Module 1

Why study PERSONAL FINANCE BASICS & TIME VALUE OF MONEY?

• To be ready for:

• Uncertain economic times (ex. covid)

• PH Number in 1 every 200 filipino lost 25B from fraudulent investments

• Ability to make wise money decisions -> Current & Long-term Well-being

Personal Financial Planning (Personal Financial Management)

The process of managing money to achieve personal economic satisfaction, that allows to control financial situation

Personal Financial Plan Advantages

↑ Effectiveness in obtaining, using & protecting financial resources

Personal Financial Plan Advantages

↑ Control on financial affairs for economic security

Personal Financial Plan Advantages

Improved personal relationships

Personal Financial Plan Advantages

Sense of freedom from financial worries

Spend

For daily living expenses

For major expenditures

For recreational activities

Save

For long-term financial security

Share

To provide local and global assistance to those in need

1. Determine current financial situation

2. Develop your financial goals

3. Identify alternative courses of action

4. Evaluate alternatives

5. Create & Implement financial action plan

6. Review & Revise Plan

What is the Personal Financial Planning Process

Determine current financial situation and Develop your financial goals

Differentiate between your NEEDS and WANTS

Identify alternative courses of action

Continue Same Course of Action, Expand Current Situation, Change Current Situation, Take a New Course of Action, The last one is that you are not doing anything with your money

Continue Same Course of Action

Continuous saving e.g. 500 a week

Expand Current Situation

Expand your saving from 500 to 1k

Change Current Situation

Initially saving it in a BPI account then want to change it to BIPF to an investment account

Take a New Course of Action

Changing the strategy without changing the scope

Ex. from saving to paying off your credit card debt

Evaluate alternatives

Assess

• Risk

• Time value of money (opportunity cost)

Consider

• Life situation

• Personal values

• Economic factors

Opportunity Cost

what is given up by making a choice

Inflation Risk

rise/fall of prices causes changes in buying power

Interest Rate Risk

change in interest rates

Income Risk

risk of unemployment

Personal Risk

health risks, safety risks, or additional costs with purchases or financial decisions

Liquidity Risk

risk of difficulty of cash conversion/selling without significant loss in value

Create & Implement financial action plan

Print and Media, Digital Sources, Financial Experts, Financial Institutions

Review & Revise Plan

Regular Assessment of Financial Decisions

Priority Adjustments

Listing down what works and what not works

Short-term Goals, Intermediate Goals, Long-term Goals

What are the TIme Frames in Goal Setting

Short-term Goals

Within the next year

Intermediate Goals

1 to 5 years

Long-term Goals

More than 5 years

Specific, Measurable (include numbers), Action-oriented, Realistic, Time-based

what is SMART FINANCIAL GOALS

Life Situation, Personal Values, and Economic Factors

what are the Three Main Elements of Affecting Financial Planning Activities

Life Situation

Adult Life Cycle, Employment Situation, Martial Status, and Number and Age of Household Members

Personal Values

Values: ideas & principles that you consider correct, desirable & important

Economic Factors

Bangko Sentral ng Pilipinas (BSP) and Economic Indicators

Inflation

rise in general level of prices

Rule of 72

dividing 72 by the annual inflation (or interest rate ) to find out how fast prices (or savings) will double

Consumer Spending

↑ Consumer Spending → ↑ Financial Resources

↓ Consumer spending → ↓ Financial Resources

Interest Rates

the cost of money

↑ Money Supply →  ↓ Interest Rates

When money supply increases interest rates decrease because the consumers don’t have any interest in taking a loan because they already have the money.

↑ Money Demand → ↑ Interest Rates

Increase in money demand increases the interest rates because there is more money demand from the banks that the banks can raise their interest rates.

Financial Acquisitions

Automobile

Home

College education

Investments

Insurance coverage

Retirement fund

Personal Opportunity Costs

Time

Effort

Health

Financial Opportunity Costs

Interest

Liquidity

Safety

Time Value of Money (TVM)

the increases in an amount of money as a result of interest earned

Simple Interest

Amount in Savings x Annual interest rate x Time period = Interest

Future Value (FV)

Amount to which current savings will increase based on a certain interest rate & time period

Also referred to as compounding

*Annuity - series of equal deposits/payments

Present Value (PV)

Current value for a future amount based on a certain time period

Also referred to as discounting

PV(1 + i)ⁿ = FV

What is the formula for Future Value?

FV / (1 + i)n = PV

What is the formula for Present Value?

Obtaining
Planning
Saving
Borrowing
Spending
Managing Risk
Investing
Retirement & Estate Planning

What are the components of Personal Financial Planning

Obtaining

Planning

Part 1: Planning Your Personal Finances

Saving

Borrowing

Part 2: Managing Your Personal Finances

Spending

Part 3: Making Your Purchasing Decisions

Managing Risk

Part 4: Insuring Your Resources

Investing

Part 5: Investing Your Financial Resources

Retirement & Estate Planning

Part 6: Controlling Your FInancial Future

Financial Plan Development

A formalized report that summarizes current financial situation, analyzes financial needs, & recommends future financial activities

Should be flexible

Financial Plan Implementation

Well-conceived Spending Plan

Appropriate insurance protection

Be informed on tax & investment alternatives

Money Management Strategy

Filipinos with better knowledge of financial concepts & who budget/plan expenses

Money Management Strategy

↑ More likely to have money left over

Money Management Strategy

↓ Less likely to borrow beyond capacity & buy things they cannot afford

Money Management Strategy

Long-term FInancial Security - as a result of effective money management

Money Management Strategy

EFFECTIVE PLANNING ON SAVING & SPENDING → WISE MONEY MANAGEMENT & FINANCIAL PROSPERITY

Money Management

Day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security

Money Management Components

Storing and maintaining personal financial records and documents

Money Management Components

Creating personal financial statements (balance sheet and cash flow statements of income and outflows)

Money Management Components

Creating and implementing a plan for spending and saving (budgeting)

Home File

Used to keep records for current needs & documents with limited value

Safety Deposit Box

A private storage area at a financial institution with maximum security for valuables & difficult-to-replace documents

Personal Computer

Computerized versions of documents

To report current financial position in relation to the value of the items owned and the amounts owed

What is the main purpose of Personal Financial Statement

To measure progress toward financial goals

What is the main purpose of Personal Financial Statement

To maintain information about financial activities

What is the main purpose of Personal Financial Statement

To provide data which can be used when preparing tax forms or applying for credit

What is the main purpose of Personal Financial Statement

Balance Sheet (Net worth statement/ Statement of financial position)

Reports what you own and what you owe

Purpose: to determine current financial position

Assets - Liabilities = Equity

Formula for Balance Sheet

Assets

Cash and other tangible property with monetary value

Liquid Assets

Real Estate

Personal Possessions

Investment Assets

Liabilities

Amount owed to others now

Current Liabilities

Long-term Liabilities (i.e. mortgage)

Net Worth

Amount if all assets were sold for the listed values & all debts were paid in full

Insolvency: Liability > Assets

You can’t pay your debts given that the liability is greater than assets

↑ Savings

↓ Spending

Ways to Increase Net Worth

↑ Value of investments and other possessions

↓ Amounts owed

Ways to Increase Net Worth

Net worth

It is not money available for use but an indication of your financial position on a given date

Cash Flow

Actual inflow & outflow of cash during a given time period

Cash Flow Statement (Personal Income & Expenditure Statement)

A summary of cash receipts & payments for a given period such as a month/year

Cash Flow Statement (Personal Income & Expenditure Statement)

Provide data on income & spending patterns, that are helpful in preparing a budget

Total cash received during the time period - Cash outflows during the time period = Cash surplus or deficit

Formula for cashflow

Budget (Spending Plan)

Necessary for successful financial planning

Live within your income

What is the main purpose of Budget?

Spend your money wisely

What is the main purpose of Budget?

Reach your financial goals

What is the main purpose of Budget?

Prepare for financial emergencies

What is the main purpose of Budget?

Develop wise financial management habits

What is the main purpose of Budget?

Successful Budgeting

Well-planned, Realistic, Flexible & Clearly Communicated

Assess Current Situation, Plan Financial Direction, Implement Budget, Evaluating Your Budgeting Program

What are the four major phases of Budgeting

Assess Current Situation

In this preliminary phase, your main tasks are to:

• Measure your current financial position

• Determine your personal needs, values, and life situation

Plan Financial Direction

The actual budgeting activities occur in this phase with:

Step 1: Setting FInancial Goals

Step 2: Estimating income

Step 3: Budgeting an Emergency Fund and Savings

Step 4: Budgeting Fixed Expenses

Step 5: Budgeting Variable Expenses

Emergency Fund (EF)

Set aside money for unexpected expenses & future financial security (highly suggested to be worth 3 to 6 months of living expenses)
The higher this is the better

3-month EF

probably adequate for stable income & employment

6-month EF

maybe needed for erratic/seasonal income

Implement Budget

As you select and use your budgeting system, this phase involves:

Step 6: Recording Spending Amounts