing and Mobile Banking with illustration. __ 4. Write the difference between Digital Banking and Mobile Bankir 22 Income, Expenses and Budgeting the needs and warits and classify between them; > the income and expenses; > budgeting and how to prepare the sample budget. : 2.1 Introduction ‘Are you sometimes short of cash at the end of the month? Don't seem to be able to save for the things you really want? You can learn to balance your income with your expenses - and even have some money left over for savings and extras. Let us show you how to manage your incoming and outgoing finances. 22 Setting Priorities: Needs and Wants It is very important to know the difference between your needs and your wants and how they influences financial decisions. This will help them to set your priorities so that you KNOW WHEE TS SPSNC YON money. E Need: ity, ing required, something essential for life. A need is something thought eo pp ea i es include food, water, and shelter. to be a necessity or essential items required for life, Examples include food, water, elt 2. Want: A something wished for, something nonessential but desired or items which “TREFEaie the quality of living. Examples include a car stereo, CDS, car, and designer clothes. Depending upon what a person defines as a need or a want will influence his/her Se decisions. For example, a person who deems a vehicle as a need will have larger expenses than12.2 |) Financial Literacy Ka «person wih relies ona bicycle for transportation and sees a vehicle asa want, Using these ee + + Seppo RTA ee 7A, you have YOU SSE orca expenses in your budget i: TOUCHE OS yi have YOO You wil usually have two. ronth, Secone. ‘example, YOU definitions, a roof over my head is a need. So are clothing, food, tools for work and medications. will have each ! sroetore arb son "se seecapctacr you kon you wil have ech. DODOS TT aay For arg er Theatre is a want and so are addictions like chewing paan, smoking and = hy are tae Sen and then oF eth re perahip OF # NE “et ; “pat bar ar aaa ar insurance Bl you wi weed 2 PL — OT ch expenaes in yur DOSES > Bxercise: eniy the llowingitem/actvty a eed or want hone you know yore gingto ned soon. You wil want CET doe | areca some funds each month so that you can pay them tation, communication, Item / Activity Need Want food, clothing, housing: FansPor shildren’s = Trcosts money olive. You need ta pay for foods < toons, entertainment, child = = dh done exer necesry expenses Ten there ae HOG? Tike vacati Going to the movies education and mariage, ifs for elatives and 89 8 TT Amon Going outa et = Le ee aes | Alco Se 2 | pcarudk eS = 1000 [Reomputer z ae » mt Owning CD ayer es Repayment oan 300 ‘Going to a basketball game re Sickness hae Owning vaeton home = Drink drugs gutka 400 Food a J ine Did you know. Toc verae commer pds BS of tine om tems hich ates han 3? Excessive expenses on Marriage, Festivals, Pilgrimage &t¢ a ee @Draane Tcomeis whats earned or recived ina gven period. Tere ar various terms for income because there are ariutway of arg ncn Inga rom emploment el employment is wags accounts, ike saving acount, ar ines wich could also come rom lending, Owing tock eaeon ‘Owing pec ofa partnership or privately held “oxporation eies one oa daw. or ‘Most of havea source of income through out job, business, farming other work Many may also be receiving interes. Se at: War be ous fms ov ee Ot how to keep ack of t and manage ito cover your expenes and sve Coe : af oats for tems of resources tha reused up or consumed inthe course of Ese ere hey bps oe nd os ce fd ag eting ep ae — ae used yp on. daily basis. [Track Your Expenses “The best way to start taking control of money is to “track your expenses” And that isnt hard today with to east isto carryaltle notebook ous the notepad on a cel phone or other hand-held device. All that you have to dois, overa month or two or three, write down what You spend your money on: 2500 ‘movie; 2100 scarf; 2500 book; €300 bus pass; and so on. Then, take a few minutes at the end of that time ‘and write down a number of categories. These might include: + Transporation: og ‘+ Snacks, eating out, and fodd in general + Movies, music and entertainment + Yourhobby; + Cell phone or Internet; + Savings: s |+ Andso on. ® Nas fry du how much you have spent on each category, write down the percentage> Unexpected “Then ad up how mach money you actly spent on each category. Seif te reuts surprise you Or see ifthe results com close to what you expected. This will give you one sign as to whether you know, where your money i goig ~ and if you are in control. Thee is one other thing you can do too, Look athow much you are spending in each category Is thatthe way you want to be using your money? Are you spending more in some areas than you would ik to ~ or think you should? Are you saving as much 45 you would like ~ or need to? Going through this exercise - seeing where your money is going - and ‘inking about where you wan it to g>~ should tel you pretty clearly if yOu need to budget Ifyou are pleased with how th h it ‘Rot need a budget ~ atleast nat YoU make more mane, ake on EW ETE having badge wil ep you stay in control > Enagends Cop. be we) expenses that could happen anytime illnes, injury, transportation, et). This ‘ould significantlyafect your months budget limiting the discretionary and variable expenses aswellas savings, Emergencies are, by nate, fen Coaly and therefore demnsates the importance of having 4 regular contribution to savings. Having. Ssrings prevents or its you from going tt debt poy for adden emergency expenses 25 Budgeting (Frioms V/S Expenses) Betme pers ‘Abbodget is a plan for -on a month-to-month bas. It helps you lok t your ‘@penses- both those you have each month and those that come up now and then It helps you work ‘ut how you wil cover your expenses from your income. A budget also helps you to save, build up your savings overtime; eve your financial goals. ee seseerakee ee -Atbodget helps you know where your money is ging. As you work ost your budget, you may find ways to cut back or ways to save more. If you can, use your budget to if first. If you pay yourself lst, it often ends up that there is nothing left. Put Some of your money in savings when _gtitand budget how you will use the rest Even fit a smal {> with guings. And try and make saving a abit from It isa great habit to develop. It can. ‘be an important way to achieve your goals. a i i Out expgnses. It gives you a picture of your financial situation - and whefe you may be heading, And rc LY fe ad FG Z Why ott Many people dot bod Prorse they fe that te de cn enh 2-2 * bol Ine ener oath te ct dg a i> Yow hw io get the mot out of your money. You wort want waste ny: Youll want vo make a8 many “pe Inoney dine ou ca udgeting can ep and ean lp ost peace erie ch inane they hve There are aio many people wo ds badge beat they fat thar a badge: wa them na “Gran strait gghet” Tey think a budget wl eve 100 much contol over what they 40 Actual a person who fasta «budget wl control them too mech is oem» person wane spending trout contol Ifyou fear budget, you probably ned to budget A budget helps you gui contol - Pet inet Deading wo budge ia sue sign you Dave SEER Sake contrl of your money. But have you ‘any iden how yous moneys being used ~ where ts gi”) 1 sip apa of nce aod epee st ieee ewe your tl nce 2 tine meee = = woe oe bve spn Conaaons! We eve money oust ey oa de arp ave Otero yuan cee or month sng orient fa a AF sop ou baw Se You ned to make change 1 bn yout budget tetera by cep ou neater or wet Tscan be inthe shor ‘tetni but is not sustainable in the long terms. ‘Budgeting sta one-time thing, To make it work, ou need to doit regularly. At frst. do this weekly ‘und once you are comfortable you can do it monthly. = Did you ever think of having o budget to help yout Do you already havea budget? Do you know if your family works with a budget? ‘Most often tis is done on a monthly interval as this provides a consistent. yet accurate description of actual income in comparison to expense. m= cae ene otro mas her cpa a al a 4 this helps you stay inline with your budget. ‘The first thing to work out is your monthly income. That will tel you what you've got to work with. The second step is to list your monthly expenses. Some expenses you will be able to control (for example, entertainment). Others you cant control as realy (fr example, your housing costs/rent ~ at teat you cat contro them today. You can always take more contro ofa cost ike rentby moving to Tess ‘stoop youa ery der indeon of wheter nt you arc he ado accompiting Jonger- goals. a ee Interestingly, survey after survey shows that most people think that having a budget i important ~and budgeting is a wise thing o da, But, as surveys also show, ost people dgnt work with budget, expensive accommodation or geting a roommate to help share the cost ~ but that wil take some time ‘When you add up your total monthiy income and your total monthly expenses, ou will see whether ‘you are.able to save money or nat. You will find if you are spending more than you would like in certain areas. You will quickly see if in ~ or heading toward money problemas. Ta" sow you can learn grea del abut you and your mone by cresting — and wing =a budget.2.6 Il Financial Literacy > SA. Sample Budget | 1, YOUR INCOME: | _A. Your Regular Monthly Income Sources | Wages/Allowance | Interest Other — Total (RM) B. Irregular Annual Income Income tax refund — Gifts —~ Bonus Other ay <= Total (IT) Divide (IT) by 12= (IM) Total Average Monthly Income (RM+1M) = (M1) b ° MIERM+ IM Ory = epuler + Prtgeley co rae vom) Crone 7 pond 2. YOUR EXPENSES: ‘A. Regular Monthly Expenses Food Transportation Phone/ Internet Recreation/ Entertainment Savings Loan Payments Emergency Fund Housing Costs (including utilities) Other Total (ER) B. Irregular Annual Expenses Medical/dental costs Insurance Gifts/ Charitable contribution Tuition / School Expenses Clothing Vacation / Holiday Other Total (IE) Divide (IE) by 12 = (EI) =} Total Average Monthly Expenses (ER+ El) = (ME) ~ + Whats the valu of «budget In what ways can itelp? oe Why is saving ~ and paying yourself ist - so important? Chey 3. What kinds of things are usually ina budget? wt What are the two kinds of expenses that are usu: ally in a budget? » 5. How can a budget help you gain, and keep, control of Your money?Savingand Management of Spending ton : After sudyig his chat, students will be able to understand: > Define savings and its benefits, » Understand the management of spending, > Explain the step to be followed for management of spending, » Explain financial discipline and the ways to achieve the financial discipline in thee life. 3.1. Introduction army | most lg ard a Moser plays an important role in our lives. On one side it is a tool for wealth creation for future needs on the other it serves as a transaction instrument for satisfying present needs. While many peoplé spend most of their time and energy on earning more, it is important to note that Without learning the art of spending money well along with judicious saving and prudent investing, they may not be able to Gres rombing fuer eae a eis oo ea the crv see money wisely could be the first Step towards the bigger goal of financial planning, In this chapter we study about the savings, its benefits, , Management of spending and financial discipline. 3.2 Savings Savings refer to mon i ther than spending it immediately. Savings is the Portion of income nots tures, Because a person does not know what will happen in ture, money saved to an > pay for unexpected events or emergencies. An individual's caring nach) Borde merpency could occur Wihout savings, unerpeced evel can become fancy can also be cong ere savings alps an individual or family become Sua rare an alto be saved to purchaie expenive items thal ar 00 coy to bur with monihly Meome. © i an automobile, oF paying fora vacation can ll be accomplished by a, porch saving portion of income secon Sp the amu ha it ar pending. Meanings refs savings Scar auch are short-term, interest beating deposi vith a bank or other Emeead rept 7 tat sving 8 the money you want tobe able to aces quit wit Ht ee the least amount of taxes. Saving means different things te different peopl, for some it means putting bing ack or om plan But Tor” voney in the bank while for others it means Ot contributing to a pension plan-But Tor Tonomi, ssvin thing consy in ondet to consume more in Sey 6" presen < to OM Gabon My should we Save? ‘We save, basically, because we cant predict the future. Saving money can help you become financially secure and provide safety net in case of an emergency. Here area few reason why we save money: 4. Emergency Fund: One of the mest important things to save for is unexpected financial emergencies. These can include losing your job, unexpected health issues ‘ot your car or other home appliances breaking down, 80 you should have between three and six months worth of living expenses set aside. Ifyou dont have an ‘emergency fund, you may end up having to take out 2 short-term, high interest loan or carry a balance on a credit card ata high interest rate. A ‘common rule of thumb i to save three to six months! worth of expenses to have at the ready, Blac Ti cot et pov and ai denon ere Cy fae ting tougher to mea the Stands As eles ke on se COR Tete A oe Ieee egea ets cies wy wits cae 3. Major life events: Getting married, tr: world, purchasing a home, having a child. Sie Oidciaee Sea Selig vos pion tae cae cate allows you to focus on what relly mater. 7 to work and earn more money lo support our 4. Average life expectancy: As we age, our ability ney to suppe Usp aay dca wll naturally decrease. And with today’s health care and techriology advancements, expectancy has increased, which requires more funds olive securely. Saving now will asist you when work advancements are no longer realistic. 5. Retirement: Another important reason to save money is our retirement. The pension scheme cg peenem ecg ace oe prc ca ou cei can work, particularly as the age at which you'll beable to claim it is moving gradually further away. ‘The sooner you start saving for retirement, the less you will aveto save inthe future. ’ Saving and Management of Spending 6. Financtal Security: Soddenty finding yourself veemployed con be frig Vormething many people wil experience st OIE POAT FRING 1 ia¥Tagi Balle? = ple help covet your living expenses while you fiad » new job can provide you with rs 3.4. How to Save? @s=¥ fi We can sve ete by col expente ob sno o spend money fo purcsing ether ence oe os we tealy cannot do without suchas ood, dlthing hme repansede ef tducation and healthcare We need thse ine rey dr ‘xtra in Me which we need beans we eer ew, tape ‘educedo postponed, eg, spending ones on dela digs ot reste capers on matte aah, pggtnge as ede jewellery et, can posi be potpned Thee we pe able to save fr essential hing Hom con we save when we donot hve enough ony een fo mee our eglr expenses? ‘The common refrain i that we do not eam enough s0 we cannot save: The truth that veryone needs saving and can save. We should keep aside 2 fou earnings as cmos ne of ou: carne The important thing is thar we ST arose ery oe co small amount. And if we get some unexpected proit/earing. we should save allor most of Ths w duce Or worries of Future financial needs and help us in dealing with unexpected expenses we ean 100, we can save ®20 and if we ean 210, wecan save 2 lf we keep we earn, then in Searing days, we would have saved one day's cari, In 100 earning day his would ‘meat savings equivalent to 20 earning days plus interest. Ist not amazing" OL income per day: Cf Bspents pr day | > fSvinginamondy Sf Saving in a year 1 fe pe Bie 1 Seved amount the nd ote year eae I 4.5 Where to Save? You kno you can save at eas litle every month, What should you do with our savings to keep them Safe? There are many options. Itcan be as simple asa savings account ata bank. It can be recurring or fixed deposits or post ofie savings schemes. ia fixed deposits, or post cfice savings schemes (0x 12= 87200cry ees _ Savings Aecodht ad ‘Savings accounts are handy for short-term savit ings. You can deposit money into a savings account at = = ‘keep your savingt safe and pay a little interest. You can take your nee ‘out pire Recurring Deposits Recurring deposits popularly known as.RD, are best if you wish to create a fund for a special occasion sch Ta tek pp we tl ml ngs ready to save a small amount every month No withdrawglsage alowed. Fixed Deposits ‘Commonly known as ED, this where you can deposit a sum fora fixed period The depositor is given 2 fixed deposit receigt, which the depsitorhas to prodoce at the time of maturity. Withdrawals ate not allowed, however, n case of need, the depasitor can ask fr the fixed deposit account to be closed by —Pevingapenay. ‘Each type ofSavings vehicle has costs and limitations Check them carefully tobe sure you understand the terms and whether they provide what you need. 3.6 Management of Spending How we manage os also affect our it.The best to manage spendingistohave money ‘automatically drawn from banks account to fund those things that are necessities (lites, insurance, house payments, retiement savings and so on) or are mos important Ifyou did put savings on atoplot it would get done, atleast not as easly and consistently sit could be done. Consistency and _— simpliccy are key when it comes to achieving financial success eta S) feck WER Take a mental inventory of your current pé = + Are you consistently overspending? «Do you have enough saved up to survive an unexpected expenéé «+ Do ye paycheck to paycheck? 1 you have more contol over day-1o-407 : Ts po you havea greater cushion to absorb financial shock’ track to meet your financial goals? wee ty se feedom to make the choices th month-to-month finances? at allow you to enjoy life? reno cle ill agen sine met oe? detest ih oe ee cone en tra te = start with the Sst bilalee in action? Jost like gaining physical muscle, YOU have to start How do you pot your right equipment 0 a0 Use the steps below t0| “+ ‘Start with a budget: Pick a budgeting ron hich allocates money for want, Ne pleny of other budgeting option to choos fom. 2 spend 1a checkbook are gone for most people, Tack lng: The days of balancing.a checkbook eo aereae in accounting foreach and every purchase and expense : é _. Find waysto save: Once you see where your money is goings Youcan, more easily identify potenti nancial muscle uild a bloeprit that works fr Y system that you eds and savings an our finances. rl stick with. We like the 50/30/20 budget id debt repayment — but there are but there is By: your | and investments, your bills, ‘on time, every time, saving You savings. passe ees, and by investing automatically, you dont have a chance to spend the money | + Use designated accounts for spending and savings: Keep designated for bills i eee , ; bodgetd expenses separate om your emergency find. Tis wil reduce the temptation 10 ip Ter Sie te pent whet canes ang ow manage oes Managing) ino Torner emergencies Saving fra house, vacation or new car? Stash those funds in separate spending. sri jour badgt can be dificult ak, But there are way to make it ease fo Sp; eae ack pal “manage your spending reach your nancial gous and improve your financial well-being 5.7 Steps Followed for Managing the Spending We are dacssing the eps tobe followed for managing the money now while preparing forthe Future, p |: Toke Inventory of Your Finances Zefore you can start managing your money beter, you need to know how much oft you have. The most ‘aie step to understanding your currest situation i to sit down and record all your regular monthly income and expeases, if needed, save | for a month to determine where is spent nig Bs Tie rent, wtlties and debt Fer some peopl it canbe a wake-p cll fo od por ere tltes and debt pment ‘elie hove much is being spent on tems such as groceries or dining out. + Make a plan to pay off debt: A. todebt repayment will help you reach the debt- {ee finish line fate. We recommend our most expensive debt — the accounts with the interest rates — fist, while making minum payments on the rest. Then work your way any lower-interest rate debt until it all paid of ~~ + Develop good credit habits: Credit cards can be your friend, if used wisely. You can earn cash it score in — Invest in your financial future: Set money aside now, for retirement plan and let compoand teat wv map, The lee pels financial freedom and aby. 1 Ath Pesce elon[ies sei) arPR he ‘Money mastery goes beyond spending less than you ‘eee ‘beyond spending les than you make, A true sigh of dna pron sig ive comfortably in the long term as well as the st stm. You cay 7 steps — Save, Invest, Pay. off debt, aa ES arene er 1. Save ee ar rn 2¥ay era money to uid an emergency fund. Lely, you should hate he on th worth of liv at Soins expenses at your disposal in case the unthinkable happens. f that sens tow amber, 2. Invest Invest your extra money for the futute Set yourself up SC tetirement by contributing to a retirement pi If your company offers a pénsion benefit, contribute. ‘enough to get the maximum. +3. Pay Off Debt Whether is. loan or Joming credit card bil, you probably have some db obligations Alvys make atleast the: Tunimuam monthly papments to you dont fll behind. Lf you haye extra Bll to throw at your bills, pay down the high-imerest debt firs. 4. Repeat R Keep building up thatemergency fund, investing fr retirement and knocking down your debt. Step 4 Be Persistent Despite their good intentions, many peopl fall off the financial bandwagon. a budge thatsto0 restrictive can be suffocating, Navigating iavestment jargon can be confusing, But dont RT ‘Managing finances requires an To be successfl, revisit your budget often and try to ‘analyse it. Compare your actual spending to your budget at least monthly or more frequently ifpossble. Make to your budget ifit is habitually out of line wit your actual spending, Check your balances ‘on accounts, credit cards, and prepaid cards. You can check your balances onlin, at ‘an ATM, on Your smart phone, or by calling your bank. Be aware that these services may incu fes— check first with your financial service provider. Also, sgn up for balance alert text message services from your firancia insision Ge your ew arnand pon Wl bard otk end elon JOUcar grow. With bard work and dedication, ‘manage your money with confidence. i ‘i 3.8 Financial Discipline? hems sul for yourself. Ikis it pr nge over Pas ton understanding tha money just tool nd gra ge deny ov snp gn ag ioe ener poten soe rp Fou Tare nani! dace you wil see up for an tem spending the money on someting. 1 [Case Study (rs 26 yas ol and have bean ple for sont ad al er rm He a "50.00 monty bby hn he evo bared ar hold ark ial wth isla cr he work hard fort ute thine overs Hes a very generous io shen omen as money he Aocsithsitate to ve Hes nt sre how o ace hat but he aw that wil bo problem especaly because | he mand start fom problem of nancial signe | Alot of others also struggle wth financial ind te good that you have realned this and want to change i. Many of us were taught how 19 make s0ne7 but aot how io manage it. and at home. we did not talk about it beyond noticing that money does not grow an wees ing nd Management of Spending || 3.7 sal dn elo how wel oe etre peng te | stalypahavesetforyounl bis conto and evaves as ‘change over time \ "is also based on the understanding that money 1s just a tool and that you control your money, money should not control you. Do you have financial discipline? Ifyou ae asking this question it maybe sign you need to evaluate your money situation. Ifyou answer yestoall six questions you definitely are onthe ight track = 1. Do you pay your bilson time? — 2. Doyou have money in savings 3, Are you saving or retirement? TT) 4. Do you have an emergency fund?” T_} 5. Do you use sinking funds t help ave ap for larger items or holays? T ] 6. Do youve below your means and practice fag iving? [ Answering ygto these questions is sign you have financial |. tora be dad wih eu CenA) 17, Education : Edacating yourselfon inancl discipline isthe key to overcoming obstacles an earning be successful Sah your mone #2. Habit "Start small continue to grow. Small habits turn into big habits and eventually are#3. Accountability Hold yourself accountable. Write down your goals and check in every two weeks. Furthermore, you can also find an accountability partner that has similar financial goals. : Yorb, | : o a . total? HW 3.9. Smart Tips to inculcate habit of financial discipline = S‘) ~ pyc. 1. Prepare a monthly spending budget and stick toi 2. Invest witha goal, Goal give direction and help you in selecting right product. . Avoid loans for your desires. Better do a financial planning check before going in for a big purchase. 4. Invest monthly to become regularise in your savings and this will also help you maintain consistency. ia . Motivate yourself by visualsing the goals and the end result for which you are working for. 6. Pamper yourself. Give yourself a party/vacation or whatever you feel like when you achieve your savings/spending target. But please make sure to do this provisioning in your monthly budget. After all your efforts should be properly rewarded. 7. Penalise yourself if you stop your investments before target date or spend more than what you have budgeted for. Your penalty can be not having any dine out in that particular month. 8, Be accountable to someone. Both spouses can keep a check on each other on the spending habits. 9, Take help of financial planner where e . They can be a good source of support. 10. If your credit cards are bothering you and coming in the way of being disciplined get rid of 11, Take review ofthe situations after a set period. (OWLrvein) vigeloy) Unfortunately we did not learn in schoo. how oben fil dit, thus you yourself has to find it out There are a number of obstacles that stand in your way when it comes to financial it basics and unfortunately that has led many of us bein, discipline. Over time we haven't practiced the “in debt, unprepared for retirement, with little to no emergency fund. Many of Wises gear wok what oUF debt really costs us. We don't really know what our debt looks like, or think about how it affects our future. sciline wil help you in managing your spending and saving and make your financial future as saving? What are the benefits of saving? “What are the steps to be following for the management of spending? Define financial discipline? How to be financial disciple with the money? ‘What are the smart tips to inculcate habit of financial discipline?4 Time Value of Money ( 8usin After studying this chapter, students will be able to: _ > know the definition and importance of the time value of money; > know the formula for calculating present value and future value of money; > solve life question using the formula mentioned above. 4.) Introduction ‘The time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. This is true because money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future. (Also, with or another.) The time value of money concept helps in arriving at the comparable value of the different Points of time into equivalent values at particular points of time, present or future. There are two ways by wi e’cash flows arising.at different points of time can be made comparable: first by compounding the present money to a future date, and second by discounting the future money receipts to present date. In financial decision-making, interest on funds plays avery crucial role. The T VM conceptexplains aS1Q why the interest is paid on money borrowed. ‘The time value of money can work for you or against you, For example, if you are deciding between. buying a new phone for %50000, or invest in a stock for example that yields 10% per year. If you buy the phone, you have just incurred an opportunity cost of 10%. Ini this chapter, we discussed about the time value of money techniques and'its application in our life.4.2 How the Time Volue of Money Works ‘A simple example can be used to show the time value of money. Assume that someone offers to pay you sow oF 8 oo ways for sme work you ate ding fr them: They wil ether pay you 8,000 one year from now = ‘Which, should you tke? It depends on whgt kind of investment return you can earn’on ee ee ome Ser resent time. Since f1,100 is 120% of €1,000, then iFyou believe you can make more” 8 ‘vr the next year, you should opt to take the €1,000 now. ‘you dont think you could earn 9% in the next year by investing ‘The money, then you should take the future payment of El ong as you trust the person to Pi Youthen 4.3 Reason for Time Value of Money Suppose | offer you the choice of taking 81,00,000 from me today, or talking ths ame sum from me after 4 year What decision wil you make? I you chose to take the sum today, youve made the right choice ‘There are some reasons why taking up the frst option is better ‘~~ 1+ Inflation: Because of inflation, its safe to consider that an B g0ods than it can in the future. You have chos example because you understand that 10,000 can get you year later py > Riis Involved What ifn the previous example, you chose to receive the money a yea ater, Cenk SH eno ppoach ether dont hae ary money oi to yut ‘mount of money can get us more sen the fst option in the previous you more things today than it will get ‘~ ® Prcerenc for caret conromption: In this example you choos he present contunption to future rer eo a arp fund to hee peer cent a h ng to use money for their present needs of buying food, lth shri. rather than defering them tothe future. Ata resuk you prefer money in hand rather thin that tobe received in future > ‘Alaestment opportunities: If you receive the money today, you will invest that money to get ight vlues to Be received tomorrow (or afer certain period oftime) through return eon investment, at east inthe form of interest Withee ou reasons, we can ast the extence ofthe concep the time value of money. 44 Importance of Time Volve of Money ‘The time value of money (TVM) 2 useful tool in the wort siaonto ine investors to andead the alee s ERLE ven hfe. elon we poe ‘outs of the TVM and how you can we time has on the ale of your money. important because investors we informed deci ‘The time value of mooey is stallows, pierce teamed out what to do wit thei mangy The TYM canbe you understand which epion may bs be Bae ‘on interest, inflation, risk and return. It can also be used to help you understand how much money to, ‘account favein an scout ou hare a cetingal in mind, such as saving €2,00:00 five year f Ho — 4.5 Components of Time Value of Money The key components a w mentioned blow 1. InteresUDiscount Rate (0) -sthe rate of discounting or compounding that we apply to an amount of money ta calculate te present or furare value 2. Time Periods (n) It efrsto the whole numberof time periods for which we want to calculate the present of future value of a-sum. These time periods can be annually, semi-annually, _guarerly, monthly, weekly tc x id 3. Present value (PV) - The present valye is known as the current value of a sum of that ve al receive in the fpr The amount of money that mg bias by applying» discounting rate on the future value of any.cash flow. ‘aie on the 4. Future value (FV) ~ The future value is known as the ‘of money that we invested today. The amount of money that we obtain by applying a compounding raie on the iesent value of any cash flow. 5. Installments/Annuity (PMT) - Installments represent payments ta be paid periodically or Positive when payments have been cecerved and Reseed dung xc peed The ru tes nee when payments age made. 4.6 Techniques of Time Value of Money | NV U Bey oe ) Terni gy Ca Ota ee isa process fee a) ae oS ‘over a period oftime. The process of investing money as well as the interest earned thereon isclled compounding The fut value or compounded value ofan mmesomesr aioe years when the Tnerest rales percent is: < & FV= Futurevalue, > PV = Present value, 1 Interest ate, n= Time: ss table to find out the eatin fo sta dbs va to know the future valve oftheir ‘hs Formal requires oly thee hing to gv wate vale ‘What amount of money do we have right now? (PV); 3 Whats the assumed interes’ which tl row? (and + After how many years will we need the money? (a) p _ Example: we are investing 1.00000 now. What isthe fate vale afer ye, 10 year and 30 yearsif ate of interests 10%? Solution; By using the future value formula: fies RV =PV (Le f 30 years FY = 1.00000 x (140.10) = 100,000 x (17.5) = 217,50,000 ‘See table A 1 to find dut the valué of (144}* Sowe can easily find out amount value ifthe interest rate and time period is known. pa Example: Find out the fture valu we ae inven £6003 years 9% pr compounded any. F Solution: = FV = 1,00,00 x (1+10/100) = 100,000 x (1.10) = 1,10,000 FV = 100/00 x (1+0.10)"*= 100,000 x (2.58) = 2,59,000 FVaPVx(leor = 6,000(1 + 0.09)? = 6000 1.09 (se table Al) ec compoundig i done mare than onc a eur can be expressed by sig the above formals. FV = PV (1 + rim) | TS Where m the numberof tine pr er compounding made ? Insemisnnoel compounding m =? > Inquartery compounding m 4 S lemonihy compounding =17 a» ws et SE in. ‘What would be the yt intrest for 3 years Example: A deposited 2100000 at the rate of 12% mere at tout a he tg nay finer qu em ansual¥ ana Solution: ‘Aste infest is sem anally then mis? : (0) Ween na favicon (see table Al) mis =PVx(L +m)" (2D sstecompoarding doe EY ee (ee table AL) sa «1.426 = €14,260 rcs monly then 12 ve FV = 10,000 (1+ 1286/12)" = 10,000 x (1+1%)* apaonibe (see table At) = 10.000 14451 = M1445) le that the ir compounded too has a huge img wn the fun be V capsta bow cng ing frequency inthe above example make + To the earnings. = wp (i) fective Rote of intrest Eetve rate ofiteret isthe intrest ate that is actully earned or paid annually in case of non-annual Seempounding Its calculated as: eg ee : s-( ‘Where, E= Bifective rate of interest (-) shows future value of €1 afer one yea. m) Snsame waive of money’) 9! Example: Mr A deposits £10,000 at 12% annual rate of intrest compounded monthly. Caleulte the fective rat of interest. FV = 100011 +0.507 + 100011 +9 JOP + 19001 4+0 JOY + 1000(1-+0.109' + 1000 Se +1001 464 0001331) +1021 + 1000.10) 1000 = t0105 one | We wl ost he compounded vl Sly ao tle (A? be) clei he vale of I future value. facil FV = Annu CVAF,., = (1-28) VAP = compounded vale easy for -f | = 1,000 « 6.105 = (1 0.01)"-1 = 06105 = 1268-1 he 9 xample: suppoie depots 2.000 every year fom he od. year ll he end ofthe fifth year Bak ‘and wants to know the EV athe end ofthe Sith year Calcaaethe farate vale he rte of ters “5% compound annually. ‘So the effective rate of interest is 12.68% ue ae FV = Annuity x CVAP oy. ‘The effective rate of interest and nominal rate of interest are same in annual compounding. st FV = 2,000 x 5.526 (table A2) (ii)_Foture Vlue of Svies of Cash Flow J 120k Frey —— When different amount of cash flows. of ecu waius Ss aces fan se (0) Future Ve of on Anny Due unequal cash ow an be cay aleuteTan Tank ofconpoundelinteete ‘When the cash flows occur at the the vaive of soch annuity is called annuity Example: Mr A deposits atthe end of each year €500, 1000, 21500, 21000 and 500 at 5%. Then using due and its future value (FV) can be calculated as under: the compounding table, we can calculate the future value as follow: PV(annuity due) = Annuity amount x CVAF ,, x (i+) Endof Year | Annual Deposit || No, of Years Compounding | Compounded Factor |. FV (0) Example: Mr X deposits €20000 at the beginning of cach year in a bank which earns a compounded 1 500 4 1216 608. |_— interest of 8% p.a. Find out how much amount he will get at the end of S years. 2 1000 3 188 1188 Solution: 3 1500 2 1103 1654 FV (annuity due) = 20,000 x CVAF,, x (18) 4 1000 1 105 1,050, = 20,000 x 5.867 x (1+0.08) (See A2 table for 8% interest and 5 500 o 1 500 time 5 years) I ee ass az =t677 ; (vi) Power of Compounding} = bootup ome wrk far Pea. Mathematically speaking, compounding is defined as, the increase in the value ofan investment, due to page earned on the pelncipl a wel a the accused interes” ‘Simply put. itis’ strategy Tat YOUF money work for you. It could be regarded as a powerful tool to grow your wealth. You can use the power fe, such as retirement. le ‘earn interest on ‘But with compound interest, you earn interest on the principal amount | Example: Suppose yr deposit £1,000 annualy tr BANK for 5 years and your deposits carn a 10% ss wel as the acrumulted ners noun oer EER periods, Jer ine Ws ine sna > compounded annually. What wil be the series of deposits at the end of 5 years. Assuming that each ‘Hoa sbstanhal moun! Here's a hypothetical example to highlight the power of compoundis it pe emg el ssi in gf Se Abs £.00.00eachinan investmet venue that fers an anuainlet tel [or years Whe Ram OC dinanrcs— — ertchooses compound in yd Shyam opts for simple interest. At the end of 10 years, Ram would make a total corpus of 32,59.374. On the £00000. This is be 4.On the other hand Shyam would earn a corpus of is isis because in Shyam's case, the i aoe carn eh oe te cay on teint incipal amount 2 jut in Rams test cane cach yar was ndadeTang vik Wel waa eine he ‘ext year. This helped increase her earirgs in a big wa . Ram opts for inte calcula calculated as simple aaa — ‘Sgempound interest while Shyam ops for interest being jfference in Final value (in ®) Particulars an | Principal invested 37,00000 ri _ Rate of interest 108 “10% Dufation of investinent (in years) 10 10 “Amount at maturity (in ®) 2259374 720,00 159374 ‘accumulates a corpus which is €59.374 ‘As seen from the table above, atthe end of 10 years, Ram higher than Shyam corpus Because ofthe power of compounding the ners hat Rem ened tion forthe next pei rrarevery wasinch revious - period, interest was: on the inital remember one ofthe example fom Shaka Devi mov. One pon ak « sion ep salary of 71 fist day and the amount wil get doubled exch day fr 39 ing wll work. He wll et ‘Shakuntal devi, if he is getting 2 ‘Then what will be his salary after 30 days. Here the pi days. a salary of €53,68,70.912 afer 30 days [Gown 1 ] _ Colaran2 Day Day 16832768 ‘Day 2-2 ‘Day 17-€65,536 pt Day 18-€1.31072 Daya-t8 | Day 19-2524,288 Day 5-216 Day 20-85,24,288 Day6-832 Day2i-t1048576 TRA ‘Day22-€20,97.152 Day23-041,54304 rn Day 24-£83,88,652. Day 28-0134217,728 Day29-£26,84 35,456 Day 30.536870972 ak if you were "70 per day. Look foo Ci w pail sive Soe Ca see The power of compounding fro daly cle sd ‘or other daily hat and were ableto what it might grow int. ie otto aly Sanck Over Tine - 19.00 08°97 _ ks for ws. just i here and how i 0 E ye and invest | fm s | eee es | a 1393 _| 0 145336 oon yi371s3_ | %2088% _ 7974130 Bee eas pases yut the er of compounding is the fe at esi he sco ht 2 lin bs ea ean i ca Se erates Tac a uncial expert to bene Io pt ‘and put it to good use. So, our west exponen Fee teat the profit earning Process is the power of compounding, Fer investor can ake advantage of is concet art investing today to enjoy rest tre ae] curert velit © (47 Dcouning (Preset Vale) > Se Tehelps in determining the pee oLa su aL REY 8 8 PE in fate. This proces i in fact the reverse of SOOBOCT ling technique and 1s knowns as discountin ‘Ponigues. In order to evaluate the present at oa samme Tormula which was used fOr ed but in an inverse manner. ~Zampourding purpose is we Present value of single amount — From compounding we know that FV = PV x (1#1)° ‘Thus to find out PV FU aft) & (yt sn" . : és present value tables are also available for different discount rates and {ie crore ant a years (see table A3). ‘Example: MB, X is likely to rece faoo serous. the ip 4 : receive 40,000 after 3 years. Ifthe rate of rt Te his the rate of interest is 10% p.a. compounded = = 40,000 x PVF og. 5y PVE = Present Value Factor and its value is 1/(1+r)", Table A3) ——S= 40,000 0.751 += 830,040 Soif Mr “eed 00 oa acme 400 er 3 er 10% ray. Example: Find out the Present vale of [0000 tobe received afer yas from a bank The dicount rate i 6%, Solotion? PV=FVXPVFexg, = 10,000 x 0.792 = 17920 ~ (i) Present Volue of a Series of Unequal ..(see table A3) In financial analysis we often come across uneven cash flow streams. For example, the cath flow stream ‘uneven. Likewise stream associated eee enn cket erote with an equity shares is usu In this ca¥€ we wll find out the present values of each i phe ding then prea los. _ Example: A firm can invest £60000 ina project with follows: of 5 years. The projected cash inflows areas Mixed Shrcomy Year | Cath iiows @ 1 1,000 2 15,000 3 18000 Lgurred 4 25000 5 20,000 > The cos of capital is 10%, Should the investment be made? — — Pv. (res i i ka ei ‘An annuity that goes on for eve is called perpetuity. The present value of s perpetuity of cash flow iven by formula: P v= reference shares. Calculate the present value of perpetual reference share ithe discount ate 612% ation: A Example: X receives a dividend of 82,500 per year at the dividend raje of 10% on his isedeemable ‘Annual cash lw = £2,500 | Interest rate = 12% | = 92083333 (ii) Present Valve ofa Series of Equal Future Cash Flow or Annuity the PVs of different times are to be calculated and In order to find out the series of equal cas fows may be calculated on the basis of Present value annuity TABI then added. Present value ofc (rable 4}, Example: MR. A is depositing 25000 annually fo S years, ina Pos office saving bank at an interest rate ‘of 9% Pa. Find the Present Value of annuity Solution: PV = Annuity amount x PVAF, = 25,000 XPVAF 5, = 25,000 3.89 = 197,250 Example: A student is awarded a scholarship and two options are put before him: (i to receive 211000 |= now or (i) to receive 21000 Per month atthe end ofthe next | months. Which options should be chosen ifthe rate of interest is 12% pa.? Option-t: Since 211000 i receivable now itis already expressed in present values and hence needs no adjustment. Option-2: Since the rate of interest ig 12% pa 1 pa ad te emu cmt o pss he eof = may be expressed as 1%, On the basisof table A-4, te present value maybe calcilated PV = Annuity amoust x PVAF,, \ 1,000 x PVAF iy = 1,000 x11.255(iv) Present Value ofan Annuity Due or Annuity Due atthe Beginning of Eoch Year sample Meh orev Ca te ging oe ye 5 rr ale the present valve ofthe anity due assuming 10% pai Solution: = 20,000 x 3.791 x 1.10 = t65.402 we Ns “Some Application of Tine Valve Techniques 1. Determination of Interest Rotes/Grovth Rte Sometimes various schemes ae offered by the finance c und a person is required to him in form of annuit the beginning ofa period and then return isavailable to him in form of annuity, Sear Tre imesior wuld ket clelte the rate of interes ava to in a scheme fr which the flowing formula can be used a * Pv: sample A Ssance company ofr + chee in which, £20,000 is depositor invested today and again Or dea nT Find out the rat of interest offered to investor? Solution: PV= Annuity xPVAF,, 20,000 = 5000 x PVAF. sy PVAF = 20,000/5,000 =4 Using table A 4, Look forthe interest corresponding to valu. 38 year. The interest rate is sx ccpecajat parle beets dos ‘1. Determination of Growth Rotes “The time value of technique can also be used finda te sin sri ot ot profits of abusiness firm. The compounded growth rate can be as follow: ‘Where, Gis the growth rate, Q Fraps: Profit of firm has grown from €10crores to 100 crores in 10 years time. Find the compounded “ate of growth company has maintained in profit during this Period. Assume the j ec Profit has grown evenly Solution: We Know, FV=PV(I4G)" 100 = 10 (146) , (146)! = 100710 =10 ‘The LIS isthe compounded interest factor fr G rate of interest for 10 years. From table Al, it's seen that the factor 10 in the 10 years row exist in the 26% rate of interest column. Thus, growth rate of company i 26% 3. Determination of Number of Yeors ‘Time value of money concept can be used to find out the numberof periods needed to grow a certain resent amount Sometimes an investor may be interested to know in how many yeats his money will be doubled or tripled or will grow to a certain “amount fora given rate of interest. The compound interest tables can provide quick answer in such cases, Example: An investor who is depositing €1.00,000 in a bank wants to know how many years are requited to double his money at 10% rate of interest? Solution: Using the compound interest formula “J Pv pv (ier? "200000 = 100,000 (1+ 0.10)" (1 + 0.10)" = 2,00,000/1,00,000 = 2 [Now usiag.the compound interest table fora single sum (table Al), we find a compound interest {actor of 1.949 appear in the 7 year rows of 10% interest rate column, J Soin approximate 7 years the investor money wile doubles 4, Calculation of Deferred Payments (Cr - ? , i . | ate of is 8% the time required to double the amount 's Some times financial manager is faced with the decision (collect specified sum‘on periodic bas | comparing the interest rate o find out the amount of annval instalment. (Gi) Student are required to calculate the Time value of money question on Excel worksheet. The diferent formula given in the excel for calculating the future value, present value, annuity, interest rate and time period wil be given to them forthe practical exercise Lab Practical: Calculations in Finance with Excel Microsoft excel is a valuable tool in the hands of students, managers, investors and analysts which is making large calculations involved in financial decision making. Excel has variety of finance functions that can be used to calculate a variety of financial calculations. Inthe excel software there are many built in finance function available. helps in working on sets, large financial models, detailed financial data ani Petes ashy d quickly ee \ Fire Value (FV) ~ FV(RATE, NPER, PMT, [PV], [TYPE] } ~ Present Value (PV) = PV (RATE, NPER, PMT, (FV), (TYPE] } Payment (PMT) = PMT (RATE, NPER, PV, [FV], TYPE] ) Woof periods (NPER) = NPER(RATE, PMT PV (FV, [TYPE]) Rate/ Discount rate/Interestrate= RATE(NPER, PMT, PY, [FV], Type guess) ™Biective rate = EFFECT (nominal rate, npery) Seton ~Nominal Rate = Nominal (Effect rate, apery) ~YPER = NO of periods for an investment based on interest ate SPMT-= Used incase of annuity payment tobe made and a constant rat ofinterest PV = Present value of the investment : ordinary > [ERPE:0 = Pryment made at the end ofthe period AD TYPE: | = Payment made atthe beginning ofthe period ‘\\Nipery= the numberof compounding per period ~~ Guess= the rough estimate for interest rate Effective ate or EFFECT = the effective annual interest rate when number of compouncing is nat per fear, od ‘Nominal rate or NOMINAL = The annual nominal interest rate, [Note: The double brackets in the PV ‘mean this value is optional. pee net seem ed4.22 || Financial Literacy flow front of EV)/(PV) in the function, As w f-1. Me invested sum of 850000 atthe beginning ofthe year atthe rate of 10% corapounded nnually. Wh is the amount that he will et after the end of 3 years? Solution: Steps DP "spare the excel sheet by entering the given information in the excel sheet in Colum B and C ‘afind out the future value ofthis investment, enter the built in FV function in Excel sheet ince 3. The FV is 66800 nt sme yh =FVC6,05.07-03,.) A 8 _ FY rate s36 mt ov. pel c } PRESENT VALUE { | b YEAR | NPER { , RATE | r PMT { | | ; Future vawue 36550 | hy Fvorasinctccasnnow Fcecency ——_] Ex-2, Ajay invests 2500000 for 8 years atthe rate of 10%. Calculate the future value tobe received atthe end of 8 years Solution: Ajay will receive €10,71,79441 Note: Future value ofa simple ‘When type is not mentioned, the form: Ex-3. Calculate FV if MR A invested 10000, £5000, and £7000 st the Calculate the compounded value of his investment at the rate of 15% compounded annually. Solution: (i) Enter the given information in excel shet: in (ii) Find out the future value of each ofthe «: sheet corresponding to each ofthe cash inflows in column D. function in ex "Note: IF the same valu from a ellis used again and again inthe formula (such as rate of intrest), freeze the value by pressing F4 (which wil give a dollar sign tothe cellas ESI) and then use the dragging down utty in the excel‘ 2 2 3 ‘The value of Me A investment afer 3 years it 27060. Ex-4. Bani Deposits 100000 atthe end of each year in SBI bank at the rate of 9% for 10 years. Calculate he future vale tobe received after 10 years? Solution: 100000 isthe annuity amount given tobe deposited every year the future vale is calculated Annuity 100000 Rate of Interest %. Period/ Years 10 wv £15,19,292.97| ae rer Time Value of Money |\ 4.23 x5, Dash has invested €10000 now for 3 years atthe interest rate of 1 annually Find the ammount he will get after 3 years. Also calculate the fu Jone () quarterly, (i) semi-annually, ii) Monthly. Solution: In case of semi-annually, quarterly and monthly the rate of interes - In case of semiannually the time period is mu by 4a as in quarterly the time period is multiple Period is multiplied by 12 and rate of interest is divide Coe Ds Renee Wet tekstas Re fe Ke seamen (ME UE. O- A ' oe 2 | Gleulation of FY of an Annuity | ‘Annually Semi-Annually Quarterly ‘Monthly ‘ Present Value 10000. -10000 10000 2on0 5] Rateof interest 12% 6x 3% i fal Period/ Years 6 2 36 $14,257.61: 8 14,307.69, 3 vv $14,049.28] 14,185.19 islets Er. MR. Sureth is supposed to get 250,000 after 3 years at 10% rate of interest, Find out the present ue ofthis sum.