Meaning of Personal Wealth Management

8/3/2019 Meaning of Personal Wealth Management

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EARN HONESTLY

SAVE REGULARY

SPEND WISELY

GIVE GENEROUSLY


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Analyze the process for making personal financialdecisions

Develop personal financial goals

Assess personal and economic factors that

influence personal financial planning

Determine personal and financial opportunitiescost associated with personal financial decisions

Identify the strategies for achieving personalfinancial goals for different life situations.


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OBJECTIVE 1

Analyze personal financial planning

Typical financial goals

Set priorities

Achieving personal economic satisfaction


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To analyze the process for makingpersonal financial decisionsfollowing are the steps Determine your current financial position

Develop your financial goal

Identify your alternative course of action

Evaluating your alternatives

Creating and implementing your currentfinancial plan

Reviewing and revising your plan


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The Situation

Understanding how to determine financial

positions:-Jane Smith is college senior majoring in

marketing. She has realized that she is near to

her graduation and she needs to make somedecisions regarding her future. She wants to

financially secure and understands she needs to

plan for her financial future. Jane has determined

that she has Rs 6000 in students loan and Rs

2,500 in credit card debt..


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She has saving account of Rs 1,300. she has

part time job in local department store

where she earns Rs750 p.m. she has got

money from her parents to help her for rent

Rs. 500. Her households expense are Rs

1,300. Determine her current situation/position, what more information you need

to plan for her finance.


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Determine your current financialposition Determine your current position i.e. you are

going to graduate, starting his/her career, peak of

his/her career or close to retirement

On the basis of above situation decide yourincome, saving , living expense and debts.

Some of above decisions can be affected by

social pressure, household needs, desires or

luxurious habbits.

You should be able to differentiate between needs

and wants.


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OBJECTIVE 2Developing Financial and Personal goal

Based on factual knowledge or on the influence of others

Based on social pressure, household needs or desire forluxury

Financial goal can range from spending all your current

income on your needs, luxury or to build saving andinvestment for future

Financial goals can be influenced by time frame and type offinancial needs

Example:-

Jane need new suit for interview

Jane needs to reduce her expenditure so that she can

improve her saving account balance


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Common Financial goals and Activities

Obtain appropriate career training

Create an effective financial recording system

Develop a regular savings and investment

program

Accumulate an appropriate emergency fund

Purchase appropriate insurance coverage

Evaluate and select investment plan

establish a retirement plan


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Identify the Alternative course of action Developing alternative is influenced by various

factors that continue the same course of action

Expand the current situation

Change the current situation

Take a new course of action

Example:- Jane can use saving account money or credit card to

buy suit Jane can use her employee discount or shop at local

mall


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Evaluating Alternative Course of action

On the basis of your life situation, personal values and

current economic conditions

On the basis of consequence of the choices

Every decision closes off an alternative (opportunity cost)

Consider amount of risk involved in each decision. Riskinclude : inflation risk, interest rate risk, income risk,personal risk and liquidity risk.

Example:-

A new suit will help Jane look better in her interview

A new suit will make it harder to reduce expenditure and

meet her credit card debt.


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Creating &Implementing your financial Plan Develop your action plan that identifies ways to achieve

your goal

Increasing saving, reducing spending or extra income

Achieve first your short term goal and then goal next ispriority

Example:-

Jane has decide not to buy new suit Jane will wear something best from her wardrobe

She has decided to reduce her expense, so that she canincrease her savings


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Reviewing and Revising Janes financial plan

It is a dynamic process

Need to keep on assessing your action

Example:- Jane has been successful in reducing credit card

debts

She need entire new wardrobe for her job


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Exercise:Within next two , Kent Mullins will complete

his undergraduate degree with major in

international studies. He has worked part-

time in various sales job. He has small saving

Fund $ 1,700 and over $ 8,500 in students

loans. Do the financial planning process on thebasis of following:-

1. What additional information should Kent haveavailable when planning his personal finance

2. What goals might be appropriate for Kent

3. What are the alternative choices to fulfill thatgoal

4. What risk he should consider while analyzinghis alternative


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Objective 3

Assess personal and economic factors thatinfluence personal financial planning

Financial decisions are affected by personals,

life situations(income, age, health , household

size)

As well as economic factors that is varioustypes of risk


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Evaluating Risk

Inflation risk

Interest rate risk

Income risk

Personal risk Liquidity risk


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Inflation Risk

Examine the general increase in price level

Measured by looking at the basket of goodswe purchase and change in their pricesovertime

Can affect those who are living on fixedincome

Example:-Mr. A knows that price of gasoline

has gone up and so it can effect the prices ofgrocery and other consumable items he

uses.


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Interest Rate Risk Change in Interest rate on borrowed or invested

money Advantage for one and disadvantage for

another

Example:-Mr. B is concerned about changing interest rate.

He has just purchased a bond that is paying him

6% interest. However he knows that if interestrate rise than others will be benefited more on the

same bond.


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Income Risk

loss of job can hamper the spending pattern ofindivisual, borrowing

one should start saving today to meet theseunforeseen events such as unemployment

As well as enhance their skills to get better jobin future

Example:- Mr C is working as realtor. His income

depends on no. and size of house he sells. He is

doing very well but concerned about the economy

slowing down and so the sale will be less and so

his income will reduce.


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Personal risk

Indivisual personal situations- spending and

buying habbits, health and safety issues.

Example:-

Mr. D always purchases electronic item from the

branded shop and never from local shops as

there is safety, guarantee and advantage of rightservicing


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Liquidity Risk Convert asset into cash with little loss in value

Trade off between liquidity and interest rate on invest. Probability of making withdrawals should be considered

while making invest. Indivisual liquidity requirement changes during lifetime

as personal situation changes

Example:-Mr. E has decided to spend her saving betweenan investment in PPF and money market mutualFund. He knows that he is going to get higher

interest rate in PPF but will not be able to get fundback whenever he wants. On the other hand hetake his money out from MF whenever he wantsbut will get low rate of return.


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Objective 4

Determinepersonal and financial opportunity cost

associated with the personal financial decisionsOPPORTUNITY COST:

In every decision we have choice to make

These choice is to be made between risk of aninvest. or return on that invest.

we sacrifice something to obtain something

else that is more desirable we can forgo current buying to invest fund for

future purchase or long term financial security


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Opportunity cost can be 2 types

Personal Opportunity Cost:

is the time when used for one activity cannot be usedfor another activity.

Time used for studying will not be available forshopping

Financial Opportunity Cost:

In making financial decisions Time Value of Money mustbe considered.

Every time you spend money you should consider time

value of that money as an opportunity cost. Spending money from saving account means lost

interest earnings however is having more priority foryou.


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Objective 5

Identify strategies for achieving personal

financial goal for different life situations

Successful financial planning require:-

specific financial goal combined with spending,saving, investing and borrowing strategies

Based on personal situation and various socialand economic factors


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ExcerciseLife situation financial data:

Single monthly income $ 2,600

Age 22 living expenses $ 2,180Starting a career Asset $ 8,200No dependents liabilities $ 3, 470

Emergency Fund $ 530

While in college, Pan Jenkins worked part-time and was neverconcerned about long term financial planning. Rather thancreating a budget, she has used her cheque book and savingsaccount ( which usually had a very low balance) to handle her

financial needs. After completing college, Pam began hercareer as a sales representative for clothing manufacturerlocated in California. After one year, her asset consist of a1999 automobile, a TV, some electronic equipment and clothingand personal belongs, with total value of about $ 8200


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Future Value of Money

Robert has $8000 that he want to invest in 10

years. He knows tat this interest will pay him 6%

per year. What is the value of investment at the

end of 10 years

FV = PV ( 1+ i)n or FV = PV * FVIF

= $ 8000 ( 1 + .06 )10= $ 14, 327


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Future value of annuity

Mr. Fed is planning a depositing a amount of $250into investment account at the end of each ofnext 12. He knows that this will earn 5% eachyears. He wants to know how much will he earnafter end of 12 years.

FV = Annuity ( 1 + i )n 1

i


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PV of a single amount

If you want to know how much you need to

deposit now to receive a certain amount in

future

PV = FV

( 1 + i)n


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PV of a Annuity

PV = Annuity 1- 1

( 1 + I ) n

i

Meaning of Personal Wealth Management

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