PERSONAL FINANCE

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dileepgmenon
VERY PERI
Introducing the Pantone Color of the Year 2022.
PANTONE 17-3938 Very Peri is a dynamic hue
that blends the faithfulness and constancy of
blue with the energy and excitement of red.

The four color palettes in this template feature

Very Peri to help you express your ideas and
convey the right mood. Read on to learn how to
use these colors in any presentation.
WEALTH
MANAGEMENT
CYCLE
Importance of Personal Financial Planning
Manage the unplanned

Accumulate wealth for special expenses

Save for retirement

“Cover your assets”

Invest intelligently

Minimize payments as tax

Principles of personal finance
Principle 1: The Best Protection Is Knowledge
• An understanding of personal finance will:

✓Enable you to protect yourself from bad investment advice.

✓Provide you with an understanding of the importance of planning for
your future.
✓Give you the ability to make intelligent investments and take
advantage of changes in the economy and interest rates.
✓Allow you to extract the principles you learn and apply them.
Principle 2: Nothing Happens Without a Plan
• Begin with a simple savings plan then once saving becomes a habit,
modify and expand your plan.
Principle 3: The Time Value of Money
• Perhaps the most important concept in personal-finance is that
money has a time value. Simply stated, because you can earn interest
on any money received, money received today is worth more than
money received later.
• Simple Interest vs Compound Interest
Importance of starting early
Principle 4: Taxes Affect Personal Finance
Decisions
• Taxes help determine the realized return of an investment.
• No investment should be made without first knowing effective taxes
on the return of that investment.
Principle 5: Stuff Happens, or the Importance
of Liquidity
• Plan for the unexpected. This means that some of your money must
be available to you at any time, or liquid.
• Unplanned borrowing is just one reason to have adequate funds to
cover 3 to 6 months living expenses.
Principle 6: Waste Not, Want Not — Smart
Spending Matters
• Personal-finance and managing your money involves more than just
saving and investing—it also involves smart spending.
• The four steps of smart buying are:
• Differentiating want from need and understanding how each purchase fits
into your life.
• Doing your homework to make sure what you get the quality you expect.
• Making a purchase and getting the best price
• Maintaining your purchase.
Principle 7: Protect Yourself Against Major
Catastrophes
• To avoid the consequences of a major tragedy you need to buy the
kind of insurance that’s right for you and know what your insurance
policy really says.
Principle 8: Risk and Return Go Hand-in-Hand
• Greater the risk, the greater the return an investor expects to receive.
• Diversification is the acquisition of a variety of different investments
instead of just one. Diversification lets you reduce, or diversify, some
of your risk. “Don’t put all your eggs in one basket”-Diversification
Principle 9: Mind Games, Your Financial
Personality, and Your Money
• Behavioral biases can lead to big financial mistakes.
• Mental accounting for example refers to the tendency for people to
separate money into different accounts, or buckets, each with a
different purpose as the following examples illustrate: (1) Keeping
money in a savings account that pays 3% interest, while not paying off
your credit card that charge you 14% interest. (2) When you get your
tax return and view it as mad money and promptly go out and spend
it, while at the same time you’re pinching pennies to save for your
child’s education.
Principle 10: Just Do It!
• Making a commitment to actually get started maybe the most difficult
step in the entire personal financial planning process.
• Pay yourself first— when you pay yourself first, what you spend
becomes residual. That is, you first set aside your savings, and what is
left becomes the amount you can spend—that’s the first step in
putting your financial plan into action.
Measuring your financial health
Measure Your Wealth
• The Balance Sheet
• Is a statement of your financial position on a given date.
• Lists your assets, the liabilities (debts) you’ve incurred, and your net worth.
• Assets: What You Own
• All of your possessions are considered assets even if you owe money on
them.
• Assets are listed using fair market value.
• Liabilities: What You Owe
• Liability is debt that must be repaid in the future.
• List only the unpaid balances.
Personal Balance Sheet
Different Types of Assets
• Monetary assets – are liquid-cash, savings account
• Investments-stocks, mutual funds, or bonds. The purpose of these
assets is to accumulate wealth to satisfy a goal such as buying a house
or having sufficient savings for a child’s college tuition or your
retirement. You can usually determine the value of your investments
by checking their current price
• Retirement plans-pension plan
• Housing
• Automobile
• Personal property-furniture, appliances, jewelry
Different Types of Liabilities
• Current Debt - must be paid off within the next year-unpaid bills
including utility bills, past-due rent, cable TV bills, and insurance
premiums that you owe. The unpaid balance on your credit cards
represents a current liability because it’s a debt that you should pay
off within a year
• Long-term liabilities – home or car or student loan.
Net Worth: A Measure of Your Wealth
• Net worth = total assets - total debt

• Liabilities > assets = negative net worth (insolvency).

• Liabilities < assets = positive net worth.
• Manage your net worth.
Trace Your Money
• The second step in creating a personal financial plan is to trace your
money.
• A balance sheet is like a financial snapshot: It tells you how much
wealth you have accumulated as of a certain date.
• Tells where your money has come from and where it has gone over a
period of time.
• An income statement can help you stay solvent by telling you whether
or not you’re earning more than you spend. If you’re spending too
much, your income statement shows exactly where your money is
going so that you can spot problem areas quickly.
The Income Statement
• Personal income statements are prepared on a cash basis, meaning
they’re based entirely on actual cash flows. You record income only
when you actually receive money, and you record expenditures only
when you actually pay money out.

• Income: Where Your Money Comes From

• Expenditures: Where Your Money Goes
Using Ratios: Financial Thermometers
• Financial Ratios Answer These Questions
• Do I have enough liquidity to meet emergencies?
• Can I meet debt obligations?
• Am I saving as much as I think I am?
Question 1: Do I Have Enough Liquidity to
Meet Emergencies?
• To judge liquidity, compare cash
• Current ratio =
and other liquid assets with debt.

monetary assets • Should be above 2.0; trend is

÷ most important.

current liabilities • This ratio does not consider

monthly payments towards long-
term debt (mortgage, car loans).
• Month’s Living Expenses • Tells how many months of living
Covered Ratio = expenses can be covered with
present monetary assets.
monetary assets
• Liquid assets covering 3-6
÷
months are optimum, less if
annual living expenses/12
credit and insurance protection.
Question 2: Can I Meet My Debt Obligations?
• Debt Ratio =
• Debt ratio tells you what percentage
of your assets has been financed by
total debt
borrowing.
÷
total assets • This ratio should decrease as you
age.
• Long-term Debt • Relates the amount of funds
Coverage Ratio = available for debt
repayment to the size of the
total income
available for living debt payments.
expenses
• This is the number of times
÷
you could make your debt
total long-term debt
payments payments with your current
income.
Question 3: Am I Saving as Much as I Think I
Am ?

• Savings Ratio = • It tells you the proportion

Income available for of your after-tax income
savings and investment
that you are saving.
÷
Income available for
living expenses
 Basics Of Investment 5

SAVINGS PLAN

Don’t wait for large amount

Start saving as early as of money to start your
possible savings plan. You can start
with a small amount too

SAVINGS
PLAN

Regularity of savings is Start making your money

important work for you

Question is, how much to save?

Basics of Investment
ALWAYS SAVINGS FIRST

Right Savings Formula

Income – Expenses = Savings
Income –Income
Savings = Expenses
statement

Accomplish goals with a process oriented approach

Psychologically consider only 70%-80% of your salary as income
Indians generally channelize 20%-30% of income towards savings
Keep one eye on the present and one eye on the future
 Basics Of Investment 8

WORK HARD AND MAKE YOUR MONEY WORK HARDER

You work hard to generate income

you know best

Your money works hard to generate returns

Making money work harder - A smarter approach to wealth creation

Asset Allocation

Cash

Gold Stock
• Balancing Risk and Return

Bonds
Investment Avenues 14

Equity
Property Mutual
Shares
Funds
Savings Bank
Fixed
Account
Deposits

Postal
Savings Gold

PPF

Diversify across asset classes through these investment options

Asset Allocation
• Asset allocation refers to diversification of your investment portfolio
across different asset classes, e.g. equity, debt, gold etc. Asset
allocation aims to balance risk and returns based on your risk
appetite, investment tenure and financial goals.
Why is asset allocation important?
• Provides stability to your portfolio:
• Different asset classes have different investment cycles. There is low or even
negative correlation in returns of two or more asset classes. You can see in
the chart below that equity (represented by Nifty 50 TRI) and gold are usually
counter-cyclical to each other i.e. gold outperformed when equity
underperformed and vice versa. Similarly, debt (represented by Nifty 10 year
benchmark G-Sec Index) had low correlation with performance of other asset
classes like equity or debt. Diversifying your portfolio across asset classes
limits downside risk and provides stability.
Why is asset allocation important?
• Balances risk and returns:
• Risk and return are directly related but risk is a double edged sword. If you
take too little risk, you may not be able to get sufficient returns to achieve
your financial goals. On the other hand, if you take too much risk, it exposes
you to the possibility of capital erosion when you may need money. You can
see in the chart below that, while equity has the potential of giving higher
returns in the long term, it can suffer large drawdowns in volatile markets.
Why is asset allocation important?
• Keeps you disciplined:
• Greed and fear are very common instincts in investing. When the market is high, people
put more and more money in equity expecting market to go even higher. When the
market is low, people sell equity in panic fearing market may go even lower. Investments
based on such emotions harm the long term financial interests of the investors. An asset
allocation based approach takes emotions out of investing and keeps you disciplined.
You should always invest according to your asset allocation irrespective of market
movements.
• Manage portfolio performance:
• Performance attribution analysis aims to identify contribution of three factors in
portfolio performance – asset allocation, security selection and interaction (combination
of asset allocation and securities selection). Investors spend much more time on scheme
selection and less on asset allocation. But historical portfolio returns analysis provides
overwhelming evidence that asset allocation is the most important attribute of portfolio
performance.
 Different types of asset allocation strategies
• Strategic asset allocation:
• This asset allocation strategy is also known as static asset allocation. Strategic or static
asset allocation is based on target allocations for different asset classes. In strategic
asset allocation you should stick to the target asset allocation ranges irrespective of
market conditions. However, periodic rebalancing is required to bring the asset
allocation back to the target.
• Dynamic asset allocation:
• In this asset allocation strategy, you change your asset allocation depending on
market conditions. For example, in some dynamic asset allocation strategies, you will
decrease your equity allocations and increase your debt allocations as equity
valuations increase. When equity valuation decreases, you will do the reverse i.e.
increase equity allocation and decrease debt allocations.
• Tactical asset allocation:
• Tactical asset allocation is a variant of strategic asset allocation strategy wherein the
investor can occasionally deviate from the core strategic or dynamic asset allocation
to take advantage of market opportunities.
What should be your ideal asset allocation?
• Your ideal or target depends on a number of factors:
• Your different financial goals – short term, medium term and long term
• Your risk appetite – lower your risk appetite, higher the debt allocation.
Consult with your financial advisor if you need help in understanding your risk
appetite
• Your age – younger investors may have higher allocation to equities
• Your assets and liabilities – if you have substantial liabilities, you should not
take make exposure to equities
• Your current investment portfolio and its asset allocation
Goal Setting
 Learning

Spiritual Career

Types of
Goals

Family Financial

Health
Time-Bound Goals Desired
Quality of Life

Long term
Goals
Intermediate
Goals

Short term
Hidden Goals
Goals

Lifestyle
Goals
Prioritizing Goals
• Health • Loans
• Job loss
• Death
Emergencies Liabilities

Responsibilitie
Desires s

• Holiday home • Home

• Exotic • Kids Education
Vacations • Retirement
Investment Process

Planning the
Need Implementing Performance
investment
identification the plan Evaluation
strategy
Return on Investment
• Yield
• Capital Gain/ Loss
 Systematic Unsystematic
Sources of Risk Risk Risk

Interest Rate Business

Risk Risk

Financial
Inflation Risk
Risk

Liquidity
Risk Default Risk

Exchange
Rate Risk

Country Risk