Introduction to Financial

Planning
UNIT 1

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 Do You Know?

• What values do you have regarding money?

• How do those values effect your personal goals?

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 Money Plan???
Question: I am a College student. I do not have money for
investments or buying property. So what difference does it make
how I spend my money now?
Answer: You will not always be a student. Learning to save and
use money wisely now will help you know how to achieve
financial security in the future. While you are in college, financial
planning can help you decide how to spend, save, and invest your
money for special purchases or activities that matter to you. You
may even be able to buy stock
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 QUESTION ??
Q: How many of you have dreamed of retiring and
becoming a multimillionaire by the time your 40?
Q: How do you think you would achieve that?

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 ???

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 ANSWER

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 “FAILING TO PLAN IS

PLANNING TO FAIL”
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 Meaning of Personal Financial Planning
 Personal financial planning is arranging to spend, save, and invest money to live comfortably, have
financial security, and achieve goals. Everyone has different financial goals. Goals are the things
you want to accomplish.

 For example, getting a college education, buying a car, and starting a business are goals. Planning
your personal finances is important because it will help you to reach your goals, no matter what
they are. It is up to you to make and follow a financial plan.

 In simple terms, Personal finance is the process of planning and managing personal financial
activities such as income generation, spending, saving, investing, and protection. The process of
managing one’s personal finances can be summarized in a budget or financial plan.

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Financial Planning ?
Everything You Need To Know About Financial Planning??
 Introduction- Financial Planning
 Many may wonder - "Do I really need a financial plan?"
 Some feel that saving regularly in bank recurring deposits or Systematic Investment Plans
(SIPs) in mutual funds is financial planning.
 But allocating savings and investments in ad hoc manner is not enough to achieve your life
goals.  And such investments lead to inefficient utilisation of your financial resources.
 To become rich or to achieve all your goals such as buying a house, car, dream vacation,
child's education and so on you need to make money work for you. Besides salary or
business income might not be sufficient enough.
 This is where financial Planning comes to your rescue.
 A financial plan enables you to construct a road map to achieve all the financial goals.  It
also helps you build your contingency fund for any unforeseen needs that may arise.
What is Financial Planning?
What is Financial Planning for an Individual?
Financial planning is the process of developing a
personal roadmap for your financial well being.
The inputs to the financial planning process are:
your finances, i.e., your income, assets, and
liabilities, your goals, i.e., your current and future
financial needs and your appetite for risk.
Who Needs Financial Plan?
 Nature of Financial Planning
Access Business Environment: Financial planning involves proper assessment of business environment for facilitating
efficient decision making. It properly evaluates nature of operations performed within the organization for identifying the
nature of business. 
Clarify business Vision and Goals: It considers all aims and objectives of business before formulating any plans.
Financial planning focuses on enhancing the business profitability by acquiring funds at lowest cost.
Determine the Capital Requirements: Financial planning properly analyses the capital requirements of business needed
for smooth functioning. It estimates both fixed and working capital needs of business for carrying out its activities. 
Decides Capital Structure: It determines the optimum capital structure for organization. Capital structure is the
proportion of debt and equity in capital of business. It involves deciding the debt-to-equity ratio both in short as well as
long term. 
Frame Financial Policies: Financial planning is concerned with formulating policies related to raising, investment and
administration of business capital. It frames policies for controlling cash movements, lending and borrowing by business.
Maintain Adequate Funds: Regulating right amount of funds at every point of time is must for every business. Financial
planning helps in maintaining proper amount of funds by raising it from distinct sources timely.
Long-Term View: Financial planning is concerned with long-term view of company. It influences the pattern of financing
in long term and have major effects on all its future goals.
 Scope of Financial Planning
Ensure Availability of Funds: Financial planning ensures availability of adequate funds within the business
for smooth functioning. It first estimates the capital requirements and then determines various sources for
procuring such funds.
Reduces Uncertainties: It minimizes the chances of uncertainties for business by delivering the right amount
of funds at right time. Proper financial planning avoids any hindrance to the growth and continuity of business.
Avoids Unnecessary Funds: Financial planning avoids any chances of shortage and surplus of funds within
the business. It properly determines the funds requirements before raising them from distinct sources. Both
conditions that is shortage and surplus of funds adversely affects the profitability of business.
Proper Balance Between Funds Inflow and Outflow: It focuses on maintaining proper balance in between
the cash inflow and outflows to ensure optimum liquidity within the organization. Financial planning regulates
all cash transactions, lending and borrowing by business organization.
Facilitates Growth and Expansion Programmes: Financial planning assist business in fulfilling long term
growth and expansion plans. This guarantees the availability of required funds every time which support
organization in attaining its long-term goals.
Need/ Importance/ Advantages –Financial Planning

1. Manage your Money

2. Regulate your Expenses
3. Maintain Personal Balance sheet
4. Dealing with Surplus Cash judiciously
5. Create your own Investment Portfolio
6. Plan for Retirement
7. Manage the Debts Wisely
8. Get your Risk Covered
9. Planning your Tax
 Areas of Personal Financial Planning

SPENDING OR INVESTMEN
INCOME EXPENDITURE SAVINGS T
PROTECTION

Rent
Salaries Taxes Physical cash Stocks
Foods Savings bank Bonds Life
Bonuses Insurance
Hourly Entertainment account Mutual funds
Checking bank Health
Wages Travel Real Estates Insurance
Pensions account
Credit card Private Estate
Dividends payments Money market Companies
securities Planning
Mortgage Commodities
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 ???

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 Financial Goals Setting
Two factors will influence your planning for
financial goals. These factors are:

1) The time frame in which you would like

to achieve your goals.
2) The type of financial need that inspires
your goals.
Time Frame of Goals
Goals can be defined by the time it takes to achieve them:

 Short-term goals take one year or less to achieve (such as saving to buy a

computer).

 Intermediate goals take two to five years to achieve (such as saving for a down

payment on a house).

 Long-term goals take more than five years to achieve (such as planning for

retirement).

Start with short-term goals that may lead to long-term ones.

 Goals for Different Needs
Services and goods are two different categories of financial needs. A
haircut is an example of a service, while a new car is a goods.
How you establish and reach your financial goals will depend on whether a
goal involves the need for:
 Consumable goods (such as a soda)
 Durable goods (such as a car)
 Intangible items (such as an education)
 Guidelines for Setting Goals
When setting your financial goals, follow these guidelines:

 Your financial goals should be realistic.

 Your financial goals should be specific.

 Your financial goals should have a clear time frame.

 Your financial goals should help you decide what type of action to

take.

Your financial goals will change as you go through life.

 SMART GOALS

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 Example for SMART Goal Settings
I will earn a promotion to senior customer service representative by completing the required
training modules in three months and applying for the role at the end of the next quarter.
• Specific: The goal setter has clearly set the objective to be promoted to senior customer
services representative.
• Measurable: Success can be measured by training module completion, filing the
application and earning the promotion.
• Achievable: The goal setter will complete the training necessary to earn the promotion.
• Relevant: The goal setter is planning to apply for the promotion after finishing their
training modules.
• Time-based: The goal setter has set a deadline to achieve their objective at the end of the
following business quarter.

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 Template of SMART Goal Setting

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 Financial Planning Delivery process

1
5 Set SMART 2
Monitor & Goals Analyze
Modify the Information
Plan

4
3
Implement the
Create A Plan
Plan
 Step 2: Analyze Information

Where does your money go?

It is important to create a Personal Spending

Record to keep track of your Cash Flow
(money you receive and spend).
  
Income (Rs) Expenditure/Spending (Rs)
Sunday    
 
 
   
Monday  
 

   
Tuesday  
 

   
Wednesday  
 

   
Thursday 
 
   
Friday
  
   
Saturday
 
   
Totals  

 
 
Difference
(Income minus Spending)

Step 2: Analyze Information

 Step 3: Create a Plan

Making decisions about how you are going to spend your

money based on your values, culture, habits and opinions of
your friends and parents.
Step 3: Create a Plan

Identify your goals

Establish your criteria
Examine your options
Weigh the pros and cons
Make your decision
Evaluate result
 Step 4: Implement the Plan
• Write down your goals and post them where you can see them
• Tell others about your goals
• Create a budget (highlighting income and expenses…more on
this later)
• Spend money according to your
budget
• Review your plan regularly
 Step 5: Monitor and Modify the Plan
Need to monitor the plan to make sure you are staying on
track
Review your plan at regular intervals.
Modify the plan if your goals or finances change or your
resources vary
 Factors Influencing Financial Planning

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 What Influences my Financial Decisions?

• Many factors will influence your day-to-day

decisions about finances.
• The three most important factors are:
 Life situations
 Personal values
 Economic factors
 Life Situations and Personal Values
Your financial planning will be affected by changes in your life situation, such as:
 Going to college
 Starting a new career
 Getting married
 Having children
 Moving to a new city
Your personal values also influence your financial decisions.
 Economic Factors
Economic factors across the country and around
the world play a role in day-to-day financial
planning and decision making for most people.
To understand economics and the economy, you
need to be aware of:
 Market forces
 Financial institutions
 Global influences
 Economic conditions
 Market Forces

• The forces of supply and demand determine

the prices of products, or goods and services,
you purchase.
• When there is a high demand for an item, or
when a company cannot manufacture enough
of a certain product to keep up with the
demand, the price of the product rises.
 Global Influences
You and the money you spend are part of the global marketplace,
which is another economic factor that can affect financial planning.
The economy of every nation is affected by competition with other
nations. When more money is leaving the U.S. than entering it, for
example:
 Less money is available for spending and investing.
 Interest rates may rise.
These global influences also affect personal financial decisions.
 Economic Conditions
Current economic conditions also
affect your personal financial
decisions. The three important
economic conditions are:
 Consumer prices
 Consumer spending
 Interest rates
 Consumer Prices
Over time the prices of most products inflate.
The main cause of inflation is an increase in demand without
an increase in supply. For example, prices will rise if:
 People have more money to spend because of pay
increases or borrowing.
 The same amounts of goods and services are
available.
The inflation rate affects consumer prices and varies from
year to year.
 Interest Rates
Interest rates represent the cost of money and are also
influenced by supply and demand.
Interest rates will affect your financial planning as you:
 Save
 Invest
 Obtain loans
Interest rates are just one facet of the economic factors
that influence your personal financial planning.
 Personal Financial Statements

 Three documents that you create yourself, the personal balance sheet, income statement and the cash
flow statement, are called personal financial statements.

 These reports provide information about your current financial position and present a summary of
your income and spending.

 The main purposes of personal financial statements are to

• Report your current financial position in relation to the value of the items you
own and the amounts you owe.
• Measure your progress toward your financial goals.
• Maintain information about your financial activities.
• Provide data you can use when preparing tax forms or applying for credit.
 THE PERSONAL BALANCE SHEET
The current financial position of an individual or a family is a common starting point for financial
planning.

A balance sheet, also called a net worth statement or statement of financial position, reports what you
own and what you owe.

We prepare a personal balance sheet to determine our current financial position using the following
process:

For example, if your possessions are worth Rs. 4,500 and you owe Rs. 800 to others, your net worth is
Rs. 3,700.
 STEP 1: LISTING ITEMS OF VALUE
Available cash and money in bank accounts combined with other items of value are the foundation
of your current financial position.
Assets are cash and other tangible property with a monetary value.

1. Liquid assets are cash and items of value that can easily be converted to cash. While assets other than liquid
assets can also be converted into cash, the process is not quite as easy.

2. Real estate includes a home, a condominium, vacation property, or other land that a person or family owns.

3. Personal possessions are a major portion of assets for most people. Included in this category are automobiles and
other personal belongings. While these items have value, they may be difficult to convert to cash. You may decide to
list your possessions on the balance sheet at their original cost. However, these values probably need to be revised
over time, since a five-year-old television set, for example, is worth less now than when it was new. Thus, you may
wish to list your possessions at their current value (also referred to as market value ). This method takes into account
the fact that such things as a home or rare jewellery may increase in value over time. You can estimate current value
by looking at ads for the selling price of comparable automobiles, homes, or other possessions. Or you may use the
services of an appraiser.

4. Investment assets are funds set aside for long-term financial needs. Since investment assets usually fluctuate in
value, the amounts listed should reflect their value at the time the balance sheet is prepared or other possessions. Or
you may use the services of an appraiser.
 STEP 2: DETERMINING AMOUNTS OWED (LIABILITY)

Liabilities are amounts owed to others but do not include items not yet due, such as next month’s rent. A
liability is a debt you owe now, not something you may owe in the future. Liabilities fall into two categories:

1. Current liabilities are debts you must pay within a short time, usually less than a year. These liabilities
include such things as medical bills, tax payments, insurance premiums, cash loans, and charge
accounts.

2. Long-term liabilities are debts you do not have to pay in full until more than a year from now. Common
long-term liabilities include auto loans, educational loans, and mortgages.
A mortgage is an amount borrowed to buy a house or other real estate that will be repaid over a period of
15,
20, or 30 years. Similarly, a home improvement loan may be repaid to the lender over the next 5 to 10 years.
The debts listed in the liability section of a balance sheet represent the amount owed at the moment; they do

not include future interest payments. However, each debt payment is likely to include a portion of interest.
 STEP 3. COMPUTING NET WORTH
Our net worth is the difference between our total assets and our total liabilities. This relationship can be stated as

Assets – Liabilities = Net worth

Net worth is the amount you would have if all assets were sold for the listed values and all debts were paid in
full. Also, total assets equal total liabilities plus net worth. The balance sheet of a business is commonly
expressed as

Assets = Liabilities + Net worth

A person may have a high net worth but still have financial difficulties. Having many assets with low liquidity
means not having the cash available to pay current expenses.

Insolvency is the inability to pay debts when they are due; it occurs when a person’s liabilities far exceed
We can increase
available assets. our net worth in various ways, including
• Increasing our savings.
• Reducing spending.
• Increasing the value of investments and other possessions.
• Reducing the amounts we owe.
 THE INCOME SATEMENT/CASH FLOW STATEMENT
Cash flow is the actual inflow and outflow of cash during a given time period. Income from employment will
probably represent your most important cash inflow; however, other income, such as interest earned on a
savings account, should also be considered. In contrast, payments for items such as rent, food, and loans are
cash outflows.

A cash flow statement, also called a personal income and expenditure statement is a summary of cash receipts
and payments for a given period, such as a month or a year. This report provides data on your income and
spending patterns, which will be helpful when preparing a budget. A checking account can provide information
for your cash flow statement. Deposits to the account are your inflows; checks written are your outflows. Of
course, in using this system, when you do not deposit the entire amounts received, you must also note the
spending of un deposited amounts in your cash flow statement.

The process for preparing a cash flow statement is:

 STEP 1: RECORD INCOME

Income is the inflows of cash for an individual or a household. For most people, the main source of income is
money received from a job. Other common income sources include
• Wages, salaries, and commissions.
• Self-employment business income.
• Savings and investment income (interest,
dividends, rent).
• Gifts, grants, scholarships, and educational
loans.
• Government payments, such as Social Security, public assistance, and
unemployment benefits.

• Amounts received from pension and retirement programs.

• Alimony and child support payments.
Take-home pay, also called net pay, is a person’s earnings after deductions for taxes and other items.
Take-home pay is also called disposable income, the amount a person or household has available to spend. Discretionary
income is money left over after paying for housing, food, and other necessities.
 STEP 2: RECORD Expenses/Outflows

• Cash payments for living expenses and other items make up the second component of a cash flow
statement.

• Cash outflows divided into two major categories: fixed expenses and variable expenses.
1. Fixed expenses are payments that do not vary from month to month. Rent or mortgage payments,
instalment loan payments, cable television service fees, and a monthly train ticket for commuting to
work are examples of constant or fixed cash outflows.

2. Variable expenses are flexible payments that change from month to month. Common examples of
variable cash outflows are food, clothing, utilities (such as electricity, telephone, cable, and Internet),
recreation, medical expenses, gifts, and donations. The use of a checkbook or some other
recordkeeping system is necessary for an accurate total of cash outflows.
 STEP 3: DETERMINE NET CASH FLOW

• The difference between income and outflows can be either a positive ( surplus ) or a negative ( deficit ) cash
flow. A deficit exists if more cash goes out than comes in during a given month. This amount must be made
up by withdrawals from savings or by borrowing.

• When you have a cash surplus, this amount is available for saving, investing, or paying off debts. Each
month, set aside money for emergency fund in a savings account that would be used for unexpected expenses
or to pay living costs. The rest of the surplus is deposited in savings and investment plans that have two
purposes. The first is the achievement of short-term and intermediate financial goals, such as a new car, a
vacation, or re enrollment in school; the second is long-term financial security—retirement.

• A cash flow statement provides the foundation for preparing and implementing a spending, saving, and
investment plan
 Budgeting
A budget, or spending plan, is necessary for successful financial planning. The common financial problems of
overusing credit, lacking a regular savings program, and failing to ensure future financial security can be
minimized through budgeting.

The main purposes of a budget are to help us:

• Live within our income.

• Spend our money wisely.
• Reach our financial goals.
• Prepare for financial emergencies.
• Develop wise financial management habits.
Budgeting may be viewed in four major phases, as shown in the following figure:
 CHARACTERISTICS OF SUCCESSFUL BUDGETING
Having a spending plan will not eliminate financial worries. A budget will work only if you follow it.
Changes in income, expenses, and goals will require changes in your spending plan.

Money management experts advise that a successful budget should be

• Well planned. A good budget takes time and effort to prepare. Planning a budget should involve everyone
affected by it. Children can learn important money management lessons by helping to develop and use the
family budget.
• Realistic. If you have a moderate income, don’t immediately expect to save enough money for an expensive
car or a lavish vacation. A budget is designed not to prevent you from enjoying life but to help you achieve
what you want most.
• Flexible. Unexpected expenses and changes in your cost of living will require a budget that you can easily
revise. Also, special situations, such as two-income families or the arrival of a baby, may require an increase in
certain types of expenses.
• Clearly communicated. Unless you and others involved are aware of the spending plan, it will not work. The
budget should be written and available to all household members.
 Money Management and Achieving Financial Goals
Your personal financial statements and budget allow you to achieve your financial goals with

1. Your balance sheet: reporting your current financial position—where you are now.
2. Your cash flow statement: telling you what you received and spent over the past
month.
3. Your budget: planning spending and saving to achieve financial goals.

People commonly prepare a balance sheet on a periodic basis, such as every three or six months. Between those
points in time, your budget and cash flow statement help you plan and measure spending and saving activities.
For example, you might prepare a balance sheet on January 1 and July 1. Your budget would serve to plan your
spending and saving between these points in time, and your cash flow statement of income and outflows would
document your actual spending and saving. This relationship may be illustrated in this way:
 WHY SAVINGS? 0R IDENTIFYING SAVING GOALS

Saving current income is the basis for an improved financial position and long-term financial security.

Common reasons for saving include:

• To set aside money for irregular and unexpected expenses.
• To pay for the replacement of expensive items, such as appliances or an automobile, or to have money
for a down payment on a house.
• To buy expensive items such as electronics or sports equipment or to pay for a vacation.
• To provide for long-term expenses such as the education of children or retirement.
• To earn income from the interest on savings for use in paying living expenses.