Fundamentals of Personal Finance

Participants Team CTS

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Financial Wisdom 4 Young Indians

Learning Objectives
1. 2.

List the benefits of studying personal finance.

Summarize the key steps in successful personal financial engineering. Understand the basic terms in personal finance
1. 2.

3.

Assets Vs Liabilities
Savings Vs Investments

4. 5.

Understanding time value of money Applying time value of money concept to

1. 2. 3.

Wealth Creation Retirement Insurance

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Financial Literacy
Financial literacy is knowledge of...

Facts Concepts Principles Technological tools

...fundamental to being smart about money.

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Financial Responsibility
Financial responsibility is being accountable for:

Your financial decisions and

Your own financial well-being.

If it is to be, it is up to me

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Personal Financial Engineering

What is it? Personal Financial Engineering is the development and implementation and monitoring of long-term plans to achieve Financial Freedom.
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What are the steps in the financial engineering process?

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Financial Planning Benefits

Financial planning helps you achieve:

Financial Success achievement of financial aspirations. Financial Security being able to fulfill any needs and most wants. Wealth an abundance of money and other financial resources. Financial Freedom the state where work is an option, you choose. Not compelled to opt.
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The Building Blocks of Financial Freedom

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Important Personal Finance Terms

Asset is one that gives a positive cash flow

Liability is one that gives a negative cash flow

Examples?

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Important Personal Finance Terms

InflationSteady rise in the general level of prices (reduces purchasing power)

DeflationFalling prices.
Examples?

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Important Personal Finance Terms

Savings Vs Investment

Comparision
Returns
Types of Returns Term Purpose

Savings
Low, Fixed, Less Risky

Investment
Higher, Variable, Risky

Cash Flow only (if any) Cash Flow and Capital Appreciation Short Term Festivities, Gifts, Small down-payments, Religious purpose Long Term Education, Marriage, Wealth creation, Large down-payments, Retirement
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Opportunity Costs and Tradeoffs in Decision Making

Opportunity Cost Value of the next best alternative that must be foregone.
Opportunity cost reflects the best alternative of what one could have done instead of choosing to spend, save, or invest money. Examples?

Trade-offs occur when you give up one thing for another.

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The Time Value of Money in Financial Decision Making

The Time Value of Money compares:

value in the future of a Rupee received today (FV)

value today of a Rupee amount to be received in the future (PV)

Key factors: Time, Interest, Principal

Annuity - a series of payments/deposits

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Compound Interest

Compound Interest interest earned on interest.

Compounding the process of earning compound interest is the best way to to build wealth over time.

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Calculating Future Values

Future Value (FV) Value of an asset at the end of a particular time period. Example: Wealth Creation

?
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Easy Thumb Rule - The Rule of 72

Calculates the number of years it takes for principal to double

Years = 72 divided by interest rate. Example: 72 divided by 8% = 9 years

Calculates the interest rate it takes for principal to double

Interest rate = 72 divided by number of years Example: 72 divided by 10 years = 7.2%

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Illustration: The Rule of 72

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Future Value of an Annuity

What lump sum will be got over time if a series of deposits are made (assuming same amount is deposited each time) Example:
Power of Compounding: Kaun Banega Crorepathi?

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Present Value of a Lump Sum

Present Value (PV) - Todays value of an amount to be received at a future date. Example: How much should I deposit?

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Present Value of an Annuity

Present value of a stream of payments to be received in the future. Example: Retirement Planning

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Risk Management

Insurance helps to transfer risk at low cost How much insurance do I need? Milestone Planning Income Replacement Method

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Golden Rules of Personal Finance

1. 2. 3.

Pay yourself first by spending less than you earn Stay up-to-date about current economic conditions Map your financial future by establishing goals and making realistic plans to achieve them Insure your risks Take advantage of tax benefits on investments Develop expertise in financial matters Remember that you are responsible for your own financial success.
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4. 5. 6. 7.

Thank you

Questions Session

This training was delivered by

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