BFINEL1X: Introduction to Personal Finance

Personal Finance

• A comprehensive evaluation of an individual’s(or household’s) current and future financial state to predict and manage future cash flows, expenditures, and asset values (BSP)

• The management of an individual’s financial activities and decisions aimed at achieving financial goals and achieving financial stability.

41%

How many percent of Filipinos have no savings at all according to Sprout Solutions’ 2024 Report

25%

How many percent of Filipinos feel confident about their financial situation according to Sprout Solutions’ 2024 Report

financial shocks

medical emergencies or job loss

Control over spending, Security from risk, Freedom from worry, Sustainable lifestyle, Freedom from debt, Realizing goals

why make a financial plan?

Budgeting, Saving, Investing, Managing debt, Planning for retirement

5 components of Personal Finance

Budgeting

creating detailed plan that outlines how to allocate income to cover essential expenses, discretionary spending, saving and investing.

Saving

setting aside a portion of income for future needs or emergencies

investing

using money to purchase assets that have the potential to grow in value over time, such as in stocks, bonds, mutual funds, real estate or even small business

Managing debt

tracking and responsibly repaying borrowed funds - credit card debt, student loans, personal loans and mortgages

Planning for retirement

saving and investing to ensure financial security after retirement-contributing to SSS, pension funds

Debt accumulation, Depleted savings, Financial stress and anxiety, Reduced quality of life, damaged relationships, impulse spending, ignoring small expenses, over-reliance on credit

control overspending to avoid: (8)

Debt accumulation

:Spending more than you earn is a fast way to accumulate debt, especially when using credit cards and financing that charge interest.

Depleted savings

Overspending depletes your savings, leaving you vulnerable to emergencies and preventing you from saving for future goals like retirement or big purchases.

Financial stress and anxiety

Worrying about money can cause stress, anxiety, and even sleep problems.

Reduced Quality of Life

Financial strain can make it difficult to afford necessities and can lead to isolation or the inability to participate in social activities.

Damaged relationships

Money problems can strain relationships with family and friends.

Impulse spending

Making unplanned purchases on a whim can quickly lead to overspending.

Ignoring small expenses

Small, frequent purchases are often overlooked but can add up to a substantial amount over time.

Over-reliance on credit

Using credit cards to finance purchases beyond your means is a major pitfall that leads to high interest payments.

know how to prepare a budget

To avoid overspending, you must ____?

Financial Literacy

Knowledge and skills to manage money effectively, including understanding concepts like:

• Financial concepts: budgeting, saving, investing, and borrowing

• Effective money management to make informed decisions about financial products and risks. It empowers individuals to set and achieve financial goals, such as buying a home, saving for retirement, or managing debt.

Smart investing decisions, planning for the future, avoiding pitfalls

financial literacy results to (3)

Excessive debt, Fraud, Poor investment choices

(3) Financial pitfalls that financial literacy prevents

Excessive debt

• Tracking and repaying debt responsibly-credit cards, student loans, personal loans, mortgage by making timely payment, minimizing interest costs and avoiding excessive borrowing

Fraud

• Phishing,

• Pyramid scheme

• Fake investments

Poor investment choices

• Financial losses

• Reduced earning potential for the future

• Cash flow problems

• Increased debt

• Emotional stress

Emergencies, Hospitalization, Business, Special Purchases, Building a Good Credit Score

Why do we borrow? (5)

Improved financial health, financial stability, financial independence, empowered decision making, Economic stability, Financial resilience, Education for the future generation, Influencing financial policies

Financial Literacy promotes (8)

Financial Goals

specific objectives related to growing money

short term

< than one year; aim is to build financial discipline and learn smart goal setting

medium term

between one to five years; requires planning and a strong commitment

long term

> than five years; involves large financial resources and strategic planning

1. Provide a structure for managing: – Income - Savings – Expenses - Investments

2. Learn how to prepare a budget

3. Develop a saving and investment strategy, aligned with a time frame and risk/return characteristics that suit your financial goals

4. Manage debt

5. Set milestones

6.Indicate frequency and time frame for regular review and adjustment

develop a plan: turn your goals into actionable steps

Debt inventory (comprehensive list), develop a debt repayment strategy

2 Managing Debt: Debt repayment strategy

Snowball method, Avalanche method

two common methods of debt repayment

Snowball method

• pay off smallest debts first

• Pay minimum amount for other debts

• When smallest debts are all paid, pay other debts

Avalanche method

• List debts according to interest rates (highest rate to lowest)

• Estimate the amount needed to make minimum payments for all debts, but set aside a bigger sum for the one with the highest rate of interest

• Move to the next highest and so on until all are paid

build an emergency fund

Typical size: 3 to 6 months of essential living expenses

Example: If your essential expenses amount toP20,000, your emergency fund may range fromP60,000 to P120,000*

investment strategy

- a plan that outlines how to allocate resources across different asset classes, such as:

• stocks

• bonds

• real estate

• mutual funds

growth focused strategy

70% stocks, 30% bonds

balanced focused strategy

50% stocks, 50% bonds

conservative focused strategy

30% stocks, 70% bonds

insurance

protect assets

health, auto, life

3 types of insurance

Estate planning

• Preparing legal documents and strategies to manage and distribute assets upon incapacity or death

• Includes, will, power of attorney , trusts