Chapter 3Financial Planning

Investment products Mandatory Provident Fund (MPF) Credit cards

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Learning how to manage money as a life- planning process. Establishing proper values by learning and experiencing how to manage and utilize wealth effectively. Mastering life skills in order to seize opportunities and meet challenges. Equipping oneself for the future to enhance personal development.

Financial management and personal development

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What is financial planning? Self-management: money, time and emotion.

Financial planning is the process of attaining life goals through properly managing personal finances.

For example, set a savings plan and invest 25% of savings in shares for 10 years in order to have enough money to buy a flat.

Financial planning: life skills to help achieve independence, self-discipline and rationality.

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Income

DeathAgeBirth

Retirement

Pre-retirement

Married with children

Young and married

Young and single

Childhood

Financial goals at different life stages

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Financial goals at different life stages

Income

DeathAgeBirth

Retirement

Pre-retirement

Married with children

Young and married

Young and single

ChildhoodAll needs, including financial needs, are provided by parents (family).

All needs, including financial needs, are provided by parents (family).

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Financial goals at different life stages

Income

DeathAgeBirth

Retirement

Pre-retirement

Married with children

Young and married

Young and single

Childhood

Young adults who do not have a spouse or children.Low income and financial burden. Expenses are mainly onentertainment, social life, luxuriesand personal growth.

Young adults who do not have a spouse or children.Low income and financial burden. Expenses are mainly onentertainment, social life, luxuriesand personal growth.

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Income

DeathAgeBirth

Retirement

Pre-retirement

Married with children

Young and married

Young and single

Childhood

Financial goals at different life stages

Young couples without children can bearthe burden of household expenses without difficulty. The major financial burdens may be rentor mortgage loan for renovation and holidays.

Young couples without children can bearthe burden of household expenses without difficulty. The major financial burdens may be rentor mortgage loan for renovation and holidays.

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Financial goals at different life stagesIncome

DeathAgeBirth

Retirement

Pre-retirement

Married with children

Young and married

Young and single

Childhood

The birth of children increases familyexpenses, such as medical expenses,food, toys and clothes.Educational expenses become a majorfamily burden.

The birth of children increases familyexpenses, such as medical expenses,food, toys and clothes.Educational expenses become a majorfamily burden.

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Financial goals at different life stages

Income

DeathAgeBirth

Retirement

Pre-retirement

Married with children

Young and married

Young and single

Childhood

Planning for retirement is a key goal, so people at this stage have to pay attention tothe balance between risk and return. The MPF accrued benefit mustbe considered when calculating retirement savings.

Planning for retirement is a key goal, so people at this stage have to pay attention tothe balance between risk and return. The MPF accrued benefit mustbe considered when calculating retirement savings.

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Financial goals at different life stages

Income

DeathAgeBirth

Retirement

Pre-retirement

Married with children

Young and married

Young and single

Childhood

Most people would like to maintain a steady income flow in theretirement stage.If they have already accumulated sufficient savings,their main need is then to preserve the real value of theirinvestments and savings against the effects of inflation.

Most people would like to maintain a steady income flow in theretirement stage.If they have already accumulated sufficient savings,their main need is then to preserve the real value of theirinvestments and savings against the effects of inflation.

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Investment products Bank deposits – Saving money Bonds – Lending money to others Stocks / Shares – Owning part of a business Insurance – Saving/spending money for

peace of mind now and financial protection in the future

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Bank deposits• Savings deposits. You can withdraw money any time using an ATM card or by going to a bank. Interest is paid on deposits. (e.g. HSBC at 0.001% p.a.*)• Fixed/Time deposits. These get a higher interest rate (0.01%-0.5%), but the

money cannot be withdrawn before maturity, which ranges from one week to twelve months.

*The interest rate is based on the figure in September 2011.

Investment products

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Bonds• A bond is issued by a government or a company to borrow money from the investors, including the general public.

• Bond holders usually receive interest

regularly, and on the maturity date, the capital as well.

• The interest rate is usually higher than that of bank deposits. (e.g. Hutchison

Whampoa International Ltd bonds give 7.45%, with maturity at 24/11/2033)

Investment products

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Stocks / Shares

• Shares represent ownership of part of a company. Shareholders are owners and have the right to share in the company’s profits (in the form of dividends).

• Another source of return is selling them for a higher price than you bought them (i.e. capital gain).

Investment products

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Insurance

• Term insurance covers basic protection needs at the lowest premium.

• There is a savings element in certain types of policies.

• Some policies make use of investment vehicles to achieve potential long-term gains.

• Risk is highly dependent on the underlying assets.

Investment products

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Background of the MPF System in Hong Kong

Ageing population

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What is the MPF?

The Mandatory Provident Fund (MPF) System, which was implemented in December 2000, aims at providing basic retirement protection for the Hong Kong workforce. All employed persons aged 18 to aged below 65 who fulfill the following conditions are required to enrol in an MPF scheme:

• those employed or self-employed for 60 days or more (both full-time and part-time employees); or• casual employees in the construction or catering industry (even less than 60 days).

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What is the MPF?

Calculation of MPF contributions:

*Relevant Income refers to all payments in monetary terms given to employees, including wages, salary, leave pay, fees, commissions, bonuses, gratuities, perquisite or allowance (including housing allowance or other housing benefits), but excluding severance payments and long service payments as defined under the Employment Ordinance.

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Why do I have to start contributing to the MPF as

soon as I start working? Why don’t I wait until I earn

more? Then I would not mind contributing at bit more. Wouldn’t that be

better?

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Determining factors for saving and investing

CAPITAL is dependent on your personal situation (e.g. income stability, cash flow requirements).

CAPITAL is dependent on your personal situation (e.g. income stability, cash flow requirements).

TIME (i.e. investment period) is relatively easy to plan for and control.

TIME (i.e. investment period) is relatively easy to plan for and control.

RATE OF RETURN is the most uncertain variable since it can be affected by different factors (e.g. market fluctuations, investment risks).

RATE OF RETURN is the most uncertain variable since it can be affected by different factors (e.g. market fluctuations, investment risks).

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Determining factors for saving and investing

If you have limited capital and a short investment period, the rate of return has to be increased. If you have a short investment period and the rate of return cannot be increased, your capital has to be increased. If you have limited capital and the rate of return cannot be increased, you can still achieve your investment goal if you have a long investment period.

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Compounding effect in long-term investments The MPF is a very long-term investment, so

the interest added to your capital continues to roll over and generate further interest, i.e. the effect of “Compound Interest”.

*These are assumed rates of return.

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“Dollar-cost Averaging” Principle

Broadly speaking, the economy and the markets are cyclical in nature. MPF investments adopt the “dollar-cost averaging”, by investing a fixed amount of money in an MPF fund every month at the prevailing market price. When the fund price drops, the same amount of money can buy relatively more fund units, which reduces the average unit cost of your investment. In long term, the impact of short-term market fluctuations will be mitigated. Bear in mind that fund prices can go down as well as up!

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Five major types of MPF Funds

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Risk and Return Relationship of MPF Funds

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Adopting different financial plans according to investment periods Set specific and realistic financial goals

regarding time and amount. Your objectives should be realistic and achievable.

Different strategies for different time frames:

• Short term (1-3 years)

• Medium term (4-7 years)

• Long term (over 8 years)

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Balance between risk and return

Investments with higher potential returns come with higher potential risks.

Source: Ibbotson Associates, as at June 22, 2010*Average annualized 10-year rolling returns using monthly data from Jan 1926 to May 2010.

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Balance between risk and return

The golden rule: Investments with higher potential returns come with higher potential risks; investments with lower potential returns come with lower potential risks. All investment plans must strike a balance between risk and return. Taking MPF investment as an example, you have to consider different factors when choosing MPF funds:

1. Personal factors : e.g. your investment goals, risk tolerance level, and investment period according to your expected retirement age.

2. Fund factors : e.g. the investment objectives, investment instruments, features, risk levels, fees and charges of the MPF funds.

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Five elements in financial planning

Saving – Meeting emergency needs.Spending – Controlling consumptions in

order to meet your savings goal.Protection – Creating a safety net for

your loved ones.

Investment – Accumulating sufficient wealth to meet your life goals (after you have met your saving and protection needs).

Retirement Planning – Investing or saving for your retirement.29

Group discussion: Different perspectives on credit cards

How do banks attract customers to

apply for credit cards?

Worksheet

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