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PERSONAL FINANCIAL
PLANNING
Presented to Members of the Kambi Sacco
3rd August 2013
By Gordon Odhiambo
Big Point
“Financially unwell associates do not
make the best decisions for
themselves…or their employer.”
Passive
Anxious
Not
Engaged
Confused
Big Point
“Associates with money problems are
like sharks swimming around the
workplace taking bites out of the
bottom line.”
Economic Purpose of Life
A LITTLE ASSIGNMENT
– Quickly form yourselves into small
but few groups.
– I have just allocated your group
Kes 500,000
– I need a quick business plan and
budget for each group and tell
us where you see your group in
one year.
(5 minutes)
OBJECTIVES OF THIS PRESENTATION
– To highlight and help Kambi Sacco
Members to understand the need for and
benefits of personal financial management
(PFM) and investing wisely
– To introduce Kambi Sacco Members to
some available avenues to strategic
personal financial management and
investment tools.
– To bring out the various factors to take
into account when undertaking any
investment.
– To highlight good financial management
tips
Definitions
• Financial Planning: process of
managing your money to achieve
personal economic satisfaction.
• Financial Plan: formalized report
that summarizes your current
financial situation, analyzes your
financial needs, and recommends
future financial activities
More Definitions
• Personal finance: the process of planning
your spending, financing, and investing
so as to optimize your financial situation
• Personal financial plan: a plan that
specifies your financial goals and
describes the spending, financing, and
investing plans that are intended to
achieve those goals
• Opportunity cost: what you give up as a
result of a decision
Introduction
• Personal Financial resources include borrowed funds
e.g. loans, owner’s funds or both.
• Loan /borrowed money must usually have a cost
(loan interest).
• when loaning a member; the SACCO assumes that
the member has plans and can take full personal
controls of the loan resource given.
Financial Planning
Financial decisions form the basis of much of what we do in our lives. Poorly
thought out personal finance decisions can at best cause great anxiety and
at worst lead to bankruptcy, whereas well thought out, sound financial
decisions can lead to a prosperous lifestyle.
What if no financial planning…?
Example:
Michael Gerard Tyson
• Former American world heavyweight boxing champion.
• Youngest man to have won a boxing world heavyweight
title belt.
• Made US$30 million during his career.
• Declared bankrupt in 2003
Reason:
• Indiscriminate Spending
• No Financial Planning
What if sound financial planning?
Example:
Kapil Dev
captained India to their maiden and only Cricket World
Cup in 1983.
His businesses:
• 5% stake in Zicom Electronics
• Invested money in his own Kapil's Eleven restaurant
and Kaptain's Retreat Hotel.
• Established a company Dev Musco Lighting Pvt Ltd
Result… He is living comfortably even after retirement.
Components of financial planning
Financial planning
comprises
Insurance
Planning
• Insurance Planning
• Investment Planning
Investment
Planning
• Tax Planning
• Estate
Planning(Housing)
• Retirement Planning
Retirement
Planning
Financial
Planning
Tax
Planning
Estate
Planning
Why investment Planning
• Identify Goals that have financial implications –
Dream home, Children's education, marriage,
managing life post retirement
• Implement Budgeting and spending plans
• Optimization of Insurance Premiums
• Manage Debt Efficiently
• Identify Investment Asset Allocation to meet the
goals
• Distribute wealth according to one’s wish and
not according to law
What is investment planning ?
Once we have saved enough money for emergencies, how can we grow
our wealth?
Investment refers to a commitment of funds to one or more assets that will be
held over some future time period.
Why investment planning?
All of us work for money. It is equally important to ensure that money works
for us.
We invest to improve our future welfare. Funds to be invested come from
assets already owned, borrowed money, and savings or foregone
consumption.
By foregoing consumption today and investing the savings, we expect to
enhance our future consumption possibilities.
In investment planning asset allocation plays important role.
Asset allocation
• Its paramount for wealth creation
• There is no fixed rule for asset allocation
• But as the age goes up the risk assets
such as equity has to be lowered
• For instance if you are 40 you can restrict
your exposure to equity between 50-60
per cent.
• Asset allocation can be in the range of
50:20:20:10(equity,debt,real estate and
Jewellery) for a conservative investor.
• Fixing target and profit booking are the
two important key for wealth creation.
The Rewards of Sound Financial
Planning
• Maintain and improve standard of
living.
• Control spending in order to live
well today and tomorrow!
• Accumulate wealth.
Advantages of Financial Planning
•Increased effectiveness in obtaining,
using, and protecting financial
resources.
•Increased control of financial affairs.
•Improved personal relationships.
•A sense of freedom from financial
worries obtained by looking to the
future.
•Other? (e.g., reaching future goals)
Financial Planning Activities
• Obtaining- Get resources from employment, investments
• Planning- Plan spending and saving through budgeting process
• Saving- Money for emergencies and short-term goals
• Borrowing- Wise borrowing habits; not misusing credit
• Spending- Considering consequences; spending < earnings
• Managing Risk- Adequate insurance coverage for risks
• Investing- Select securities for income and LT growth
• Retirement and Estate Planning- Financial security in later life
Financial Planning Process
6. Monitor the plan
5. Implement the plan
4. Develop a plan
3. Analyze the information
2. Gather information
Elements of Practical Personal
Finance
A Personal Financial Epidemic?
• Why do most people live under so much financial
stress when their seem to be earning higher incomes
than ever?
• Do you know that each year, you earn more than you
did in the previous year?
• Financial insecurity is the result of the choices we
make rather than the income we earn.
• The principles that lead to financial security are
largely the same as the ones underlying a prosperous
economy.
Who Needs Money?
There is more to a good
life than making
money!!!
But the desire for more
wealth unseemly!!!
Our life objectives are
easier to achieve if
we have more
wealth.
Practical Element #1
Discover your
comparative
advantage.
Comparative Advantage
• We are all relatively more productive in some areas than
in others.
• Your comparative advantage is determined by your
comparative abilities, not your absolute abilities.
What’s Your Comparative Advantage?
• Even if you’re better at doing
everything, you shouldn’t.
• Specialize in what you are relatively the
best at…for which you give up the least.
• Allow others’ work to be to your
advantage.
• Self-sufficiency is for novels, not real
life!
Practical Element #2
Be entrepreneurial.
In a market economy, people get
ahead by helping others and
discovering better ways of doing
things.
Who are Entrepreneurs?
• Entrepreneurs are
people who are adept
at discovering better
ways of doing things
and acting on these
opportunities.
• Disproportionately
wealthy… did you know
that 2/3 of World
millionaires are
entrepreneurs?
Entrepreneurs’ Success:
1. Entrepreneurial talent: the ability to
discover innovative new products, costreducing production methods, and
profitable opportunities that have been
overlooked by others.
2. Tolerance for risk: Self-employment is
more risky, but greater risk and higher
returns go together.
Entrepreneurs’ Success (cont.)
3. High Savings Rates: Investing in their businesses
adds to entrepreneurs’ wealth.
4. Hard Work …Business owners tend to work
longer hours.
Practical Element #3
Spend less than you
earn.
Begin a regular savings
program now.
Why Save?
•
•
•
Saving is necessary to
accumulate the capital
needed to produce wealth.
This is just as true for
individuals as for nations.
The most effective way to
begin saving is by identifying
and eliminating some
discretionary spending.
Don’t Wait!!!
• If you don’t exert the willpower to save now, it is
unlikely that you will do so later.
• If you wait to save until your income goes up, it is
extremely costly in terms of the amount of money
you will end up with at retirement.
CommonSenseEconomics.com
Practical Element #4
Don’t finance anything
for
longer than its useful
life.
Financing Consumption
•
•
•
Why continue to pay for
something- a car, a vacation, a
television- that you are no
longer able to use and enjoy?
Purchase on credit only when
buying a long-lasting asset
with short-lasting financing.
Should you pay for your
holiday by credit card and
repay in 2 years?
When should you buy on credit?
What goods and services can you
pay for while you use them?
– homes
– automobiles (depending on
lifespan)
– education
Some assets even generate income
or further service even after you
finish paying for them…these can
enhance your net worth!!!
Practical Element #5
Avoid credit card debt.
Don’t Undermine Your Future!!!
•
The opportunity cost of saving for tomorrow is
spending (and enjoying!) today.
•
You CAN have more in the future while still enjoying
today…
“…ordinary people can have lots of nice
things and still accumulate a lot of money.”
Credit Card Convenience
• Paying with a credit card is NOT spending
your own money, but borrowing
someone else’s.
• Interest charged on credit cards outstrips
returns that could be earned on
investments!!!
• Think of your credit card as an extension
of your normal operating account…Use
your credit card only to access those
funds.
The Most Expensive Vacation
• Mwangi takes a holiday
to Bahamas for Kes
150,000.
• The credit card company
tells him that he only
• 10 YEARS LATER this
needs to pay minimum 2%
trip has cost Mwangi
of the balance each
Kes 271,610, and all
month(Kes 2,263.55 at 8%
he has left are faded
interest each month.).
photos.
• What a brilliant idea!!
Practical Element #6
Begin paying into your real
savings account every
month.
Rainy Days & the Real World
•
•
•
Life is full of surprises, and
they’re usually expensive!
The surprise is only in the
timing…So it is possible to plan
for these surprises!
Purchase “peace of mind” by
building a cushion…Make this
a regular and mandatory
expense!
Practical Element #7
Put the power of
compound interest
to work for you.
It’s a Miracle!!!
•
•
Getting a head start brings a
HUGE payoff.
Compounding occurs when
the interest you’ve already
earned earns even more
interest on itself.
Practical Element #8
Diversify- don’t put
all of your eggs in
one basket.
Risk vs. Return
•
–
–
–
–
There are many types of risk
that come with investing:
Market risk
Inflation risk
Financial risk
Fraud risk
•
There is no such thing as a
guaranteed return!
•
Diversification is the practice
of holding a large number of
unrelated assets.
The Law of Large Numbers
•
Mutual funds are one way of diversifying investments in
the stock market.
•
While diversification cannot reduce the volatility of the
stock market, it WILL reduce the volatility of your
investment in it.
•
When some firms do poorly, others do well.
•
Business cycles have differential effects on companies.
Practical Element #9
Indexed equity funds can
help you beat the experts
without taking excessive
risk.
The Random Walk Theory
• No one can predict the future of the
stock market.
• The random walk theory suggests
that current stock prices are the best
reflection of the market’s value.
• The future price of a stock is driven by
unforeseeable events.
• Since we can only see the present, it
is impossible to “beat the market”.
Practical Element #10
Invest in stocks for longrun objectives;
as the need for money
approaches, increase
the proportion of bonds.
What About Diversification?
• Merely an extension of the
diversification concept…
• Because the stock market is
volatile, you want to reduce
your risk when you know you
need a cash stash.
• Avoid selling off stocks when
the market is at a low point.
So Why Not Just Hold
Bonds?
• Bonds offer a lower return than
stocks, but with less risk.
• Inflation risk and interest rate
risk are larger problems with
bonds.
• Buy bonds that mature at the
time you anticipate needing the
cash.
• Transfer capital gradually from
stocks to bonds.
Practical Element #11
Beware of investment
schemes promising high
returns with little or no
risk.
(Pyramid Schemes)
There’s no such thing as a free lunch!!!
• If it’s such a good deal, why do they need
to sell it to you???
• The principal-agent problem makes you
vulnerable.
– A potential conflict exists between
the investor and the agent being paid
to do something for the
investor…Because the agent has
more information about the product
than you, you are at a disadvantage.
Tips for Avoiding Investment Fraud
1. If it looks too good to be true, it probably is.
2. Deal only with parties that have a reputation to
protect.
3. Never purchase an investment solicited by telephone
or email.
4. Do not allow yourself to be forced into a quick
decision.
5. Do not allow friendship to influence an investment
decision.
6. If high-pressure marketing is involved, grab your
checkbook and run!!!
•Developing Personal
Financial Goals
Develop Personal Financial Goals
• There are 3 different time frames for achieving financial goals
– Short-Term Goals- Achieved within next year
– Intermediate Goals- Achieved within next 2 to 5 years
– Long-Term Goals- Achieved > 5 years in the future
• There are 3 different financial needs goals
– Consumable-Product Goals (food, clothing, entertainment)
– Durable-Product Goals (“big ticket” items like appliances and
cars)
– Intangible-Product Goals (health, education, relationships,
service)
Goal setting guidelines suggests goals should...SMART
– Be realistic, be stated in specific, measurable terms, have a
time frame, and indicate the type of action to be taken.
Financial Planning Life
Cycle
SMART Financial Goals
Specific
Measurable
Attainable
Realistic
Time Bound
State exactly what is to be done with the
money involved
Write the exact shilling amount
Determine how it can be reached, which is
often determined by the individual’s budget
Do not set the goal for something unattainable
or unrealistic
Specifically state when the goal needs to be reached
What influences a person’s
financial plan?
Many factors
that can be
expected or
unexpected:
Values,
Goals, &
Personal
Choices
Life Cycle
Needs
Financial
Planning
Lifestyle
Conditions
Major
Life
Events
The choices you make
today impact your future!
Choices and goals made in the
present may have a significant
impact on your future financial plan
Values,
Goals, &
Personal
Choices
Financial
Planning
Life events that affect your
financial plan may be
unexpected
Major
Life
Events
What are examples of lifestyle conditions
that may affect a person’s financial
plan?
Marital
status
Age
Income
Number of
dependents
Education
Health
status
Employment
status
Economic
outlook
Values,
Goals, &
Personal
Choices
Financial
Planning
Lifestyle
Conditions
Major
Life
Events
Financial Life Cycle
Life cycle - a series of
stages through which an
individual passes during his
or her lifetime
Typical financial life
cycle pattern applies to
most people and affects
a financial plan
Values,
Goals, &
Personal
Choices
Life Cycle
Needs
Financial
Planning
Lifestyle
Conditions
Major
Life
Events
Typical Financial Life Cycle
Single * Marriage * Start and Raise Family
Approaching
Retirement
Years
Retirement Years
Stage 3: Wealth
Distribution
Kshs
Stage 2: Wealth
Accumulation
Stage 1: Basic Wealth
Protection
0
20
30
40
50
60
Years of Age
70
80
Financial Life Cycle Stages
Stage 1: Basic Wealth Protection
Focus on building financial security
Stage 3
Stage 2
Stage 1
Which stage of the
financial life cycle
are you in?
Stage 2: Wealth Accumulation
Head of household has reached peak
earning years, is accumulating wealth, and
approaching retirement
Stage 3: Wealth Distribution
The consumption of wealth, usually
during retirement
What types of financial planning would
occur during each stage of the financial
life cycle?
Stage 1: Basic Wealth Protection
(protecting your future)
Stage 3
Stage 2
Stage 1
•
•
•
•
Develop emergency savings
Develop positive credit
Begin investing in retirement
Purchase insurance
Stage 2: Wealth Accumulation
(giving it to yourself)
• Investing to build wealth
• Purchasing a home
Stage 3: Wealth Distribution
(giving it to your chosen ones)
• Estate planning
Typical Financial Life Cycle
Stage 3
Stage 2
Stage 1
What factors or events in
a person’s life could
cause the typical
financial life cycle to
change or vary?
Financial Life Cycle Events
Activity
People in certain age groups tend to
have similar financial life cycle needs
Adult
with or
without
children:
25-34
High
school:
13-17
Young
adult:
18-24
Retired:
65 and
older
Midlife:
45-54
Working
parent
or adult:
35-44
Preretireme
nt: 55-64
Determine what types of financial
planning may occur for each
age group.
Traditional Age Group Financial
Planning Needs
High
school:
13-17
– Developing a plan for eventual
independence
– Preparing for career
– Evaluating future financial needs and
resources
– Exploring financial systems – banks, etc.
– Developing a personal system of record
keeping
Traditional Age Group Financial
Planning Needs
Young
adult:
18-24
–
–
–
–
–
–
–
–
–
Establishing a household
Training for a career
Earning financial independence
Determining insurance needs
Establishing credit
Establishing savings
Creating a spending plan
Begin investing in retirement
Developing a personal financial identity
Traditional Age Group Financial
Planning Needs
Adult with
or without
children:
25-34
–
–
–
–
–
–
Child-bearing
Child-raising
Expanding career goals
Investing in retirement
Managing increased need for credit
Discussing and managing additional insurance
needs
– Creating a will
– Starting an education fund for children
Traditional Age Group Financial
Planning Needs
Working
parent
or adult:
35-44
– Upgrading career training
– Developing protection needs for head-ofhousehold
– Investing in retirement
– Establishing retirement goals
– Building on children’s education fund
– Need for greater income due to expanding
needs
Traditional Age Group Financial
Planning Needs
Midlife:
45-54
– Assisting with higher education for
children
– Investing in retirement
– Updating retirement goals and plans
– Developing estate plans
Traditional Age Group Financial
Planning Needs
–
–
–
–
–
–
–
–
Preretirement:
55-64
Consolidating assets
Re-evaluating property transfer
Investing in retirement
Evaluating expenses for retirement and current
housing
Planning future security
Investigating retirement part-time income or
volunteer work
Meeting responsibilities of ageing parents
Planning for long-term care insurance and medical
care in retirement
Traditional Age Group Financial
Planning Needs
Retired:
65 and
older
– Re-evaluating and adjusting living
conditions and spending as related to
health and income
– Adjusting insurance programs for increasing
risks
– Finalizing will or letter of last instructions
– Acquiring assistance in management of
personal and financial affairs
– Finalizing estate plans
True or False?
Everyone has the
same financial
plan
FALSE! Individualize your financial plan but
consider the typical life cycle needs for
every age group.
Assessing Personal and
Financial Opportunity Costs
of Financial Decisions
Assess Personal and Financial
Opportunity Costs of Financial Decisions
Opportunity cost is what you give up by
making a choice.
– The cost, referred to as the trade-off of a
decision, cannot always be measured in
money terms. Sometimes the cost is your
time.
– Consider lost opportunities that will result
from your decisions (health, knowledge,
abilities)
•Implement a Personal Plan
Implement a Personal Plan
1.
2.
3.
4.
5.
6.
Determine your current financial situation.
Develop your financial goals.
Identify alternative courses of action.
•
Continue the same course of action (e.g. same savings rate)
•
Expand the current situation (e.g., higher savings rate)
•
Change the current situation (e.g., switch to online bank or credit union)
•
Take a new course of action (e.g., pay off credit card debt instead of
saving)
Evaluate your alternatives.
•
Consequences of choices (e.g., opportunity costs)
•
Evaluating different types of risks (e.g., inflation risk)
•
Financial planning information sources (e.g., advisors, media, Web sites)
Create and implement your financial action plan.
Review and revise your plan.
Average Propensity to Consume:
Average Propensity to Consume:
The percentage of each shilling of
income that is spent, on average,
for current needs rather than saved.
 What is your average propensity to
consume?
Income spent on current needs
Total income
30% is good
•Taking conscientious and
systematic steps toward
fulfilling your financial goals.
What Personal Financial Planning
Process entails
Steps in the Financial Planning Process:
1. Define financial goals.
2. Develop financial plans and strategies to
achieve goals.
3. Implement financial plans and strategies.
4. Develop budgets to monitor and control
progress toward goals.
5. Evaluate results by using financial
statements.
6. Revise goals as situations change.
1. Define financial goals
2. Develop plans
1. Define financial goals
2. Develop plans
3. Implement plans
4. Develop budgets
FINANCIAL ACTIONS
•Basic asset decisions
•Credit decisions
•Insurance decisions
•Investment decisions
•Retirement and
estate decisions
1. Define financial goals
2. Develop plans
3. Implement plans
4. Develop budgets
Prepare financial statements
5. Evaluate results
6. Revise plans
FINANCIAL ACTIONS
•Basic asset decisions
•Credit decisions
•Insurance decisions
•Investment decisions
•Retirement and
estate decisions
To attain your financial goals:
• Be specific in defining goals and focus
on results.
• Make goals realistically attainable.
• Involve family members and enlist their
cooperation.
• Prioritize goals and set a definite time
frame.
Putting target dates
on financial goals:
• Short-term goals—to be
accomplished within the next year.
• Intermediate-term goals—to be
accomplished in the next 2-5 years.
• Long-term goals—to be
accomplished in time periods greater
than 5 years.
From Goals to Plans: A Lifetime of
Planning
• Early childhood
• High school and college
• Family formation
• Career development
• Pre-retirement
• Retirement
Benefit of planning:
• Your money works more efficiently
for you by...
• Utilizing the financial wonder—
The power of compounding
through time!
What Determines Your
Personal Income?
•Age, marital status
•Education
•Where you live
•Career choice
FINALLY
• PERSONALITY TRAIT IN
FINANCIAL MANAGEMENT
• WHO ARE YOU?
PERSONALITY TRAIT IN FM
• Personality traits refers to an individual enduring
characteristic and disposition that provide some
degree of variation from one person to another’s
mental and physical behavior.
• If this trait could be used to study the stability and
instability of an individual’s characteristic that
distinguish him from other, then it could also be used
to determine an individual financial trait,
management and financial behavior.
• It could be used to ascertain the extent of our
emotions and habit in financial management.(Allport
G. W and Eysenck’s )
TYPE B PERSONALITY-INTROVERT
• These set of people stand the chance of financial conflict
when they are faced with business or financial failure
• They are full with self pity and fear of failure that they hardly
undertake any business or financial venture.
• Their personality trait may not allow them to develop an
optimistic tendency of a bright future rather they would focus
on the past; they will possibly be engulfed with the burden of
the past regrets.
• They have the potential procrastination(because to them life
is all about being real and upright) as a result of trying to be
perfect and realistic,.
• One most deadly characteristic that has crippled this set of
people is in term of decision making relating financial goals
and objectives.
TYPE B PERSONALITY-INTROVERT
• They are the most creative, analytical and intelligent but their
tendency to see everything perfect subject them to fail to
believe in themselves not minding that we are not in a perfect
world.
• They want to see everything perfect yet they never see anything
perfect. They feel they have not measure up to the expected
standard. They feel they have not achieved it.
TYPE A- STABLE PERSONALITY
• characterized with a high sense of optimism,
solitary, lack empathy, sensitivity yet they are
the most optimistic, excitable, active and stable
creature to venture into business activities
without any atom of fear and doubt.
• They understand and define failure as an
academic field of study or wisdom and step
toward the right direction to the future.
TYPE A- STABLE PERSONALITY
• To them, this might be the last
opportunity, let’s use it and use it
properly. These sets of people are usually
good leaders but sometimes, can be very
narcissistic, lacking genuine concern and
feeling for others.
• Their traits help them to successful
manage their finances without fear and
regrets.
PERSONAL BUDGET TEMPLATE
• Personal Budget.xls
FINAL
ASSIGNEMENT!
THE END!