MANAGING PERSONAL FINANCE
PERSONAL FINANCE
u It involves analyzing current
financial positions, projecting
short-term and long-term funding
needs, and executing a plan to fulfill
those needs considering individual
financial constraints.
MANAGING PERSONAL FINANCE
PERSONAL FINANCE
u It is primarily dependent on one’s
earnings, cost of living, and
personal goals and wants.
MANAGING PERSONAL FINANCE
FINANCIAL PLANNING AND THE
INDIVIDUAL’S LIFE CYCLE
u The financial plans of an individual
would depend on his financial
objectives that are very much
affected by the stage he is at
individual life cycle.
MANAGING PERSONAL FINANCE
THE DIFFERENT PHASES OF
INDIVIDUAL INVESTOR’S LIFE CYCLE
u ACCUMULATION PHASE An investor
who belongs to this phase is
characterized by someone who just
started working or is in the early part
of his or her career.
MANAGING PERSONAL FINANCE
u Since they are relatively young, they
can afford to take on high risk
investments for they can simply start
again if they fail in some of their
business ventures and investments. In
this, they are still accumulating assets
that will satisfy their individual goals.
MANAGING PERSONAL FINANCE
u CONSOLIDATION PHASE This is
the phase wherein an investor has
already the necessary assets
required of a typical household and
has settled most of his/her
outstanding liabilities.
MANAGING PERSONAL FINANCE
u With higher income and cash inflows
than expenses and cash outflows, as
well as the existence of a shortening
time horizon, the individual in this
phase should aim for gradual shift to
lower risk (more conservative, less
volatile) investments.
MANAGING PERSONAL FINANCE
u S P E N D I N G P H A S E R e t i r e d
individuals belong to this phase
and their main source of income
comes from their pension although
they also benefit from the returns
of their existing investments.
MANAGING PERSONAL FINANCE
u It is called the spending phase since
their pensions should be able to
cover for their daily living needs yet
they have more than enough funds
beyond this source for them to
enjoy the fruits of their labor
throughout their working careers.
MANAGING PERSONAL FINANCE
u Capital Preservation is their main
return objective with the intention of
earning more than the inflation to
protect the value of their investment in
real terms. Capital Preservation
objectives require the individual to put
his money in very safe investments.
MANAGING PERSONAL FINANCE
u It is called the spending phase since
their pensions should be able to
cover for their daily living needs yet
they have more than enough funds
beyond this source for them to
enjoy the fruits of their labor
throughout their working careers.
MANAGING PERSONAL FINANCE
u GIFTING PHASE Not everyone is
expected to reach this phase and most
of the time this stage is concurrent with
the consolidation phase. This stage
focuses on how the individual provides
support to the family members, their
friends or any charitable institutions.
MANAGING PERSONAL FINANCE
u This stage is when individual
possesses more assets than what
he/she needs until the end of his/
her life. Investment in this phase
may be kept in low-risk, lower-
rewards assets.
MANAGING PERSONAL FINANCE
PERSONAL FINANCIAL PLANNING
PROCESS
v It is the process of managing your
money to achieve personal
economic satisfaction.
v This planning process allows you to
control your financial situation.
MANAGING PERSONAL FINANCE
PERSONAL FINANCIAL PLANNING
PROCESS.
v Every person, family, or household
has a unique financial position, and
any financial activity therefore must
also be carefully planned to meet
specific needs and goals.
MANAGING PERSONAL FINANCE
PERSONAL FINANCIAL PLANNING
PROCESS.
A. OBJECTIVE SETTING
v Quantify monetary objectives
with definite time frames.
v Prioritize objectives.
MANAGING PERSONAL FINANCE
A. OBJECTIVE SETTING
v Examine these objectives with an
individual’s resources and
limitations.
MANAGING PERSONAL FINANCE
B. DATA GATHERING
v Use surveys, questionnaires,
and interviews to gather
quantitative and qualitative
information from the individual.
MANAGING PERSONAL FINANCE
B. DATA GATHERING
v Quantitative – for assessing
financial status (i.e. investments,
cash flow, liabilities, etc.)
v Q u a l i t a t i v e – t o i d e n t i f y
individual’s goals and objectives,
lifestyle, risk-tolerance, etc.
MANAGING PERSONAL FINANCE
C. DATA ANALYSIS
v Analyze the individual’s financial
position and cash flows.
v Review legal papers (i.e. insurance
policies, trust agreements, wills,
etc.)
MANAGING PERSONAL FINANCE
C. DATA ANALYSIS
v Evaluate objectives vis-à-vis the
individual’s resources and
economic conditions.
MANAGING PERSONAL FINANCE
D. FINANCIAL PLAN
RECOMMENDATION
v Propose financial products.
v At this point, the individual can
comment on the proposed
solutions.
MANAGING PERSONAL FINANCE
E. PLAN IMPLEMENTATION
v Assist the individual in the execution
of the recommended financial plan.
v Implementation may involve other
entities so assist the individual in
dealing with the parties involved in
the execution of the financial plan.
MANAGING PERSONAL FINANCE
F. PLAN MONITORING
v R e v i e w t h e f i n a n c i a l p l a n
periodically to evaluate changing
market conditions (i.e. economic
conditions, taxes, interest rates,
etc.).
MANAGING PERSONAL FINANCE
F. PLAN MONITORING
v Evaluate the financial plan
regularly to see if it effectively
meets the individual’s goals and
objectives.
MANAGING PERSONAL FINANCE
MANAGING PERSONAL FINANCE
SIX KEY AREAS OF PERSONAL
FINANCIAL PLANNING
A. FINANCIAL POSITION
v U n d e r s t a n d i n g o f p e r s o n a l
resources by checking an
individual’s net worth and cash
flow.
MANAGING PERSONAL FINANCE
A. FINANCIAL POSITION
v Net Worth = assets less liabilities
at a point in time
v Cash Flow = expected sources of
income less expected expenses
within a period (i.e. year)
MANAGING PERSONAL FINANCE
A. FINANCIAL POSITION
v Helps in determining the time
frame to which personal goals can
realistically be met
v May need to answer the following
questions:
MANAGING PERSONAL FINANCE
A. FINANCIAL POSITION
Ø D o t h e y h a v e a c l e a r
understanding of their goals?
Ø How do they track their income,
expenses, and net worth?
Ø What financial benefits do they
get from their employer?
MANAGING PERSONAL FINANCE
B. ADEQUATE PROTECTION
v Analysis of protection needed for
unforeseen risks.
Ø I n c l u d e s r i s k s o f l i a b i l i t y ,
propert y, deat h, disabil it y,
health, and long-term care.
MANAGING PERSONAL FINANCE
B. ADEQUATE PROTECTION
v Some insurance plans enjoy some
tax benefits.
v May need to answer the following
questions:
Ø What things can they not afford
to lose?
MANAGING PERSONAL FINANCE
B. ADEQUATE PROTECTION
Ø How will they take care of their
dependents?
Ø How have they planned for
financial risks such as disability,
illness, long-term care, and
death?
MANAGING PERSONAL FINANCE
C. TAX PLANNING
v Management of when and how
much taxes will be paid.
v Understanding possible tax
incentives, deductions, rebates,
etc.
MANAGING PERSONAL FINANCE
C. TAX PLANNING
v It can have a significant impact
on managing personal finances
given the magnitude of taxes paid
by an individual.
v May need to answer the following
questions:
MANAGING PERSONAL FINANCE
C. TAX PLANNING
Ø How do they manage their taxes?
Ø How do they plan the timing of
income and deductions for tax
purposes?
Ø Are they comfortable with the tax
environment applicable to them?
MANAGING PERSONAL FINANCE
D. INVESTMENT AND
ACCUMULATION GOALS
v Planning on wealth accumulation
for large purchases such as
house, educational expenses,
investments for retirement, etc.
MANAGING PERSONAL FINANCE
D. INVESTMENT AND
ACCUMULATION GOALS
v May need to answer the following
questions:
Ø What are their goals for wealth
accumulation? (i.e. education,
home, business, retirement etc.)
MANAGING PERSONAL FINANCE
D. INVESTMENT AND
ACCUMULATION GOALS
Ø H o w a r e t h e i r c u r r e n t
investments performing to meet
their goals?
Ø How much will they need? When
will they need it?
MANAGING PERSONAL FINANCE
E. RETIREMENT PLANNING
v U n d e r s t a n d i n g t h e c o s t o f
retirement.
v Analysis of cash flows to come up
with investment plans that will
meet the costs of retirement in the
future.
MANAGING PERSONAL FINANCE
E. RETIREMENT PLANNING
v May need to answer the following
questions:
Ø How are they preparing for
their retirement?
MANAGING PERSONAL FINANCE
E. RETIREMENT PLANNING
Ø H o w a r e t h e i r l i a b i l i t i e s
affecting their retirement
objectives?
Ø Do they think they can maintain
their standard of living during
their retirement?
MANAGING PERSONAL FINANCE
F. ESTATE PLANNING
v Planning for disposition of one’s
assets after death.
v E s t a t e t a x e s p a i d t o t h e
government are huge, so avoiding
these taxes can significantly
impact one’s personal finances.
MANAGING PERSONAL FINANCE
F. ESTATE PLANNING
v May need to answer the following
questions:
Ø How should their assets be
distributed upon death?
Ø How will their intentions be
carried out? (i.e. will, trust, etc.)
MANAGING PERSONAL FINANCE
BASIC PRINCIPLES OF PERSONAL
FINANCE
Keown (2010) summarized the basic
principles of personal finance
management in the following points:
v Principle 1: The Best Protection is
Knowledge
MANAGING PERSONAL FINANCE
BASIC PRINCIPLES OF PERSONAL
FINANCE
v Principle 2: Nothing Happen
Without a Plan
v Principle 3: The Time Value of
Money
MANAGING PERSONAL FINANCE
BASIC PRINCIPLES OF PERSONAL
FINANCE
v Principle 4: Taxes Affect
Personal Finance Decisions
v Principle 5: Stuff Happens, or
the Importance of Liquidity
MANAGING PERSONAL FINANCE
BASIC PRINCIPLES OF PERSONAL
FINANCE
v Principle 6: Waste Not, Want
Not—Smart Spending Matters
v Principle 7: Protect Yourself
against Major Catastrophes
MANAGING PERSONAL FINANCE
BASIC PRINCIPLES OF PERSONAL
FINANCE
v Principle 8: Risk and Return Go
Hand in Hand
v Principle 9: Mind Games, Your
Financial Personality, and Your
Money
MANAGING PERSONAL FINANCE
BASIC PRINCIPLES OF PERSONAL
FINANCE
v Principle 10: Just Do It!
Once you've established some
fundamental procedures, you can
start thinking about philosophy.
MANAGING PERSONAL FINANCE
q The key to getting your finances on
the right track isn't about learning a
new set of skills. Rather, it's about
learning that the principles that
contribute to success in business
and your career work just as well in
personal money management.
MANAGING PERSONAL FINANCE
q T h e t h r e e k e y p r i n c i p l e s a r e
prioritization, assessment, and
restraint.
q Prioritizing means that you're able to
look at your finances, discern what
keeps the money flowing in, and make
sure you stay focused on those efforts.
MANAGING PERSONAL FINANCE
q Assessment is the key skill that
keeps professionals from spreading
themselves too thin. Ambitious
individuals always have a list of
ideas about other ways they can hit
it big, whether it is a side business
or an investment idea.
MANAGING PERSONAL FINANCE
q Assessment - While there is
absolutely a place and time for
taking a flyer, running your
finances like a business means
stepping back and truly assessing
the potential costs and benefits of
any new venture.
MANAGING PERSONAL FINANCE
q Restraint is that final big-picture skill
of successful business management
that must be applied to personal
finances. Time and time again,
financial planners sit down with
successful people who somehow still
manage to spend more than they make.
MANAGING PERSONAL FINANCE
q Restraint Earning $250,000 per year
won't do you much good if you spend
$275,000 annually. Learning to
restrain spending on non-wealth-
building assets until after you've met
your monthly savings or debt-reduction
goals are crucial in building net worth.
