Personal Finance PPT PDF

PERSONAL FINANCE The Financial Planning Process Learning Objectives 1. Explain why personal financial planning is so important. 2. Describe the five basic steps of personal financial planning. 3. Set your financial goals. 4. List ten principles of personal finance. 5. Understand tha...

PERSONAL FINANCE The Financial Planning Process Learning Objectives 1. Explain why personal financial planning is so important. 2. Describe the five basic steps of personal financial planning. 3. Set your financial goals. 4. List ten principles of personal finance. 5. Understand that achieving financial security is more difficult for women.  Introduction It’s easier to spend than to save. Personal financial planning is an ongoing process—it changes as your financial situation and position in life change. Manage and control your finances with a personal financial plan. It helps you achieve financial and lifestyle goals. What is financial planning? Financial planning is a step-by-step approach to meet one’s life goals. A financial plan acts as a guide as you go through life’s journey. Essentially, it helps you be in control of your income, expenses and investments such that you can manage your money and achieve your goals. For example, if you want to build up a corpus of Rs. 10 lakh for your daughter’s college education through investments, you need to grow this amount by the time she turns 18. Not a year later. This is where financial planning becomes essential.  Importance of Personal Financial Planning Manage the unplanned Accumulate wealth for special expenses Save for retirement “Cover your assets”-A financial plan is no good if it doesn’t protect what you’ve got. A complete financial plan will include adequate insurance at as low a cost as possible. Invest intelligently Minimize payments as tax- Why earn money for the government? Part of financial planning is to help you legally reduce the amount of tax you have to pay on your earnings. Steps for personal financial planning Steps for personal financial planning Step 1: Evaluate Your Financial Health A financial plan begins with an examination of your current financial situation. Prepare a personal balance sheet. Determine what you’re worth and prepare a personal income statement. Use ratios to monitor your financial health. Determine where your money comes from and where goes. To survive financially, you have to see your whole financial picture, which requires careful recordkeeping, especially when it comes to spending. Step 2: Define Your Financial Goals The second step of the financial planning process is defining your goals. Identify what you are saving for and how much you need to save, which entails: (1) writing down or formalizing your financial goals (2) attaching costs to them, and (3) determining when the money to accomplish those goals will be needed.  Steps for personal financial planning Step 3: Develop a Plan of Action The third step of the process is developing an action plan to achieve your goals. Make your spending conform with your budget goals. A solid personal financial plan includes: (1) an informed and controlled budget, (2) determines your investment strategy, and (3) reflects your unique personal goals. Although everyone’s plan is different; some common factors guide all sound financial plans: flexibility, liquidity, protection, and minimization of taxes. Flexibility – your financial plan must be flexible enough to respond to changes in your life and unexpected events such as losing your job or market fluctuations.  Steps for personal financial planning Step 3: Develop a Plan of Action Liquidity – The relative ease and speed with which you can convert non- cash assets into cash. In effect, it involves having access to your money when you need it. Protection – Insurance offers protection against fire,flood, major illness and death (at reasonable rates) shielding you from costly events that would otherwise threaten your financial security. Minimization of Taxes – every sound financial plan must take taxes into account. While you want to pay as little in taxes possible, your goal in effect is not to minimize taxes but to maximize the cash available to you after taxes have been paid.  Steps for personal financial planning Step 4: Implement Your Plan Just do it! While you don’t want to become a slave to your financial plan, you will need to track income and spending, as well as keep an eye on your long-term goals. Step 5: Review, Reevaluate, and Revise Your Plan As time passes and things change-you must review your progress and re-examine your plan. Your financial plan is not the goal; it is the tool you use to achieve your goals. Setting financial goals Financial goals cover three time horizons: (1) short term, (2) intermediate-term, and (3) long term. Short-Term Goals — include goals which can be accomplished within a one year period, such as buying a television or taking a vacation. Intermediate Term Goals — may take from one year to 10 years to accomplish, one example is saving for a downpayment on a house. Long-Term Goals — include goals which take more than 10 years to accumulate the money. Retirement is a common example of a long-term financial goal. Setting financial goals Set Your Financial Goals To reach your financial goals you must first set them. This process involves (1) writing down your financial goals and attaching costs to them, (2) identifying when the money to accomplish those goals will be needed. Once you have set your goals, they will become the cornerstone of your personal financial plan, a guide to action, and a benchmark for evaluating effectiveness of the plan. Over your lifetime your goals will change and you’ll see that a general financial life cycle pattern applies to most people, even you. Setting financial goals Setting financial goals Wealth creation Retirement planning Child’s education Saving tax The Life Cycle of Financial Planning There are three stages in the financial life cycle: (1) the early years— a time of wealth accumulation, (2) approaching retirement— the golden years, and (3) the retirement years. Stage 1: The Early Years – A Time of Wealth Accumulation -Prior to age 54: Purchase a home. Prepare for child rearing costs. Save for a child’s education. Develop a regular pattern of saving. Start retirement savings. Establish an emergency fund. The Life Cycle of Financial Planning Stage 2: Approaching Retirement – —The Golden Years Transition years between ages 55-64. Retirement goals are very important. Continuously review your financial decisions, insurance protection and estate planning. Unplanned events have dramatic effects on your goals. The Life Cycle of Financial Planning Stage 3: The Retirement Years – After age 65, live off savings- Retirement age depends on savings. Less risky investment strategy- Preserving rather than creating wealth. Review insurance, consider extended nursing home protection. Estate planning decisions are critical. Trim estate tax bills, have wills, living wills, and health proxies. A Typical Individual’s Financial Life Cycle How to create a successful financial plan?  Understand your current financial situation  Write down your financial goals  Look at the different investment options  Implement the right plan  Monitor your financial plan regularly 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. Principles of personal finance  Principle 2: Nothing Happens Without a Plan begin with a simple plan then once saving becomes a habit, modify and expand your plan. Principles of personal finance 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. The importance of the time value of money is twofold: 1) It allows us to understand how investments grow over time. 2) It allows us to compare dollar amounts in different time periods. Simple Interest vs Compound Interest Importance of Starting Early—Just Do It!—to Accumulate $1 Million by Age 67 Investing Your Money at 12% Principles of personal finance 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. Principles of personal finance 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: (1) differentiating want from need and understanding how each purchase fits into your life. (2) doing your homework to make sure what you get the quality you expect. (3) making a purchase and getting the best price (4) 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. Principles of personal finance 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 The Risk-Return Trade-Off Principles of personal finance 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. Many people seem financially wired in ways that make it hard to save while others find it hard to spend. Our views on spending and saving and whether we have a fear of money-related issues resulting in the tendency to “just not think about it” will go along way toward determining our financial success. Principles of personal finance 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.  Women and Personal Finance Tougher to achieve financial security. Generally earn less. Women live, on average, 7 years longer than men Women tend to be more conservative with their investments, which means their investments tend to earn less. Women and Personal Finance Need to take charge of their money and financial future. Acquire knowledge. Make things happen—need a plan. See a financial planner about specific concerns. COVID-19 impact: Managing personal finances in the middle of an emergency https://www.cnbctv18.com/personal-finance/covid-19-impact-managing-personal-finances-in-the-middle-of-an- emergency-5706851.htm https://qz.com/india/1844153/personal-finance-tips-to-survive-indias-covid-19-crisis/  LET US SUM UP Personal financial planning allows you to manage your finances and achieve lifecycle financial goals. There are five basic steps to personal financial planning. Set your financial goals in order to achieve them with a financial plan. An emergency fund can help protect yourself in the event of an economic downturn. The more educated you are about investments, the more you will earn. There are ten basic principles on which personal financial planning is built. Measuring Your Financial Health and Making a Plan Learning Objectives 1. Calculation of net worth using Balance Sheet 2. Ratios and financial position 3. Record keeping to track expenses and income 4. Financial planner and financial affairs 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. Different Types of Assets 1. Monetary assets – are liquid-cash, savings account 2. 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 3. Retirement plans-pension plan 4. Housing 5. Automobile 6. Personal property-furniture, appliances, jewellery  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. Personal Balance Sheet Personal Balance Sheet  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.  Trace Your Money 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 Trace Your Money  Understanding Personal Financial Statements The income statement and balance sheet can and should be used together. The balance sheet lets you judge your financial standing by showing your net worth, and the income statement tells you exactly how your spending and saving habits affect that net worth. By reviewing all your expenses and spending patterns, you can decide on specific ways to cut back on purchases and increase savings. This process of setting spending goals is referred to as setting a budget.  Using Ratios: Financial Thermometers Use financial ratios. Ratios allow you to analyze data in your balance sheet and income statement and compare the data to targets or to previous performance.  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 and other Current ratio = liquid assets with debt. Should be above 2.0; trend is most important. This ratio does not consider monthly monetary assets payments towards long-term debt (mortgage, ÷ car loans). current liabilities Question 1: Do I Have Enough Liquidity to Meet Emergencies? Month’s Living Expenses Covered Ratio = Tells how many months of living expenses can be covered with present monetary monetary assets assets. Liquid assets covering 3-6 months are ÷ optimum, less if credit and insurance annual living protection. expenses/12  Question 2: Can I Meet My Debt Obligations? Debt Ratio = Debt ratio tells you what percentage of your assets has been financed by borrowing. total debt This ratio should decrease as you age. ÷ total assets Question 2: Can I Meet My Debt Obligations? Long-term Debt Coverage Ratio = Relates the amount of funds available for debt repayment to the size of the debt payments. total income available for living This is the number of times you could make your debt expenses payments with your current income. ÷ total long-term debt payments  Question 3: Am I Saving as Much as I Think I Am ? Savings Ratio = It tells you the proportion of your after-tax income that you are saving. Income available for savings and investment ÷ Income available for living expenses Record Keeping Keep and maintain records. Needed to prepare taxes. Allows you track expenses and know how much and where you are spending. Makes it easier for someone to step in during an emergency and understand your financial situation. Involves just 2 steps: a) Track your financial dealings. b) File and store your financial records so they are readily accessible. Record Keeping Cash expenditures are more difficult to track. Record transactions in a ledger-A book or notebook set aside to record expenditures. Putting It All Together: Budgeting A budget is a plan for controlling cash inflows and outflows. Purpose is to keep income in line with expenditures plus savings. Preparing a Cash Budget Examine last year’s total income and make adjustments for the coming year. Estimate your taxes and calculate your anticipated after-tax income. Estimate your living expenses. Identify fixed and variable expenditures. Implementing the Cash Budget At the end of the month, compare your actual income and expenditures with your budgeted amounts. Try the envelope system- For example, if you budgeted $120 per month for restaurant expenditures, put $120 in an envelope each month. When it is exhausted, trips to the restaurant are over for the month. Hiring a Professional Options: Go it alone; make your own plan and have it checked by a professional. Work with a professional to develop a plan. Leave it all in the hands of a professional. Choosing a Professional Planner Ascertain the planner’s credentials. Consider their level of experience. Ask for referrals. Choosing a Professional Planner Fee-Only Planners - earn income through fees. Fee and Commission Planners - charge a fee and a commission on products they recommend. https://www.livemint.com/money/personal-finance/how-do-you-choose-a-financial-planner-who- suits-your-needs-1549809971941.html LET US SUM UP Calculate your level of net worth or wealth using a balance sheet. Analyze where your money comes from and where it goes using an income statement. Use ratios to identify your financial strengths and weaknesses. Set up a record-keeping system to track your income and expenditures. Implement a financial plan or budget that will provide for the level of savings needed to achieve your goals. Decide if a professional financial planner will play a role in your financial affairs. Understanding and appreciating the Time Value of Money Learning Objectives 1. Explain the mechanics of compounding. 2. Understand the power of time and the importance of the interest rate in compounding. 3. Calculate the present value of money to be received in the future. 4. Define an annuity and calculate its compound or future value. Measuring Your Financial Health and Making a Plan Learning Objectives 1. Calculation of net worth using Balance Sheet 2. Ratios and financial position 3. Record keeping to track expenses and income 4. Financial planner and financial affairs 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. Different Types of Assets 1. Monetary assets – are liquid-cash, savings account 2. 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 3. Retirement plans-pension plan 4. Housing 5. Automobile 6. Personal property-furniture, appliances, jewellery  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. Personal Balance Sheet Personal Balance Sheet  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.  Trace Your Money 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 Trace Your Money  Understanding Personal Financial Statements The income statement and balance sheet can and should be used together. The balance sheet lets you judge your financial standing by showing your net worth, and the income statement tells you exactly how your spending and saving habits affect that net worth. By reviewing all your expenses and spending patterns, you can decide on specific ways to cut back on purchases and increase savings. This process of setting spending goals is referred to as setting a budget.  Using Ratios: Financial Thermometers Use financial ratios. Ratios allow you to analyze data in your balance sheet and income statement and compare the data to targets or to previous performance.  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 and other Current ratio = liquid assets with debt. Should be above 2.0; trend is most important. This ratio does not consider monthly monetary assets payments towards long-term debt (mortgage, ÷ car loans). current liabilities Question 1: Do I Have Enough Liquidity to Meet Emergencies? Month’s Living Expenses Covered Ratio = Tells how many months of living expenses can be covered with present monetary monetary assets assets. Liquid assets covering 3-6 months are ÷ optimum, less if credit and insurance annual living protection. expenses/12  Question 2: Can I Meet My Debt Obligations? Debt Ratio = Debt ratio tells you what percentage of your assets has been financed by borrowing. total debt This ratio should decrease as you age. ÷ total assets Question 2: Can I Meet My Debt Obligations? Long-term Debt Coverage Ratio = Relates the amount of funds available for debt repayment to the size of the debt payments. total income available for living This is the number of times you could make your debt expenses payments with your current income. ÷ total long-term debt payments  Question 3: Am I Saving as Much as I Think I Am ? Savings Ratio = It tells you the proportion of your after-tax income that you are saving. Income available for savings and investment ÷ Income available for living expenses Record Keeping Keep and maintain records. Needed to prepare taxes. Allows you track expenses and know how much and where you are spending. Makes it easier for someone to step in during an emergency and understand your financial situation. Involves just 2 steps: a) Track your financial dealings. b) File and store your financial records so they are readily accessible. Record Keeping Cash expenditures are more difficult to track. Record transactions in a ledger-A book or notebook set aside to record expenditures. Putting It All Together: Budgeting A budget is a plan for controlling cash inflows and outflows. Purpose is to keep income in line with expenditures plus savings. Preparing a Cash Budget Examine last year’s total income and make adjustments for the coming year. Estimate your taxes and calculate your anticipated after-tax income. Estimate your living expenses. Identify fixed and variable expenditures. Implementing the Cash Budget At the end of the month, compare your actual income and expenditures with your budgeted amounts. Try the envelope system- For example, if you budgeted $120 per month for restaurant expenditures, put $120 in an envelope each month. When it is exhausted, trips to the restaurant are over for the month. Hiring a Professional Options: Go it alone; make your own plan and have it checked by a professional. Work with a professional to develop a plan. Leave it all in the hands of a professional. Choosing a Professional Planner Ascertain the planner’s credentials. Consider their level of experience. Ask for referrals. Choosing a Professional Planner Fee-Only Planners - earn income through fees. Fee and Commission Planners - charge a fee and a commission on products they recommend. https://www.livemint.com/money/personal-finance/how-do-you-choose-a-financial-planner-who- suits-your-needs-1549809971941.html LET US SUM UP Calculate your level of net worth or wealth using a balance sheet. Analyze where your money comes from and where it goes using an income statement. Use ratios to identify your financial strengths and weaknesses. Set up a record-keeping system to track your income and expenditures. Implement a financial plan or budget that will provide for the level of savings needed to achieve your goals. Decide if a professional financial planner will play a role in your financial affairs. Introduction 1. Always comparing money from different time periods 2. A dollar received today is worth more than a dollar received in the future 3. Everything in personal finance involves time value of money Simple Interest -Revision What is Simple Interest? Simple interest is only computed on the initial principal and not on any interest earned by the initial principal amount. Consider the following example: An investor invests $1,000 in a 5-year term deposit paying a simple interest of 6%. Total Interest Earned = Principal * Interest * Time Total Interest Earned = $1,000 *.06 * 5 = $300 Average Annual Interest = Total Interest Earned / Time Average Annual Interest = $300 / 5 = $60 Compound Interest-Revision What is Compound Interest? Compound interest is computed on the initial principal as well as on the interest earned by the principal over a specified period of time. Consider the following example: An investor invests $1,000 in a 5-year term deposit with an interest rate of 8% with the interest compounded annually. Therefore, at the end of each year, the interest amount generated in that year is added to the principal amount. It is the new principal amount and the interest for the next year is generated based on the principal amount. Total Interest Earned = Principal * [(1 + Interest Rate)Time – 1] Total Interest Earned = $1,000 * [(1 +.06)5 – 1 = $338.23 Average Annual Interest = Total Interest Earned / Time Average Annual Interest = $338.23 / 5 = $67.65 Compound Interest and Future Values 1. Interest paid on interest. 2. Reinvestment of interest paid on an investment’s principal 3. Principal is the face value of the deposit or debt instrument. How Compound Interest Works 1. Future value (FV) = Present Value (PV) x Amount it has increased by the end of 1 year (1+i)^n 2. For example, suppose you place $100, which is your present value (PV ), in a savings account that pays 6 percent interest annually, which is the annual interest rate (i ). How will your savings grow? At the end of the first year you’ll have earned 6 percent or $6 on your initial deposit of $100, giving you a total of $106 in your savings account. That $106 is the future value (FV ) of your investment, that is, the value of your investment at some future point in time. 3. Assuming you leave the $6 interest payment in your savings account, known as reinvesting, what will your savings look like at the end of the second year? You begin the second year with $106, and you add the interest you earned in the second year (6 percent on $106 for a total of $6.36 in interest), and you end up with $112.36. How Compound Interest Works Future value—the value of an investment at some point in the future Present value—the current value in today’s dollars of a future sum of money How Compound Interest Works Annual compounding—reinvesting interest at end of each year for more than 1 year FV = PV x Amount Present Value has increased by the end of n years (1+i)^n n is equal to the number of years during which compounding occurs Compound Interest at 6 Percent Over Time The Future-Value Interest Factor The value of (1+i)^n used as a multiplier to calculate an amount’s future value. Found in certain tables FV = PV x Future-Value Interest Factor Future-Value Interest Factor Future Value of Single Cash Flow Illustration: What is the future value of Rs100 if interest is compounded annually at a rate of 6% for three years? Illustration: Rs. 1,000 invested at 10% is compounded annually for three years, Calculate the Compounded value after three years. Future Value of Single Cash Flow Illustration: What is the future value of Rs100 if interest is compounded annually at a rate of 6% for three years? FV= 100 * (1+0.06)^3= Rs119.10 Illustration: Rs. 1,000 invested at 10% is compounded annually for three years, Calculate the Compounded value after three years. A = P (1+i)^n A = 1000 (1 +.10)^3 A = 1,331 Future-Value Interest Factor EXAMPLE You receive a $1,000 academic award this year for being the best student in your personal finance course, and you place it in a savings account paying 5 percent annual interest compounded annually. How much will your account be worth in 10 years? Future-Value Interest Factor EXAMPLE You receive a $1,000 academic award this year for being the best student in your personal finance course, and you place it in a savings account paying 5 percent annual interest compounded annually. How much will your account be worth in 10 years? FVn = PV(1 + i)n = $1,000(1 + 0.05)10 = $1,000(1.62889) = $1,628.89 Future Value of Series of Cash Flows An investor investing money in installments may wish to know the value of his savings after ‘n’ years. Mr. Manoj invests Rs. 500, Rs. 1,000, Rs. 1,500, Rs. 2,000 and Rs. 2,500 at the end of each year. Calculate the compound value at the end of 5 years, compounded annually, when the interest charged is 5% p.a. Answer: Amount at the end of the 5th Year Rs. 8020.50 The Rule of 72 How long will it take to double your money? Numbers of years for a given sum to double by dividing 72 by the investment’s annual growth or interest rate. For example, if an investment grows at an annual rate of 9 percent per year, according to the Rule of 72 it should take 72/9 = 8 years for that sum to double. Keep in mind that this is not a hard and fast rule, just an approximation, but it’s a pretty good approximation at that. For example, the future-value interest factor for 8 years at 9 percent is 1.99, which is pretty close to the Rule of 72’s approximation of 2.0. Facts Of Life If you can earn 8 percent on your savings, then you could either spend $10,000 on a cruise today, or save that money for 45 years and have $319,204 to spend during retirement. Compound Interest with Nonannual Periods Compounding may be quarterly, monthly, daily, or even a continuous basis. Money grows faster as the compounding period becomes shorter. Interest earned on interest more frequently grows money faster Compound Interest = Principal * [(1 + Annual Interest Rate/N)N*Time Where: N is the number of times interest is compounded in a year. Compound Interest with Nonannual Periods Compound Interest = Principal * [(1 + Annual Interest Rate/N)N*Time Where: N is the number of times interest is compounded in a year. Consider the following example: An investor is given the option of investing $1,000 for 5 years in two deposit options. Deposit A pays 6% interest with the interest compounded annually. Deposit B pays 6% interest with the interest compounded quarterly. Compound Interest with Nonannual Periods Compound Interest = Principal * [(1 + Annual Interest Rate/N)N*Time Where: N is the number of times interest is compounded in a year. Consider the following example: An investor is given the option of investing $1,000 for 5 years in two deposit options. Deposit A pays 6% interest with the interest compounded annually. Deposit B pays 6% interest with the interest compounded quarterly. Compound Interest with Nonannual Periods Suppose you deposit Rs.200,000 with an investment company which pays 12 percent interest with compounding done once in every two months, how much will this deposit grow to in 10 years?. Compound Interest with Nonannual Periods Suppose you deposit Rs.200,000 with an investment company which pays 12 percent interest with compounding done once in every two months, how much will this deposit grow to in 10 years? FV10 = Rs.200,000 [1 + (0.12 / 6)]^(10x6) = Rs.200,000 (1.02)^60 = Rs.200,000 x 3.281 = Rs.656,200 Present Value-What’s It Worth in Today’s Dollars? What’s it worth in today’s dollars? Strip away inflation to see what future cash flows are worth today. Inverse of compounding. Discount rate is the interest rate used to bring future money back to present. Present Value The present value of a future sum of money is inversely related to both the number of years until payment will be received and the discount rate. PV = FV at the end of n years (FVn) x [1/(1+i)n] Present Value Factor Table  Present Value Example EXAMPLE Let’s consider the impatient son of wealthy parents who wants his inheritance NOW! He’s been promised $500,000 in 40 years. Assuming the appropriate discount rate (i.e., the interest rate used to bring future money back to the present) is 6 percent, what is the present value of the $500,000?  Present Value Example EXAMPLE Let’s consider the impatient son of wealthy parents who wants his inheritance NOW! He’s been promised $500,000 in 40 years. Assuming the appropriate discount rate (i.e., the interest rate used to bring future money back to the present) is 6 percent, what is the present value of the $500,000? Present value = future value × present-value interest factor Present value = $500,000(0.097) = $48,500 That $500,000 the son is to receive in 40 years is worth only $48,500 in today’s dollars. Another way of looking at this problem is that if you deposit $48,500 in the bank today earning 6 percent annually, in 40 years you’d have $500,000. Present Value of Series of Cash Flow Given the time value of money as 10% (i.e. the discounting factor), you are required to find out the present value of future cash inflows that will be received over the next four years. Year Cash Flows 1 1,000 2 2,000 3 3,000 4 4,000 Present Value of Series of Cash Flow Given the time value of money as 10% (i.e. the discounting factor), you are required to find out the present value of future cash inflows that will be received over the next four years. Year Cash Flows Present Value Present Value Factor at 10% 1 1,000 0.909 909 2 2,000 0.826 1,652 3 3,000 0.751 2,253 4 4,000 0.683 2,732 Present value of series of Cash flows Rs 7,546 Annuities An annuity is a series of equal dollar payments coming at the end of each time period for a specific number of time period. Future Value of Annuity Future Value of Annuity The mathematical formula to calculate the future value of annuity is as follows: FV5 = A (1+i) 4 + A (1+i) 3 + A (1+i) 2 + A (1+i) + A = A [(1+i) 4 + (1+i) 3 + (1+i) 2 + (1+i) + 1] = A [(1+i) 4– 1/i] When the time period extended to n years, the equation can be re-written as: FVn = PVA [(1+i) n – 1/i] Where, FVn = Future Value of Annuity of cash flow P =Principal at the beginning of the year i = Rate of interest n = Number of years FVIFA Compound Annuities Example You’ll need $10,000 for education in 8 years. How much must you put away at the end of each year at 6% interest to have the college money ready? Compound Annuities Example You’ll need $10,000 for education in 8 years. How much must you put away at the end of each year at 6% interest to have the college money ready? future value = annual payment × future-value interest factor of an annuity $10,000 = annual payment (9.897) $10,000/9.897 = annual payment annual payment = $1,010.41 Present Value of an Annuity To compare the relative value of annuities, you need to know the present value of each. Need to know what $500 received at the end of the next 5 years is worth given discount rate of 6% Sum up the present values PV of an annuity = Annuity Payment or (PMT) x Present-Value Interest Factor of Annuity (from table) Present Value of an Annuity To compare the relative value of annuities, you need to know the present value of each. Need to know what $500 received at the end of the next 5 years is worth given discount rate of 6% Sum up the present values PV of an annuity = Annuity Payment or (PMT) x Present-Value Interest Factor of Annuity (from table) Present Value of an Annuity How much should Vijay save each year, if he wishes to purchase a flat expected to cost Rs.80 lacs after 8 years, if the investment option available to him offers a rate of interest at 9 percent? Assume that the investment is to be made in equal amounts at the end of each year. Present Value of an Annuity How much should Vijay save each year, if he wishes to purchase a flat expected to cost Rs.80 lacs after 8 years, if the investment option available to him offers a rate of interest at 9 percent? Assume that the investment is to be made in equal amounts at the end of each year. A x FVIFA (9 %, 8 years) = 80,00,000 A x 11.028 = 80,00,000 So, A = 80,00,000 / 11.028 = Rs. 7,25,426 PVIFA Amortized Loans Loans paid off in equal installments. You borrow $16,000 at 8% interest to buy a car and repay it in 4 equal payments at the end of each of the next 4 years. What are the annual payments? PV = Annual payment x Present-Value Interest Factor of an annuity Amortized Loans Amortized Loans Your company is taking a loan of 1,000,000, carrying an interest rate of 15 percent. The loan will be amortised in five equal instalments. What fraction of the instalment at the end of second year will represent principal repayment ? Amortized Loans Your company is taking a loan of 1,000,000, carrying an interest rate of 15 percent. The loan will be amortised in five equal instalments. What is the EMI? Annual instalment = 298,329 Perpetuities A perpetuity is an annuity that continues to pay forever. Present value of a perpetuity = annual dollar amount provided by the perpetuity divided by the annual interest (or discount) rate. Numerical Mr. Bharat, principal, wishes to institute a scholarship of Rs. 5,000 for an outstanding student every year. He wants to know the present value of investment which would yield Rs. 5,000 in perpetuity, discounted at 10%. Summary The cornerstone of time value of money is compound interest. Using future-value interest factors, you can determine how much investments will grow over time. The interest rate or the number of years that your money is compounded for increase future values. Summary Use the present-value interest factor to find present value of future value. An annuity is a equal dollar periodic payment of investment earnings or paying off installment loans Tax Planning Learning Objectives 1. Describe the importance of taxes for personal financial planning 2. Calculate taxable income and the amount owed for income tax 3. Prepare income tax return 4. Select appropriate tax strategies for different financial and personal situations 1 Taxes and Financial Planning Importance of taxes for personal financial planning An effective tax strategy is vital for successful financial planning Understanding tax rules and regulations can help you reduce your tax liability 2 Taxes and Financial Planning (continued) To help you cope with the many types of taxes you should... Know current tax laws as they affect you Maintain complete tax records Plan purchases and investments to reduce your tax liability Tax planning – Take advantage of tax benefits while paying your fair share of taxes 3 Income Tax Fundamentals Calculate taxable income and the amount owed for income tax Step 1: Determining adjusted gross income Step 2: Computing Taxable Income Step 3: Calculating taxes owed 4 Income Tax Fundamentals https://www.iciciprulife.com/insurance-library/income-tax/income- tax-slabs-rate-deductions.html https://www.paisabazaar.com/tax/income-tax/ -Deductions 5 Income Tax Structure The starting point for tax planning is looking at the overall structure of the income tax. Our present tax structure is a progressive or graduated tax, meaning that increased income is taxed at increasing rates. This system is based on the idea that those who earn more can afford to pay a higher percentage of their income taken in taxes. This is why people who earn different incomes fall into different tax brackets. However, not all income is taxed. Some income is tax free because of personal exemptions, and other income is shielded by itemized or standard deductions 6 Income Tax Structure Your deductions have brought you to the 15 percent tax bracket. Does that mean you have to pay 15 percent of your taxable income of $37,000 in taxes? No. Remember, tax rates are graduated, which means that income is taxed at increasing rates. It means that the last dollars you earned are taxed at 15 percent. The first $17,000 of taxable income is taxed at 10 percent, and the next $20,000 (income from $17,000 to $37,000) is taxed at 15 percent, resulting in a total tax bill before tax credits of $4,700.00. 7 Marginal Versus Average Rates There are two ways we measure your tax rate—we measure the average tax rate that relates taxes to taxable or overall income, and we measure your marginal tax rate that looks at the percent of the next dollar you earn that will go toward taxes. You paid taxes of $4,700 on taxable income of $37,000, so your average tax rate on taxable income was about 12.7 percent. Your average tax rate on your overall income of $70,000 was $4,700/$70,000, or about 6.7 percent. The term average tax rate refers to this latter figure—the average amount of your total income taken away in taxes. 8 Marginal Versus Average Rates(continued) While it’s good to know what percent of your taxable income and what percent of your overall income goes toward taxes, it’s even more important to know what percent of the next dollar you earn will go toward paying taxes. Why? Because it is the tax rate that you pay on the next dollar of earning that is important in making financial decisions. For example, if you were looking at an additional part-time job that would produce $5,000 per year in income, you would be concerned with how much in taxes you’d pay on that $5,000. The tax rate that is important in making this decision is your marginal tax rate or marginal tax bracket, which is the percentage of the last dollar you made that goes to taxes or the tax bracket that your taxable income falls into. If your taxable income is $37,000, and $37,000 falls in the 15 percent tax bracket, then 15 percent is your marginal tax rate. If you earn $5,000 on that part-time job, it is your marginal tax rate that determines how much of that raise you have left to spend. Marginal Tax Rate or Marginal Tax Bracket The percentage of the last dollar you earn that goes toward taxes. 9 Marginal Tax Rates If you are in the 15 percent marginal tax bracket and have a choice of investing in tax-free bonds that earn 7 percent or taxable bonds that earn 8 percent, To make a fair comparison, you must look at your after-tax returns. The tax-free bond would still return 7 percent after taxes, but the 8 percent bond would have 15 percent of its returns confiscated for taxes, resulting in a return of 8, × (1 – 0.15) = 6.85 10 Calculating Your Taxes https://www.maxlifeinsurance.com/tax-saving-investments - Cases Rebate is applicable to those under a specific income: Individuals whose income does not exceed Rs. 3,50,000, are eligible to claim the rebate under section 87A. This rebate is limited to Rs. 2,500 11 Calculating Your Taxes 12 Best Tax Saving Instruments in India https://www.exidelife.in/knowledge-centre/blogs-and-articles/11-effective-income-tax-saving-instruments https://www.policybazaar.com/income-tax/tax-saving-instruments/ https://economictimes.indiatimes.com/wealth/tax/best-tax-saving-options-ranking-of-the-top-10- instruments/articleshow/73095787.cms?from=mdr Income Tax Return 1. You can file your income tax return electronically on the income-tax portal incometaxindiaefiling.gov.in provided by the Government of India 2. Filing the return online is an easy and straightforward process. First, you need to create your login on the e-filing portal. You will need your PAN card details to create the login. It is advisable to assign your Aadhaar Number as well to your ITR for easier processing 3. Once you log in to the account, you can select your assessment status and year of filing to access the applicable ITR form 4. Fill the information in the ITR form as prompted. If you are salaried, it is recommended to use Form 16from your employer and 26AS as well, while filing ITR online 5. Alternatively, you can engage the services of a Tax Return Preparers (TRPs) authorized by the Government of India 14 Tax-Planning Strategies Five mistakes you must avoid while investing to save income tax- https://www.hdfclife.com/insurance-knowledge-centre/tax-saving-insurance/mistakes- while-investing-to-save-income-tax 15 Summary 1. Importance of taxes for personal financial planning 2. Calculate taxable income and the amount owed for income tax 3. Prepare income tax return 4. Select appropriate tax saving strategies Cash or Liquid Asset Management Learning Objectives 1. Manage your cash and understand why you need liquid assets. 2. Choose from among the different types of financial institutions that provide cash management services. 3. Compare the various cash management alternatives. 4. Compare rates on the different liquid investment alternatives. 5. Transfer funds electronically and understand how electronic funds transfers (EFTs) work. 1 Managing Liquid Assets 1. Cash management is deciding how much to keep in liquid assets and where to keep it. 2. Banks and other financial institutions offer an array of account types and investments. 3. Goal: Pay expenses (including unexpected expenses) without dipping into long term investments. Managing Liquid Assets 1. Cash management means not only making choices from among alternatives, but maintaining and managing the results of those choices. 1. Principle 1: the risk-return trade-off. 2. Liquid assets have little risk and therefore a low expected return. 3. Low risk is important in cash management. 4. Another type of risk associated with keeping liquid assets: the more cash you have, the more you are tempted to spend. Automating Savings: Pay Yourself First Use cash management alternatives to have savings automatically deducted from your paycheck. Automating your savings means you are less likely to spend that money. Remember Principle: Pay yourself first The earlier you start to save, the easier it is to achieve your goals. Remember Principle : The time value of money Financial Institutions Financial institutions are categorized as: Deposit-type financial institutions – referred to as “banks” Nondeposit-type financial institutions – such as mutual funds and brokerage firms Those that accept deposits from customers—depository institutions—include commercial banks, savings banks; those that don't—nondepository institutions—include finance companies, insurance companies, and brokerage firms. They also sell securities and provide financial advice.  “Banks” or Deposit-Type Financial Institutions Financial institutions that provide traditional current and savings accounts are called “banks” or deposit-type institutions. https://sbi.co.in/web/personal-banking/home https://www.elearnmarkets.com/blog/various-types-of-bank-deposits/ Types of Bank Accounts https://indianmoney.com/articles/the-different-types-of-checking-accounts – Types of Checking Accounts Nondeposit-Type Financial Institutions https://onlinezerobrokerage.com/top10-stock-brokers/best-stock-broker-india/ Nondeposit-Type Financial Institutions http://www.technofunc.com/index.php/domain-knowledge/bfsi-industry/item/financial- intermediaries-non-depository Online Banking Online banking—access to your accounts, and the ability to conduct business transactions, through the Internet, a mobile phone, or some other online device. With online banking you may be able to: Access your accounts at any time of day. Check your balances and see when cheques have cleared and when deposits have been made. Transfer funds between accounts. Download your financial information directly into your personal financial or tax software. Pay bills and receive payments online. Online Banking What to Look For in a Financial Institution Choose among the alternatives by asking: Which financial institution offers the kind of services you need and want? Is your investment safe? Is it insured? Is the financial institution sound? What are the costs and returns associated with the services you want? Are there minimum deposit requirements or hidden fees? Cost, Convenience, Consideration  Cash Management Alternatives https://indianmoney.com/articles/6-alternatives-to-savings-account-for-higher-returns https://www.reliancesmartmoney.com/Insights/blog/rsm-articles/2018/12/04/comparison- between-liquid-funds-and-savings-account https://wealthbucket.in/blog/liquid-funds-taxation/ https://www.policybazaar.com/life-insurance/investment-plans/articles/top-10-short-term- investment-options/ Electronic Funds Transfer Electronic funds transfer (EFT) refers to any financial transaction that takes place electronically. Funds move instantly without paper https://indianmoney.com/articles/electronic-funds-transfer https://www.hdfclife.com/insurance-knowledge-centre/about-life-insurance/types-of- electronic-funds-transfer Automated Teller Machines An ATM or cash machine provides cash instantly and is accessed through a credit or debit card. Obvious appeal is convenience. To use ATM, just swipe card, enter PIN, and indicate amount of cash. Automated Teller Machines ATMs of India provide following services. Cash Withdrawal. Balance Enquiry. Statement Enquiry (printing in some cases) PIN Change. Cash Deposit. Cheque Deposit. Funds Transfer. Credit Card Payment. Automated Teller Machines Are customers entitled to any free transactions at ATMs? Yes, a bank must offer to its savings bank account holders a minimum number of free transactions at ATMs as under: Transactions at a bank’s own ATM at any location: Banks should offer their savings bank account holders a minimum of five free financial transactions in a month, irrespective of the location of ATMs. Any number of non-cash withdrawal transactions will be provided free. Transactions at any other banks’ ATM at Metro locations: In case of ATMs located in six metro locations, viz. Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, and New Delhi, banks shall offer their savings bank account holders a minimum of three free transactions (including financial and non-financial transactions) in a month. Transactions at any other banks’ ATM at non-Metro locations: At any location, other than the six metro locations as above, banks must offer its savings bank account holders a minimum of five free transactions (including financial and non-financial transactions) at other bank ATMs in a month. Automated Teller Machines How should the customer keep his / her ATM transaction secure? Only one card holder should enter and access the ATM at a time. The card holder should not lend his / her card to anyone. The card holder should not write the PIN on the card. The card holder should not share the PIN with anyone. The card holder should not let anyone see the PIN while it is being entered at the ATM. The card holder should never use a PIN that could be easily guessed. The card holder should never leave the card in the ATM Automated Teller Machines The card holder should register his / her mobile number with the card issuing bank for getting alerts for transactions at ATMs. The card holder should be vigilant and check if any extra device/s is / are attached to the ATMs The card holder should keep an eye on suspicious movement/s of people around the ATMs The card holder should remember that bank officials never ask for card details or PIN over telephone / email. So, he / she should not respond to any such communication from anyone indicating that they represent his / her bank. Debit Cards https://www.moneycontrol.com/news/business/personal-finance/types-of-debit-card-pf10- 4386391.html Credit Card https://www.opploans.com/content/credit-ebook/part-credit-concept/offers-credit-cards/advantages-disadvantages- credit-cards/ https://www.sbicard.com/en/personal/benefits.page Smart Cards Smart cards are of flexible plastic sized of the credit card that contains silicon integrated circuit chips to store and securely transact the data. Smart cards have multiple advantages from storing data to storing cash. Smart card is an important component which is in developing phase in India. The establishment of smart cities and growing adaptation of the technologies are the major factor driving the growth of India smart card market. Smart cards enable quick access and quick ID verification in multiple places such in transport system, payments, hotels and restaurants. The transforming economy of India with the expansion of manufacturing industries, infrastructure industries and hospitality are major application areas of smart cards. Smart Cards https://www.news18.com/news/partner-content/why-smart-cards-are-a-better-option-than- normal-credit-cards-2029883.html Stored Value Cards – Another Way to Carry Cash Merchant gift cards and prepaid phone cards are examples of stored value cards. Stored value cards can be either: Single purpose or “closed-loop” cards which can be used at only one store. Multi-purpose or “open-loop” cards which can be used just like a credit card and can be reloaded. Summary – Manage your cash and understand why you need liquid assets – Choose from among the different types of financial institutions that provide cash management services – Compare the various cash management alternatives – Transfer funds electronically and understand how electronic funds transfers (EFTs) work – Debit Cards, Credit Cards, Smart Cards Using Consumer Loans and Credit Cards Learning Objectives Understand the various consumer loans. Calculate the cost of a consumer loan. Pick an appropriate source for your loan. Get the most favorable interest rate possible on a loan. Know when to borrow. Control your debt. 1 Types of Loans https://www.bajajfinserv.in/insights/the-different-types-of-loans-available-in- india  The Loan Contract Security agreement states if purchased item will be used as collateral. Note states payment schedule and rights of borrower and lender if default. A note is standard on all loans, security agreement is standard on secured loans. https://www.ndtv.com/business/seven-clauses-in-a-loan-agreement-that-you-should-be-watchful-of-1204190  Types of Personal Loans https://www.cibil.com/personal-loans https://www.moneycontrol.com/news/business/personal-finance/types-of-personal-loan-in-india-pf7-4393871.html https://www.icicibank.com/Personal-Banking/loans/personal-loan/type-of-personal-loan.page https://www.hdfcbank.com/personal/borrow/popular-loans/personal-loan https://www.hdfcbank.com/personal/resources/learning-centre/borrow/benefits-of-a-personal-loan-to-repay-debt https://www.myloancare.in/personal-loan/  Home Loans Home Equity Loans – secured loan using equity in home as collateral. Advantages: Interest is tax deductible up to Rs 200,000. Carry lower interest than other consumer loans. Disadvantages: Puts your home at risk. Limits future financing flexibility.  Automobile Loans Automobile Loans – loan secured by auto. Annual Percentage Rate APR is the annual percentage rate charged for borrowing. https://www.axisbank.com/retail/calculators/annual-percentage-rate-calculator Finance charges include all costs associated with the loan: Interest payments Loan processing fees Credit check fees Insurance fees Cost of Installment Loans Repayment of both interest and principal occurs at regular intervals. Payment levels are set so loan expires at a preset date. Relationship of Payment, Interest Rate, and Term of the Loan How does the duration of loan and interest rate affect size of payments? As interest rates rise, so do finance charges. Increasing the maturity will lower the monthly payments, but result in higher total finance charges. Lenders charge a lower interest rate on shorter-term loans. https://economictimes.indiatimes.com/wealth/borrow/how-interest-rate-you-have- to-pay-on-your-loan-is-determined/articleshow/69384100.cms Sources of Consumer Loans Inexpensive sources: The least expensive source of funds is your family. Home equity loans and other secured loans are inexpensive. Most Expensive Sources- Personal Loans How and When to Borrow How do you get a favorable rate? Have a strong credit rating. Loan must be relatively risk-free. Use variable rate loan. Keep loan short-term. Provide collateral. Apply large down payment. Debt affects future financial flexibility. How and When to Borrow Borrow If: Pay Cash If: After-tax cost of borrowing < after-tax After-tax cost of borrowing > after-tax lost return from using savings to return from using savings for purchase. purchase the asset.  How and When to Borrow When you borrow to invest: Hope to receive an income stream that offsets the cost of borrowed funds. Borrow with the goal of building wealth. Earnings > cost of borrowed funds. Controlling Your Use of Debt Determine how much debt you can comfortably handle. This changes during different stages of life. Earlier years, debt builds up. Later years, income rises and debt declines. https://www.yesbank.in/life-matters/7-tips-for-managing-your-debt  Debt Resolution Rule Debt resolution rule helps control debt obligation, excluding borrowing for education and home financing, by forcing you to repay all outstanding debt obligations every 4 years. Logic is that consumer credit should be short-term. Credit Cards Learning Objectives Know how credit cards work. Understand the costs of credit. Describe the different types of credit cards. Know what determines your credit card worthiness and how to secure a credit card. Manage your credit cards and open credit. Introduction- Credit Cards Convenient, but if you’re not careful, credit cards will cost you. Some charge over 20% interest on unpaid balances. Most people don’t consider interest charges on purchases they have to pay. Manage credit wisely to avoid high interest.  A First Look at Credit Cards and Open Credit Credit involves receiving cash, goods, or services with an obligation to pay later. Open credit (revolving credit) is a line of credit extended before the purchase. Revolving credit involves paying back at least some minimum amount each month and carrying the remaining balance into the next month. Unpaid balance plus interest carries over to next month. Higher balances on credit lines, higher costs. https://www.hdfcbank.com/personal/resources/learning-centre/pay/how-do-credit-cards-work https://www.moneyunder30.com/how-to-use-a-credit-card-responsibly https://www.moneycontrol.com/news/business/personal-finance/5-ways-to-effectively-manage- credit-cards--1597523.html  Types of Credit Cards https://www.moneycontrol.com/news/india/mastercard-credit-card-types-benefits-offers-bill- payment-fees-charges-moneycontrol-pf3-4131641.html https://www.moneycontrol.com/news/india/types-of-credit-card-available-in-india-pf3- 4130171.html https://www.icicibank.com/card/credit-cards/credit-card.page? Credit card Fees Interest charges Annual fee Foreign Transaction Fee Late Payment Fee Cash Withdrawal Charge Merchant discount fee-The merchant discount rate is charged to merchants for processing debit and credit card transactions. To accept debit and credit cards, merchants must set up this service and agree to the rate. The merchant discount rate is a fee, typically between 1%-3%, that merchants must consider when managing business costs. https://www.financialexpress.com/money/credit-card-fees-and-charges-you-need-to- know/1591004/ https://www.financialexpress.com/money/credit-card-payment-what-happens-if-you-pay- only-the-minimum-amount-due/1877081/ Advantages of Credit Card 1. Purchasing Power: Credit Cards enable users to make big ticket purchases they might not otherwise be able to afford. 2. Rewards: Many cards offer rewards programs that will accrue points, discounts, or other benefits like frequent flyer miles. 3. Convenience: Credit cards reduce the need to carry cash. Most retailers accept credit cards and they are pretty much required for online purchases. 4. Trackability: The electronic record keeping that comes with credit cards make it easy to track your spending and identify fraud. 5. Use during an emergency: There are times when money is the simple solution to an emergency. If you get hit with an unexpected expense, credit cards can be the quick and easy solution you need. 6. Builds credit history: Responsible use of a credit card over time builds your credit history, qualifying you for better interest rates and other financial benefits.  Disadvantages of Credit Card 1. Overspending: Credit cards can make life easier, but they can also make overspending easier as well. With a credit card, you’re spending money you don’t necessarily have yet. If you’re not careful, this can quickly lead to unexpected debt. 2. Interest and fees: Using credit is essentially borrowing. And you’re not borrowing for free. Mismanaging a credit card can lead not only to a high balance, or maxed-out card, but also to debt in the form of interest and fees. 3. Fraud: Credit cards (and other electronic forms of payment) carry unique dangers. Credit cards can be stolen, their numbers can be copied, and they can be used to steal your money and identity. 4. Mounting Debt: If you carry a balance on your credit card from month to month, it can be very easy for charges and interest to rack up. Many people don’t expect credit cards to be gateways to extra debt, but if you’re not careful, that’s exactly what happens. How Your Credit Score is Computed What is a good score? A good credit score doesn’t just mean that you’ll get a loan, it also means you’ll pay less for it through lower rates. Creditworthiness also based on employment history, job history, and amount of debt you currently have. https://www.hdfcbank.com/personal/resources/learning-centre/borrow/how-to-check-your-cibil- score https://www.bloombergquint.com/business/cibil-explains-the-reasons-behind-indias-soaring- personal-loan-growth https://cleartax.in/s/how-credit-cards-affect-credit-score  If Your Credit Card Application is Rejected Apply for a card with another financial institution. Find out why you have been rejected. Set up an appointment with credit card manager. Address the problem. How Do You Know if You’re a Victim of Identity Theft? Receive a credit card you didn’t apply for. Denied credit or offered less favorable terms. Calls or letters from debt collectors. Fail to receive bills or other mail. Controlling and Managing Your Credit Cards and Open Credit Reducing your balance Protecting against fraud Trouble signs in credit card spending If you can’t pay your credit card bills https://www.indiainfoline.com/article/research-articles-personal-finance/how-to-manage-your-credit-card-debt-smartly- 114020505388_1.html https://economictimes.indiatimes.com/investments-markets/how-a-credit-card-can-help-improve-your-credit-score/credit- cards-give-facility-of-making-big-purchase/slideshow/16704290.cms  Summary Main form of open credit is the credit card which you can use to make charges up to a certain point as long as you pay off the minimum amount of your debt each month. Costs of open credit include interest rate, cost of cash advances, annual fee, penalty fees. Choices of open credit lines include different types of credit cards and charge accounts. Different credit cards charge different APR and calculate finance charges differently. Focus on controlling credit card spending and look for signs of trouble. The Home and Automobile Decision Learning Objectives 1. Make good buying decisions 2. Choose a vehicle that suits your needs and budget. 3. Choose housing that meets your needs. 4. Decide whether to rent or buy housing 5. Calculate the costs of buying a home 6. Get the most out of your mortgage. 1 How Your Credit Score is Computed What is a good score? A good credit score doesn’t just mean that you’ll get a loan, it also means you’ll pay less for it through lower rates. Creditworthiness also based on employment history, job history, and amount of debt you currently have. https://www.hdfcbank.com/personal/resources/learning-centre/borrow/how-to-check-your-cibil-score https://www.bloombergquint.com/business/cibil-explains-the-reasons-behind-indias-soaring-personal- loan-growth https://cleartax.in/s/how-credit-cards-affect-credit-score https://www.cibil.com/freecibilscore  Smart Buying Step 1: Differentiate Want From Need 1. Smart buying requires separating wants from needs. 2. “Want” purchases require a trade-off. 3. Before buying a “want,” determine whether the purchase will interfere with your ability to pay for your future needs. Step 2: Do Your Homework Smart Buying Step 3: Make Your Purchase 1. Getting the best price might involve negotiations. 2. Conduct research before haggling. 3. Consider what fits your budget. Step 1: Narrow Your Choices 1. Consider your lifestyle and needs versus wants 2. Look at the alternatives 3. Fit your car into your budget; calculate the payment. Step 2: Pick Your Vehicle 1. Do your comparison shopping via the internet or publications. 1. compare price 2. compare features 3. compare quality 2. Determine what is available in your price range. 3. Test-drive the exact vehicle you are considering. https://www.cibil.com/auto-loans Step 3: Make the Purchase 1. Take advantage of sales, but negotiate the price 1. know the dealer’s cost of the vehicle and any holdback 2. Understand the various dealer markups 3. Be aware of any rebate(s) that may apply Step 3: Make the Purchase (cont’d) 1. Evaluate financing alternatives determine the length of financing shop around to find the best interest rate choose a financing period and rate to give you an affordable monthly payment 2. Consider a lease a) https://economictimes.indiatimes.com/wealth/insure/motor-insurance/5-factors-to-consider-while- buying-a-new-car-in-india/articleshow/70228145.cms?from=mdr b) https://www.nydailynews.com/autos/street-smarts/8-important-decisions-buying-new-car-article- 1.2558671 c) http://overdrive.in/news-cars-auto/features/key-factors-that-influence-car-buying-decisions-in-india/ d) https://www.moneycontrol.com/news/business/personal-finance/leasing-a-car-is-a-convenient-but- costly-affair-4122311.html e) https://economictimes.indiatimes.com/industry/auto/cars-uvs/if-you-dont-want-to-buy-a-car-well-lease- it-to-you/articleshow/69749295.cms?from=mdr Comparing Needs Versus Wants for Housing 1. Decide on the fundamentals such as bathrooms, bedrooms, and closet space 2. Decide on property size 3. Compare other considerations like school systems, proximity to shopping centers, or safety 4. Consider the future -- such as additional family members Advantages of Renting 1. Mobility 2. No downpayment 3. Can be less expensive 4. Protection from declining housing values 5. More extensive amenities 6. No home repair or maintenance 7. No groundskeeping responsibilities 8. No property taxes Advantages of Buying 1. Own Property 2. Allows for capital appreciation 3. Greater personal freedom 4. Tax advantages 5. Protection from rising rent costs Renting Versus Buying Buying Renting 1. Many up-front and 1. No large up-front costs other than a one-time costs security deposit 2. Beneficial for those who itemize their 2. Beneficial if staying only for the short- deductions term 3. Mortgage payments are a form of forced savings https://getmoneyrich.com/rent-vs-buy-house/ Guidelines for Renting 1. Determine what you can afford 2. Compare the location with shopping, employment, and schools 3. Understand the lease 4. Get every detail in writing 5. Research the reliability of the landlord Addressing Your Housing Needs Step 1: Do your homework Compare your needs versus wants for housing Compare your options for housing and the costs of each Weigh your alternatives of renting versus buying Determine what’s most affordable Your financial history- Your ability to pay a) Maximum mortgage b) The down payment Step 2: Make your selection Step 3: Make your purchase Step 4: Postpurchase activities Costs of Housing: What’s Involved in Ownership 1. One-time or initial costs 2. Recurring costs 3. Maintenance and operating costs  Determining What You Can Afford 1. Before house hunting, ask yourself: 2. What is the maximum amount the bank will lend me? 3. Should I borrow up to this maximum? 4. How big a down payment can I afford? What is the Maximum Amount the Bank Will Lend Me? 1. Lenders look at: 1. Your financial history – steadiness of income, credit report 2. Your ability to pay 3. Appraised value of home – limit mortgage loan to 80%. How Much Should You Borrow? 1. A mortgage is a large financial commitment of future earnings. 2. Look at your overall financial plan before deciding on how much to borrow. 3. Prequalifying – lender confirms the loan size based on ability to pay and down payment. https://www.cibil.com/loans-home Housing Step 2: Selection 1. The search process use a traditional real estate agent use the Internet to learn about buying a home 2. The inspection process Negotiating a Sales Price 1. Always haggle on the actual purchase price and counteroffers 2. Include all contingencies 3. Consider closing costs 4. Offer earnest money 5. Note: You may never see the seller because often the real estate agents carry the offers between parties Housing Step 3: Making the Purchase 1. Guidelines for renting 2. Negotiating a sales price 3. Signing the sales contract 4. Financing the purchase – the mortgage Signing the Sales Contract 1. Always have a fixed price 2. Do a title search 3. Perform inspection 4. Make the contract contingent on receiving the proper financing 5. Include all other contingencies that may interfere with a satisfactory purchase https://economictimes.indiatimes.com/realty-trends/before-buying-a-property-read- the-sales-agreement-carefully/articleshow/23580197.cms?from=mdr  Maximise your chances of getting a Loan and paying them 1. https://www.moneysupermarket.com/money-made-easy/ten-ways-to-maximise-your-mortgage-chances/ 2. https://www.financialexpress.com/money/want-to-reduce-your-home-loan-burden-follow-these-smart-tips/1872659/ 3. financialexpress.com/money/want-to-pay-off-your-home-loan-faster-follow-this-trick/1886164/ Summary 1. Make good buying decisions 2. Choose a vehicle that suits your needs and budget. 3. Choose housing that meets your needs. 4. Decide whether to rent or buy housing 5. Calculate the costs of buying a home 6. Get the most out of your mortgage. Life and Health Insurance Learning Objectives Understand the importance of insurance. Life insurance needs and program. Coverage types and Coverage Provisions Health insurance coverage and provisions Purpose of long-term insurance care 1 Insurance People who are exposed to similar kind of risk come together and create a pool of funds out of which those who suffer are paid. i.e. Those who do not suffer from loss do well to those who suffer by contributing towards the loss. The sharing of losses can be on a pre-decided formula, which is evaluated on basis of the size of group, nature of risk the group is exposed to and the likely proportion of loss. i.e. the total amount of compensation is divided between the groups. Insurance neither protect the asset nor prevent its loss. What insurance can only do is to protect from impact of loss i.e. compensate the financial value of loss. Classification of Insurance Insurance can be broadly classified into Life Insurance and Non-Life (General) Insurance Life Insurance (Covers Human Life) Non-Life Insurance (Covers everything except Human Life however Accidental Death and Medical Insurance are part of Non-Life Insurance) Insurance: Contract of Indemnity, Only actual loss is compensated within the limits of Insured value. Importance of Life Insurance To replace loss of income To repay pending debts To meet educational expenses To diversify your investments To save for retirement To receive tax benefits To benefit from add-on riders To improve your financial security https://www.canarahsbclife.com/allplan/life-insurance/importance-of-life-insurance.html Why Life Insurance Is Important at Every Stage of Life https://www.aegonlife.com/insurance-investment-knowledge/why-life-insurance-is-important-at-every-stage-of-life/ Important Terms Premium Sum Assured Grace Period Lapse Revival Surrender Value Assignment https://www.canarahsbclife.com/knowledge-centre/insurance-guide.html https://economictimes.indiatimes.com/wealth/insure/how-to-assign-a-life- insurance-policy/types-of-assignment/slideshow/71522863.cms Beneficiaries People to whom your policy benefits will be paid if you die. Unit-linked and Non-linked Insurance Plan https://www.moneycontrol.com/news/business/personal-finance/who-should-consider-investing-in-unit-linked-and-non- linked-insurance-plans-and-why-3158391.html Types of Life Insurance Policies Term Plan – pure risk cover Unit linked insurance plan (ULIP) – Insurance + Investment opportunity Endowment Plan – Insurance + Savings Money Back – Periodic returns with insurance cover Whole Life Insurance – Life coverage to the life assured for whole life Child’s Plan – For fulfilling your child’s life goals like education, marriage, etc. Retirement Plan - Plan your retirement and retire gracefully https://www.coverfox.com/life-insurance/articles/types-of-life-insurance-policies/ https://www.maxlifeinsurance.com/life-insurance-plans LIC Insurance Policies https://www.policyx.com/life-insurance/lic-of-india/ How to choose the right life Insurance provider? Claim Settlement Ratio Solvency Ratiocost cost https://www.maxlifeinsurance.com/life-insurance-plans https://www.bankbazaar.com/insurance/life-insurance.html How to Pick the Best 1 Crore Term Plan? https://www.aegonlife.com/insurance-investment-knowledge/1-crore-term-life-insurance/ Premium Age Flexibility Low claim rejection Riders Return of Premium [ROP) for Term Life Insurance Policy in India https://www.aegonlife.com/insurance-investment-knowledge/return-of-premium-rop-for-term-life-insurance-policy-in-india- explained/ How to revive a lapsed life insurance policy? https://www.aegonlife.com/insurance-investment-knowledge/how-to-revive-a-lapsed-life-insurance-policy/ COVID-19 COVID-19 to lead to spike in demand for health and life cover https://www.financialexpress.com/money/insurance/insurance-covid-19-to-lead-to-spike-in-demand-for-health-and-life- cover/1942497/ https://www.canarahsbclife.com/knowledge-centre/blog/does-life-insurance-in-india-cover-deaths-due-to-coronavirus.html What are health insurance plans? Health insurance plans reimburse insured customers for their medical expenses, including treatments, surgeries, hospitalization and the like which arise from injuries/illnesses, or directly pay out a certain pre-determined sum to the customer. A health insurance policy offers coverage for any future medical expenses of the customer. This is an agreement between the insurance company and the customer where the former agrees to guarantee payment/compensation for medical costs in case the latter is injured/ill in the future, leading to hospitalization. In most cases, insurance companies have tie-ups with a network of hospitals, thereby ensuring cashless treatment for patients there. Health Insurance Terms https://www.tataaig.com/content/tagic/tagicRepositaries/tagicArticles/knowledgearticle/15-terms-you-must-know-before- buying-health-insurance- Need for Health Insurance Health insurance pays for future illnesses/medical treatments without depleting your savings or negatively impacting your family’s financial future. Medical costs are increasing rapidly and for those with insufficient savings, affording medical care becomes a problem during emergencies. Cashless treatment possible with network hospitals while reimbursements are given by insurance companies in other cases. Health insurance plans offer coverage for several types of ailments and surgeries along with other aspects of medical treatment. Health insurance keeps you and your family worry free; you only have to pay a small premium for the same. In many cases, you also get coverage for hospitalization costs, ambulance costs, consultations, medicines, tests and post-hospitalization expenditure. Kinds of health insurance plans Individual plans-These are basic health insurance plans, covering the hospitalization costs of the person insured. Family plans-These are health insurance plans where all family members can be included in a single coverage model. In this case, a fixed sum assured is provided for any family member who falls ill. Senior citizen plans-These are special insurance policies designed to meet the needs of senior citizens who are above 60 years of age. Critical illness insurance plans-These plans cover specific critical illnesses such as kidney ailments, heart attacks and so on. Cancer insurance and other plans included in this section as well. Personal accident insurance-These plans offer coverage for hospitalization in case of any motor accident. Kinds of health insurance plans Maternity plans- These policies offer coverage for pre and post natal medical care and delivery expenditure. They also offer coverage for the new-born for a certain duration along with ambulance costs. Unit-linked health insurance plans- These plans offer health insurance coverage while also helping build savings to meet those costs which do not have coverage under the policy. These are insurance-cum-investment plans that help you accumulate corpus. https://www.apollomunichinsurance.com/health-insurance-plans.aspx https://www.licindia.in/Products/Health-Plans/Plan-parameter https://www.licindia.in/Products/Health-Plans How Much Health Insurance Do You Need? https://www.tataaig.com/content/tagic/tagicRepositaries/tagicArticles/knowledgearticle/how-much-health-insurance-do-i- need health insurance cost Health insurance costs are a function of your age, coverage amount and health status. For instance, if your age is 20 years, the health insurance cost in form of premium will be lower than somebody is 50 years of age. For instance, a 20 year old buying ICICI Pru Heart & Cancer Health Insurance will pay a premium of ₹ 119 per month (including taxes) for a ₹ 20 lakh cover for 20 years. But a 50 year old for the same cover and duration will shell out ₹ 1652 per month (including taxes). Do note that the premium cost goes up if you are a smoker since they are prone to more health risks. A 20 year old male who smokes will pay ₹ 132 per month for ₹ 20 lakh cover for 20 years as premium, about 11% more than a non-smoker. Choosing a health insurance plan 1. Payout mechanism - Whether payout happens on diagnosis, or on actual hospitalization 2. Claim Process - Claim process should be simple, fast and efficient involving minimum discomfort to policyholder/family 3. Waiting Period - The best plans will have minimal waiting period before you can claim for a pre-existing cover 4. Adequate cover - With health costs on the rise, the best health plans will give maximum cover at an affordable cost 5. Pre/post hospitalization benefit - Some health plans have limits related for pre and post hospitalization expenses and so you must be aware of them before buying. https://www.policyx.com/health-insurance/ Mediclaim Policy https://www.policyx.com/health-insurance/articles/difference-between-health-insurance-mediclaim-policy/ Health Insurance vs Mediclaim Policy https://www.religarehealthinsurance.com/blog/health-insurance-articles/how-is-a-health-insurance-different-from-a- mediclaim-policy https://www.coverfox.com/health-insurance/mediclaim-policy/ https://www.moneycontrol.com/news/business/mediclaim-vs-health-insurance-which-is-better-pf8-5017181.html Why You Shouldn’t Rely Only On Corporate Health Insurance? https://www.etmoney.com/blog/corporate-health-insurance-should-you-rely-on-it/ Coronavirus Health Insurance Covers https://www.thehindu.com/brandhub/all-you-need-to-know-about-coronavirus-health-insurance- covers/article31629765.ece https://www.financialexpress.com/money/insurance/health-insurance-for-covid-19-all-your-important-queries- answered/1940703/ Government Sponsored Socially Oriented Insurance Schemes https://financialservices.gov.in/insurance-divisions/Government-Sponsored-Socially-Oriented-Insurance-Schemes https://www.turtlemint.com/health-insurance/articles/6-government-sponsored-health-insurance-schemes-which-you- should-know/ Summary Understand the importance of insurance. Life insurance needs and program. Coverage types and Coverage Provisions Health insurance coverage and provisions Purpose of long-term insurance care Property, Liability Insurance and Investment Basics Learning Objectives Buying and maintaining homeowner’s insurance Recover on a liability or a loss to your property Buying an automobile insurance policy 1 Learning Objectives- Investment Basics Set your goals and be ready to invest Interest rates and real rates of return Asset allocation Beating the market 2 Importance of Home Insurance Home means a world to us, it is the epitome of our desires and emotions. Many of us invest the savings of lifetime to get a home for ourselves. We need to make sure that it is safe... Home insurance covers the structure of house and the contents which include prized possessions against damage from natural calamities like floods, earthquake, storm and man made events like riots https://www.policyx.com/home-insurance/ Benefits and Features of Home Insurance Complete coverage for any damage to your home or it's contents from natural calamities and man made events Theft or burglary of property and valuables at the insured premises if the homeowner is away Valuable articles cover for silverware, jewelry and costly electronic gadgets, computers are covered Benefits like round the clock customer service, immediate access to the insurance experts and quick customer service. https://www.hdfcergo.com/home-insurance Home Insurance- Content Protection https://www.reliancegeneral.co.in/Insurance/Home-Insurance/House-Property-Insurance.aspx https://www.policybazaar.com/home-insurance/ https://www.financialexpress.com/money/insurance/home-insurance-check-out-best-home-insurance-plans-in-india-and- what-they-cover/1594444/ https://www.relakhs.com/top-best-home-insurance-plans-details-comparison-faqs/ - Car Insurance What is Motor Insurance? A car insurance policy protects the vehicle owner against the covered financial loss(es) due to damage/theft of the insured vehicle (as per the applicable terms and conditions). https://www.policyx.com/motor-insurance/car-insurance.php https://www.policybazaar.com/motor-insurance/car-insurance/articles/everything-you-need-to-know-about-motor- insurance-india/ https://www.godigit.com/motor-insurance/car-insurance/types-of-car-insurance-in-india https://www.policybazaar.com/motor-insurance/car-insurance/articles/best-motor-insurance-companies-in-india/ Claim settlement Process https://www.policybazaar.com/motor-insurance/general-info/articles/car-insurance-claim-process-guide/ https://www.acko.com/articles/car-insurance/claims/ https://economictimes.indiatimes.com/wealth/insure/dos-and-donts-while-filing-your-motor-insurance- claim/articleshow/65386833.cms https://www.relakhs.com/top-best-home-insurance-plans-details-comparison-faqs/ http://www.policyholder.gov.in/How_To_Make_a_Claim__Motor.aspx IRDA All claims Investing Investing – saving in a way that earns income Forms of Investing – savings accounts, CDs, money market accounts, stocks, government bonds Investing (cont.) There is no “right” way to invest – it must fit your personal financial situation Considerations: 1. age – How soon will you retire? 2. salary - What is the right amount to risk? 3. financial responsibilities - Do you have a family to support? Are you in debt? 4. risk tolerance – What is a comfortable risk level? 5. values – Do your investments reflect your values? Set your goals and be ready to invest https://www.indiainfoline.com/article/news-personal-finance/why-should-you-set-goals-before-investing- 117111700477_1.html Risk Risk – the chance that an investment will decrease in value All investments involve risk -Almost no risk for bank accounts and government bonds -High risk for investment in businesses Types of Risk- Systematic and Unsystematic Risk Interest rate and Investments https://finance.zacks.com/effect-interest-rates-investments-5809.html Return Return – the income you earn on an investment Rule of Thumb – the greater the risk, the greater the potential rate of return Diversification Diversification – investing in various businesses with different levels of risk Reduces the overall risk of loss -If one investment loses, the others could gain and your money still increases Diversify according to financial needs -Young – more years to earn – may want to be more risky -Older – saved enough to retire – may want to be less risky Sample Risk Tolerance Quiz Aggressive investors (20-28 pts) An aggressive investor is an investor who is willing to accept a higher degree of investment risk in exchange for a chance to earn a higher rate of return. Investment risk is the volatility of investment returns. A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return. Moderate investors (15-19 pts) An investor who is willing to accept some investment risk in exchange for a chance to earn a hig