Financial Literacy

Unit 1 (Financial Planning and Financial Products)

Financial Planning

Financial planning is the process of managing and assessing your finances to achieve
your life goals and assets.

The goal of financial planning is to ensure enough money is available at the right time to
meet life goals
.
Financial goals may include purchasing a car, a flat, funding education, protecting family
through insurance, planning for retirement, managing debt, saving taxes, and passing
on wealth to the next generation.

The process involves evaluating investments and estimating future needs to create a
plan that will help clients achieve their financial goals.
Financial Planning also includes

• Using a monthly spending plan or budget to keep finances on track.

• Making decisions about the job and its benefits.

• Getting the most out of other financial resources, including insurance and employer
provided benefits

• Saving and investing money.

• Controlling expenses and staying out of debt.

• Planning for estate transfer

Need of Financial Planning

• Financial planning is necessary to meet one's financial goals, which help achieve
one's life goals.

• Financial planning involves analyzing one's current situation, including income level,
wealth, responsibilities, aspirations, risk profile, ability to save, and lifestyle.

• Changes in the Indian financial markets have made financial planning more important
due to increased volatility and integration with global markets.

• Investment options have increased and now include bank deposits, bonds, mutual
funds, equities, derivatives, gold, real estate, and equities of foreign companies, with the
universe of options likely to expand further.
Steps in Financial Planning

1. Assessing the Current Financial Status: This step involves evaluating an individual's
financial situation, including income, expenses, debt, assets, and liabilities.

2. Setting Financial Goals: Once an individual has assessed their current financial
status, they can set realistic and achievable financial goals.

3. Developing a Financial Plan: A financial plan is a comprehensive document that

outlines the steps an individual will take to achieve their financial goals.

4. Implementing the Plan: This step involves taking the necessary actions to put the
financial plan into action.

5. Monitoring and Revising the Plan: Financial plans should be reviewed periodically to
ensure that they are still aligned with an individual's current financial situation and goals.
Financial Products

Financial products refer to various types of investment vehicles, insurance policies, and
banking services offered by financial institutions to help individuals and businesses
manage their finances, achieve their financial goals, and protect their assets.

Examples of Financial Products

• Savings and deposit accounts: These are banking products that allow individuals and
businesses to deposit money, earn interest, and withdraw funds as needed.

• Credit cards and loans: These are financial products that allow individuals and
businesses to borrow money and make payments over time, with interest charged on
the outstanding balance.

• Mutual funds: These are investment products that pool money from multiple investors
to invest in a diversified portfolio of stocks, bonds, and other assets, managed by a
Professional fund manager.

• Stocks and bonds: These are investment products that allow individuals and
businesses to buy ownership in a company (stocks) or lend money to a company
(bonds) in exchange for potential returns.

• Insurance policies: These are financial products that protect against potential losses
due to unforeseen events, such as life insurance, health insurance, auto insurance, and
property insurance.

• Retirement accounts: These are investment products that help individuals save for
retirement, such as 401(k) plans, IRAs, and pension plans.

There are many other types of financial products available, and each product has its
own features, benefits, and risks. It's important to carefully evaluate each product to
determine if it aligns with your financial goals and risk tolerance.
Introduction to Savings

Savings is the process of setting aside money for future use. It is an important part of
financial planning as it helps individuals to achieve their financial goals.

Benefits of Saving

1. Financial Security: Having savings provides financial security and can help
individuals to cope with unexpected expenses such as medical emergencies, car
repairs, or job loss.

2. Achieving Financial Goals: Saving money can help individuals to achieve their
financial goals such as buying a house, saving for retirement, or starting a business.

3. Earning Interest: Savings that are deposited in a bank account earn interest, which
can help individuals to grow their wealth over time.

4. Avoiding Debt: Having savings can help individuals to avoid taking on debt to cover
unexpected expenses.

5. Peace of Mind: Knowing that one has savings can provide peace of mind and reduce
financial stress.
Time Value of Money

Money has time value because a rupee today is worth more than a rupee in the future
due to factors such as the opportunity cost of sacrificing present needs for future goals,
inflation, and the need for compensation for risk and returns.

• In an inflationary period, the purchasing power of money decreases over time, so it's
important to consider the impact of inflation when saving and investing for the future.

• The person who saves money will ultimately use it for productive purposes, so they
should be compensated for the sacrifice of their present needs through interest or
returns.

• When lending money to others, there is a risk of default, so compensation in the form
of interest or returns is needed to offset this risk.

The various terms used in financial mathematics are:

PV - Present value

FV - Future value

PMT - Payment/annuity/cash inflow/cash outflow

I - Interest rate/discount rate/required rate

N - Number of periods
Calculation of Future Value for one-time investment that is a single investment.

The formula for calculating the future value (FV) of a one-time investment (PV) is:

FV = PV x (1 + r)^n

Where:

r = the interest rate or rate of return per compounding period (usually expressed as a
decimal)

n = the number of compounding periods

For example, if you invest Rs. 10,000 today for 5 years at an annual interest rate of 8%,
the future value of your investment can be calculated as follows:

FV = 10,000 x (1 + 0.08)^5 = 10,000 x 1.469 = Rs. 14,690

Therefore, your investment of Rs. 10,000 today would be worth Rs. 14,690 after 5 years
at an annual interest rate of 8%.

Question - What amount should be invested now for it to become Rs. 85,000 in 5 years
when the rate of return is 9% per annum and compounding is done once a year?

Ans - Formula
PV = FV/(1 + r)^n
PV = 85000/(1 + 0.09)^5
PV = Rs. 55,244.17
Management of Spending and Financial Discipline

Managing spending and practicing financial discipline are essential for achieving
financial goals. Financial discipline is the ability to control your spending habits and
make responsible financial decisions.

Tips for managing spending and practicing financial discipline

1. Create a Budget: Creating a budget and sticking to it is the foundation of financial

discipline. A budget helps individuals to track their spending and ensure that they are
living within their means.

2. Avoid Impulse Buying: Impulse buying can lead to overspending and can derail an
individual's financial goals. To avoid impulse buying, individuals should make a list of
necessary items and stick to it.

3. Use Cash: Using cash instead of credit cards can help individuals to manage their
spending and avoid overspending.

4. Avoid Debt: Avoiding debt is critical for financial discipline. Individuals should aim to
pay off their debts as soon as possible and avoid taking on new debt.

5.Save First: Instead of spending first and saving what is left, individuals should aim to
save first and then spend what is left.

6. Review your finances regularly: It's important to track your expenses, income, and net
worth regularly to ensure you're on track to meet your financial goals. You can use a
personal finance app or a spreadsheet to track your finances. Review your budget,
spending, and investments periodically and adjust them as needed.

7. Build an emergency fund: An emergency fund is a savings account that you can use
to cover unexpected expenses, such as medical bills, car repairs, or job loss. Aim to
save three to six months' worth of living expenses in your emergency fund.
Unit 2 (Banking and Digital Payment)

Banking involves depositing money into an account, which can be used for making
payments, earning interest, and borrowing money. Banks also offer various financial
products such as loans, credit cards, and insurance.

Digital payment refers to the use of electronic means to transfer money from one
account to another. This can be done through online banking, mobile wallets, and
payment gateways. Digital payment is convenient, fast, and secure, and is increasingly
replacing traditional cash and check payments.
Banking products and services in India are diverse and cater to the needs of various
individuals and businesses.

Most common banking products and services available in India

1. Savings Account: A savings account is a basic type of bank account that

allows individuals to deposit and withdraw money, earn interest on their
deposits, and access basic banking services such as debit cards and online
banking.

2. Current Account: A current account is designed for businesses and allows

them to deposit and withdraw money, make and receive payments, and
access overdraft facilities.

3. Fixed Deposits: Fixed deposits are investment products that offer a fixed rate
of interest over a fixed period of time. They are popular among individuals
looking for a low-risk investment option.

4. Loans: Banks offer various types of loans such as home loans, personal loans,
car loans, and education loans. These loans provide individuals with the
necessary funds to purchase a house, a car, or finance their education. The
interest rates and eligibility criteria for each type of loan may vary.

5. Credit Cards: Credit cards are payment cards that allow individuals to make
purchases on credit. Credit card users can repay their debt in full or in part,
with interest charged on the outstanding balance.
6. Online Banking: Most banks in India offer online banking services that allow
customers to access their accounts, make transfers, and pay bills from their computers
or mobile devices.

7. Wealth Management: Wealth management services are offered by banks to

help individuals manage their investments, plan for retirement, and minimize
their tax liability.

8. Insurance: Many banks in India offer various types of insurance, including life
insurance, health insurance, and vehicle insurance.

9. Investments: Banks offer a variety of investment products, such as mutual

funds, stocks, bonds, and other securities, to help customers grow their wealth

10. Mutual funds: Banks also offer mutual fund investment products where
customers can invest in a pool of securities managed by a fund manager.
Digitization has transformed the way financial transactions are conducted.

Some popular digitized financial transactions in India

1. Debit Cards (ATM Cards) and Credit Cards: Debit and Credit cards are widely used
for cashless transactions. Debit cards allow the cardholder to withdraw money from
ATMs and make payments online or in stores. Credit cards, on the other hand, allow the
cardholder to borrow money from the bank up to a pre-determined credit limit and repay
it with interest. Credit cards also offer various reward programs and cashback offers.

2. Net Banking and UPI: Net banking enables customers to perform banking
transactions such as fund transfers, bill payments, and check account balances through
the internet. Unified Payments Interface (UPI) is a real-time payment system that
enables instant fund transfer between bank accounts through a mobile phone.

3. Digital Wallets: Digital wallets are mobile applications that enable users to store
digital money and make cashless transactions. They can be used to pay for bills,
recharge mobile phones, and make online purchases. Some popular digital wallets in
India include Paytm, PhonePe, and Google Pay.
Security and precautions against Ponzi schemes and online frauds

It is important to be aware of security measures and precautions against Ponzi schemes

and online frauds to protect your finances.

Measures

1. Research and verify: Before investing in any scheme or product, it is important to

research and verify its authenticity. Check for licenses and registrations, track record,
and reviews from trusted sources.

2. Avoid high returns: Be cautious of investment schemes that offer exceptionally high
returns. Such schemes could be a trap for Ponzi schemes.

3. Don't share sensitive information: Avoid sharing sensitive information like bank
account details, passwords, or any personal information with anyone over phone calls,
text messages, or emails.

4. Use secure platforms: Always use secure websites and apps for financial
transactions. Look for the "https" protocol and padlock icon on websites before making
any financial transactions.

5. Keep software updated: Keep your computer and mobile devices updated with the
latest security software, operating systems, and web browsers to prevent online fraud.
6. Use two-factor authentication: Enable two-factor authentication for your financial
accounts. It adds an extra layer of security by requiring you to enter a unique code sent
to your phone or email along with your password.

7. Stay alert: Be aware of any suspicious emails, messages, or calls claiming to be from
financial institutions. Report any such instances immediately to your bank and law
enforcement agencies.

8. Use antivirus software: Use antivirus software to protect your computer or mobile
device from malware and viruses that can compromise your personal and financial
information.

9. Be cautious while using public Wi-Fi networks as they are often unsecured and can
be used to steal personal information.

10. Educate yourself and others about online security risks and ways to protect against
them. Stay informed about the latest security trends and best practices

By following these security measures and precautions, you can safeguard your finances
against Ponzi schemes and online frauds.
Unit 3 (Investment Planning and Management)

Investment planning involves the process of identifying investment goals and

developing a plan to achieve those goals. Investing can help individuals to grow their
wealth over time and achieve their financial goals such as saving for retirement, funding
a child's education, or buying a house.

Steps in Investment Planning

1. Determine Investment Goals: The first step in investment planning is to determine

investment goals. Individuals should identify their short-term and long-term investment
goals and determine how much money they need to achieve those goals.

2. Assess Risk Tolerance: Risk tolerance refers to an individual's willingness to accept

risk when investing. Individuals should assess their risk tolerance and choose
investments that align with their risk tolerance.

3. Determine Investment Options: There are various investment options available such
as stocks, bonds, mutual funds, and real estate. Individuals should research and
evaluate different investment options and choose the ones that align with their
investment goals and risk tolerance.

4. Develop an Investment Plan: Once investment goals, risk tolerance, and investment
options are determined, individuals should develop an investment plan. The plan should
include a portfolio allocation strategy, investment timeline, and expected return on
investment.

5. Monitor and Adjust the Investment Plan: Monitoring and adjusting the investment plan
is essential to ensure that the plan is on track to achieve investment goals. Individuals
should regularly review their investment portfolio and make adjustments as necessary
to ensure that their investment plan aligns with their investment goals and risk
tolerance.
Benefits of Investment Planning:

1. Achieving Financial Goals: Investment planning can help individuals to achieve their
financial goals such as saving for retirement, funding a child's education, or buying a
house.

2. Wealth Accumulation: Investing can help individuals to grow their wealth over time
and achieve financial security.

3. Diversification: Investment planning can help individuals to diversify their portfolio and
reduce the risk of losing money.

4. Tax Benefits: Some investments offer tax benefits such as tax-deferred growth or
tax-free withdrawals.

5. Inflation Protection: Investing can help individuals to protect their investments from
the effects of inflation.

Investment opportunity and financial products Investment opportunities refer to the

various ways you can invest your money with the aim of earning a return on your
investment.
Some popular investment opportunities

1. Stocks: These are shares of ownership in a company. When you buy stocks, you
become a shareholder in the company and are entitled to a portion of its profits.

2. Bonds: These are debt securities issued by companies or governments. When you
buy a bond, you are essentially lending money to the issuer, and in return, you receive
regular interest payments and the return of your principal when the bond matures.

3. Mutual funds: These are professionally managed investment portfolios that pool
money from many investors to buy a diverse mix of stocks, bonds, and other assets.

4. Real estate: This includes investing in rental properties, REITs (Real Estate
Investment Trusts), and other real estate-related assets.

5. Cryptocurrencies: These are digital currencies that use encryption techniques to

secure and verify transactions and control the creation of new units.
Financial products

Financial products refer to the various types of investment vehicles and tools that are
available to investors.

Some popular financial products

1. Bank products: These include savings accounts, checking accounts, money market
accounts, and certificates of deposit (CDs).

2. Insurance products: These include life insurance, health insurance, auto insurance,
and home insurance.

3. Investment products: These include stocks, bonds, mutual funds, exchange-traded

funds (ETFs), options, futures, and real estate investment trusts (REITs).

4. Retirement products: These include 401(k) plans, individual retirement accounts

(IRAs), and annuities.

5. Credit products: These include credit cards, personal loans, and mortgages.

6. Alternative investments: These include hedge funds, private equity, venture capital,
and commodities.
Insurance Planning: Life and Non-Life including medical

Insurance schemes

Insurance planning involves evaluating your risks and determining the appropriate types
and levels of insurance coverage to protect yourself and your assets from financial loss.

Factors to Consider: When selecting insurance policies, individuals should

consider various factors such as their current and future needs, their budget, and the
policy's features, including the premium, coverage, and benefits.

It is also essential to review insurance policies periodically to ensure that they continue
to meet the policyholder's needs and to make any necessary changes to the policies.

Need for insurance: Insurance provides financial protection against potential risks and
losses. It helps individuals and businesses manage the financial impact of unexpected
events such as illness, injury, property damage, or liability claims. Insurance also
provides peace of mind by ensuring that individuals and businesses have the necessary
financial resources to cope with such events.
Insurance can be broadly categorized into two categories that is Life and Non-Life
Insurance

Life Insurance

Life insurance provides financial protection to your family in case of your untimely death.

Two main types of life insurance policies

1. Term life insurance: This provides coverage for a specified term, typically 10, 20, or
30 years. If the policyholder dies during the term of the policy, the beneficiaries receive
the death benefit.

2. Permanent life insurance: This provides coverage for the lifetime of the policyholder.
Permanent life insurance policies also have a savings component that grows over time
and can be used to borrow against or withdraw from.
Non-Life Insurance

Non-life insurance, also known as general insurance, provides financial protection

against losses arising from events like accidents, illness, theft, and damage to property.

Most common types of non-life insurance

1. Health Insurance: Health insurance provides financial protection to the policyholder in

case of illness or injury. Medical expenses can be high, and having health insurance
can help reduce the financial burden on the policyholder and their family. Health
insurance is especially important for individuals who have a chronic illness or a family
history of medical conditions.

2. Property Insurance: Property insurance provides financial protection to the

policyholder's property in case of damage or loss due to unforeseen events such as
theft, fire, or natural disasters. Property insurance can help the policyholder cover the
cost of repairing or replacing damaged property. Property insurance is especially
important for homeowners who have invested a significant amount of money in their
property.

3. Credit Life Insurance: Credit life insurance provides financial protection to the
policyholder's family in case of the policyholder's death. This type of insurance is usually
taken out in conjunction with a loan or mortgage to ensure that the debt is paid off in
case the borrower dies before the loan is fully repaid. Credit life insurance is especially
important for individuals who have significant debt and do not want to burden their
family with it in case of their death.

4. Professional Liability Insurance: Professional liability insurance provides financial

protection to individuals in case they are sued for negligence, errors, or omissions in
their professional capacity. This type of insurance is especially important for
professionals such as doctors, lawyers, and accountants who have a high risk of being
sued due to the nature of their work.

5. Travel insurance: This provides coverage for medical expenses, trip cancellations,
lost luggage, and other travel-related expenses. Travel insurance policies can also
cover emergency medical evacuation and repatriation.
Unit 4 (Personal Tax)

Personal tax planning is the process of minimizing your tax liability by using various tax
strategies and techniques. It's important to have a basic understanding of the tax
system in your country, including the various tax laws, deductions, exemptions, and
credits.

Tax planning strategies can help you minimize your tax liability, including timing your
income and deductions, maximizing your tax credits, and investing in tax-advantaged
accounts. Major life events can have significant tax implications, so it's important to plan
accordingly.
Tax compliance involves following the rules and regulations set forth by the tax
authorities, including filing your taxes on time, paying your taxes, and keeping
accurate records.

1. Understanding Tax Laws: The first step in personal tax planning is to understand the
tax laws applicable in your country or region. This includes understanding the tax rates,
tax deductions, and exemptions, and tax-saving investment options.

2. Maximizing Deductions and Exemptions: Tax deductions and exemptions are an

essential part of personal tax planning. These can include expenses related to
healthcare, education, and charitable donations. By maximizing these deductions and
exemptions, individuals can lower their taxable income and reduce their tax liability.

3. Utilizing Tax Credits: Tax credits are incentives provided by the government to
encourage certain behaviours or investments. Examples of tax credits include the child
tax credit, education tax credit, and renewable energy tax credit. By taking advantage of
these credits, individuals can reduce their tax liability.
Tax Structure in India for Personal Taxation

The tax structure in India for personal taxation is progressive, which means that the tax
rate increases as the income increases.

Tax rates applicable for the financial year 2022-23

• For individuals with income up to Rs. 2.5 lakh: Nil

• For individuals with income between Rs. 2.5 lakh and Rs. 5 lakhs: 5%

• For individuals with income between Rs. 5 lakh and Rs. 7.5 lakhs: 10%

• For individuals with income between Rs. 7.5 lakh and Rs. 10 lakhs: 15%

• For individuals with income between Rs. 10 lakh and Rs. 12.5 lakh: 20%

• For individuals with income between Rs. 12.5 lakh and Rs. 15 lakhs: 25%

• For individuals with income above Rs. 15 lakhs: 30%

Exemptions and Deductions for individuals

In India, individuals can claim various exemptions and deductions to reduce their
taxable income and lower their tax liability.

Most common exemptions and deductions available to individuals

Exemptions

1. Standard deduction: Individuals can claim a standard deduction of up to Rs. 50,000

from their gross salary income.

2. Leave travel allowance (LTA): LTA is an allowance provided by employers to

employees to cover their travel expenses during leave. It is exempt from tax twice in a
block of four years.

3. House rent allowance (HRA): HRA is an allowance provided by employers to

employees to cover their rental expenses. The exemption amount is calculated as the
minimum of actual HRA received, 50% of salary for individuals residing in metro cities,
or 40% of salary for individuals residing in non-metro cities.

4. Gratuity: Gratuity is a lump sum payment made by employers to employees as a

retirement benefit. It is exempt from tax up to a certain limit based on the employee's
years of service.
Deductions

1. Section 80C: Under this section, individuals can claim deductions of up to Rs. 1.5
lakh for investments in various instruments such as PPF, EPF, life insurance premiums,
and ELSS, among others.

2. Section 80D: This section allows individuals to claim deductions for payment of health
insurance premiums for self, spouse, and dependent children, as well as for payment
of preventive health check-ups.

3. Section 80E: This section allows individuals to claim deductions for payment of
interest on education loans taken for higher studies.

4. Section 80G: Donations made to certain charitable organizations are eligible for
deductions under this section.

It's important for individuals to understand the various exemptions and deductions
available to them and to plan their investments and expenses accordingly to optimize
their tax planning.
E-Filing

E-filing refers to the process of filing income tax returns electronically through the
internet. The Income Tax Department of India has made e-filing mandatory for certain
categories of taxpayers, such as those with an annual income of more than Rs. 5 lakhs
or those who are seeking a tax refund.

Steps in E-Filing Process

1. Registering on the Income Tax Department's e-filing portal by providing basic details
such as name, PAN, and contact information.

2. Downloading the appropriate income tax return form based on the type of income and
filing status.

3. Filling in the details of income, deductions, and taxes paid in the relevant sections of
the form.

4. Verifying the tax calculation and ensuring that all details are accurate and complete.

5. Submitting the form electronically by uploading it on the e-filing portal.

6. Generating an acknowledgment receipt or an electronic verification code (EVC) as

proof of submission.
Advantages of E-filing over traditional paper-based filing

1. Faster processing and quicker refunds.

2. Reduced chances of errors or mistakes.

3. Convenience and ease of use.

4. Access to online tax calculators and other tools to help with tax planning.

5. Increased transparency and accountability.

It's important for taxpayers to ensure that they file their income tax returns accurately
and on time to avoid penalties and other legal consequences. Consulting with a tax
professional or financial advisor can help individuals navigate the e-filing process and
ensure compliance with relevant tax laws and regulations.