1 Financial.Goals Afier studying this chapter, students will be able to understand: > The concept of financial goals, > The importance of financial goal, > Different types of financial goals, > How financial goals can be achieved, > When financial goals should be formed. 1.1 Introduction Most people want to handle their finances so that they get full satisfaction from each money spend. ‘Typical financial goals include such things asa new car, a larger home, advanced career training, extended travel, and self-sufficiency during working and retirement years. To achieve these and other goals, people heed to identify and set priorities. However, if you don’t set your financial goals, you'll probably be left Wondering where all your money went. In this chapter we will study about the financial goals, their needs, types and importance in our life. 1.2 Meaning of Financial Goa! financial Boal is a goal or aim that revolves around managing your finances or money. Financial goals largets, usually driven by specific future financial needs. It can involve saving, spending, earning ornce and Planning 4 || Personal to creating a budget, wy, i ls is . When ng target is easy. That means thar , 9 ou hav, cen iestig king toate al gol ‘we might set as, tat yy oath, picture ‘of what you is d time oriented. Some fin! iene indi; fe a coger en ae eal t to be—financialh ‘naging our fin, weg saving for @ —, Financial goals are where you want yin ‘on enable a home purchase. . a cure objectives you set for how youl] 20 years. Oreven nt al, big-picture objectives y° youl save ang i Fiance ous the rn the short term ot farther down the road Bens a ‘They can be things baat vfyo identify them in advance. nyt a ‘easier to reach your goals Exomples of Financial Goals Include: » Paying off debt. + Saving for retirement. + Building an emergency fund. + Buying a home. + Saving fora vacation. + Starting a business. + Feeling financially secure. 1.3 Need of Financial Goal : "Having nancial goals can help shape you future by influencing the actions you take today. For exampe ‘say your goal is to pay off a credit card bill. You might cut back on takeout dinners and use the money you save to make extra payments instead. Without establishing that goal, you're more likely to continue spending as usual while your debt piles up. Like all expenses, financial goals should be included in your budget. That way, you can take conce steps toward reaching them while leaving room for other costs, ‘dentifying goals and creating a realistic plan for them allows you to track progress and can moti You to keep going. Even ifyou fall shor, you might develop some healthy money habits along the 14 Types of Financial Goals future when you expect to have achi jecti ieved of i i tives, TET . sla aad ea completed certain financial objet ers, There several ypesof financial goal ger term financial goals and/or as deadlines for oth' » Short-term goals * Mid-term goals *+ Long-term goals(i) Short term Financial Goals Short-term financial goals are set each year and ial, regular contributi i 3° Cover a 12-month period, is a ae Savings or investments in order Ceca ae worth, © ut for the cach bud val targets that can be teached within a Year. Short-term goals be i Tee eval ale in DUdBeb a tool used to plan for short-term income and expenses Shonen arial cevings account sera shing an emergency fund wine nod expenses Short-term special savings ae Serves as a safety reserve in case of financial ‘emergencies such as a te I of income. This includes things like a New television, computer, or family vacation, as a temporary loss (i) Mid-term/Intermediate Financial Goals Intermediate goals bridge the gap between short. term goals should be consistent with those long- years to achieve. A little more expensive than an and hard work. Paying off a credit card balance, mid-term goals. months’ worth of income. This and long-term goals, and both intermediate and short- term goals. Typically, midterm goals take about 2 to 5 everyday goal, they are still achievable with discipline a loan or saving for a down payment on a car are all (iii) Long-term Financial Goals ‘This type of goal usually indicates want and desires for time period more than 5 years out to the next 30 years or 40 years to achieve, Although it’s difficult to Pinpoint exactly what you will want 20 years or 30 years from now, it’s useful to establish some tentative long-term financial goals. However, you should recognize that long-term goals will change over time and that you'll need to revise them accordingly. If the goals seem too ambitious, you'll want to make them more realistic. If they’re too conservative, you'll want to adjust them to a level that. encourages you to make financially responsible decisions rather than squander surplus funds. Some examples of long term goals are saving for a college education or a new home. Unless you attain your short-term goals, goals. Its tempting to let the desire to spend by making some short-term sacrifices now, tealize this for another 10 or 20 years then important financial goals. you probably won't achieve your intermediate or long-term. now take priority over the need to save for the future. But you're more likely to have a comfortable future. If you don't you may discover that it’s too late to reach some of your most Examples of Personal Goals ‘These are some of the example of personal goals classified them into short term, intermediate and long term, ‘Possible Goals Minimize your debt Pay off college loans _ | Short'Term_ Buy a house 1 2. 3. Build an emergency fund 4. 5. Make home improvements Contd...= Buyavecaon Rome Buy anew car Have children Finance children educati 10, Buy major luxury items 11,_ Buynew furniture oF appliances 12. Bnjoyan expensive vocation ‘Take time off from work 14, Start your own business 15. Retireearly 16 Livein style afer retirement ion 1.5 Develop Finacial Goal hort Developing financial goals chart isa good way to be follow in order to set up Your goal chart: 1. Write down one personal financial goal. It should be specific, measurable, action-oriented, > -orien realistic and it should have a timeline. 2, Decide if your goal is short-term, mid-term, 01 ¢ , mid-term, or long-term, imeli This may change at any time based on your uation, ae eae egin this process. Here are the five steps you should 0 3. Determine how much mont the month andlor year, ey you need to save to reach your goal and separate that amount b 4, Think ofall ways ° you can reach that goal. F é or finding additional resources, goal. Include saving, cutting expenses, earning extra mone} 5. Decide which is the b P e best combination of ways to reach your goal and write them down. Alf that might so a und daunting ie accomplishing bi ; eat tng Se ofthe easier aaa toset incremental goals. Prioritize, then achieve. After achieve the more dificult arpete thy confidence in your decision making. That provides argets that require more ti ti iscipli 1.6 Steps to Set Financial Goal — “Whee i you be financial may get answers like “| wi ly five years fj ae If you dont know a ail ony on! 10 years from now...? 20 years from now..2 Ye ie foe unig taker te Eloy to be financially better” Are these Boals in li i ctly, there i i Measurable, Achiewtl life, Therefore a ifone has oa ere is no focus. Though setting in These are the 5 inn Relist le framin, and clarity of thought, its rather 2 EDS be followed ta 8 the financial goals they need to be tS specif T. Financit | ‘ime bound Fi i Financi: to set the financial, ane Goals, That is S.M.A.R-T-Financial Goals || 7 1, Be Clear About the Objectives Any. goal (financial) without a clear objective is nothing more than a Pipe dream. And this couldn't be more true for financial matters. It is often said that savings is nothing but deferred consumption. Therefore if you are saving today, then you should be crystal clear about what it is for. It could be anything like kid’s education, retirement, marriage, that dream vacation, fancy car etc. Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives, however small they may be, that you foresee in the future and put a value to it. 2. Keep Them Realistic {tsgood to be an optimistic person but being a day dreamer is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going out of the line will definitely hurt your chances of achieving them. Its important that you keep your goals realistic in nature for it will help you stay the course and keep you motivated throughout the journey. 3, Account for Inflation You should account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future. For example, if one of your financial goal is your sor’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation. 4. Short Term vs Long Term Just like every calorie is not the same, the approach towards achieving every financial goal will not be the same. It is important to bifurcate goals in short term and long term. ‘Asa rule of thumb, any financial goal, which is due in next 3 years should be termed as short term 80al. Any longer duration goals are to be classified as long term goals. This bifurcation of goals into short term ys long term will help in choosing the right investment instrument to achieve them. 5, Financial Gools are Yours Not Inspired by Others ‘The journey of setting financial goals is an individualistic affair ie. your goals are your own goals and are ‘termined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only realize later on that it was not meant for us. Itis important that your goals are actually your goals and not inspired by someone else. Take a hard Took at this step at all the goals you've set for after this step, you will be on the way to achieve them. t8 || Personal Finance and Planning | | 1 | 17 Step to Achieve Financial Goals . eve financial goals today, even for the most financial} Te: i Tecan be very calenging ay vou very fr if you ae not carefl to avoid the pitfalls and disrent ‘iat oa easily derail your financial plan. If you are serious about achieving your financial goals more important than ever to take proactive measures in Pann yous mae It doesn't have toy complicated. In fact, it should be fairly straightforward if you apply some basic tactics, ] Here are five simple strategies to achieve financial goals: | 1. List down Financial Goals: Write down all your financial goal like buying a house, kid’s education, Vacation, planning for yoy, retirement and so on. You may wonder why this mechanical act of writing financial goals is so importany You can be thinking something without actually realizing what that something is. It is intangible ang 0 itis not clearly defined in your mind. ‘When you start putting that thought into words and you try expressing it, an amazing thing begins to happen. By creating it in words, that abstract thought now takes on body, shape, form, substance. is no longer just a thought. It becomes something which motivates you, or creates a gut feeling inside, Your dream becomes a goal the moment you write it down. Say one of your dreams is to buy a house, ‘You dream about it alot. But the moment you started writing it down, your mind will ask yourself “when, where, how many square feet, how many bedrooms?” This writing gives clarity to your goal and it forces your mind to find out the ways and means to achieve the goal. 2. Categories and Prioritize ‘When we finally take the time to seriously consider what we want to acc the mind un wild, and suddenly were swimming in financial goals Itcan be very inspiring and exciting to envision an ideal financial future, but there is a price attached to everything and, in FY cases not everything is attainable. This prioritization will help you in creating a better financial Sl nS if you arein deficit, you know which financial goal need to be compromised and which ae alike eal goals you want o achieve irrespective of the deficit. Goals need to be Prioritized as Ti a tna desirable and they need tobe categorized by time-frame ~ longterm, intermedces eee ea Available resources must fist be applied to essential short term goals, then exec ng i Tee tuort tera} so on. This categorization will help you in building a roadmap to achieve yo gr One term goals and ara Boals and also in selecting ‘omplish financially, it’s easy to let 3. Determine Your Costs If you don't know where your target is, you'll never it it. In financial planni knowing what Us will cost in the f , naing parlance that 1g what your goals will cost in the future. Goals such as retirement must be thorough leans to come up with realistic numbers that dont over or understate the cost: The easiest way te 1) '2lYzed determine the cost of the goal or event ift were to occur today and then factan teaee, tty of in for the time-frame. is is to NationFinancial Goals || 9 4, Calculate Your Savings While financial planning is not an exact science, it must be more than a hypothetical exercise. ‘The numbers have to be realistic in order to take them seriously. For each of your goals, especially your essential goals, you need to determine an amount of savings to which you can commit. The total savings commitment must be fit comfortably within your budget to the extent that, each month, it is the very first expenditure you make — automatically if possible. Saving calculators are available for free online which will enable you to calculate a present savings rate for a future goal with consideration for inflation and taxes. 5. Manage Your Finances Its time to start managing your personal finances as if you were running a business. Strict budgeting, attentive cash flow management, focused debt reduction and risk management are essential to maintaining control over your finances and minimizing the impact of any unforeseen circumstances that may arise. 6. Track Your Progress With financial goals, you can't just set them and forget it. It is important to establish short term benchmarks which will be your indicators to tell you if you are on track to achieving your goals. Once you get off track the gap can widen quickly and it’s much easier and less costly to make smaller, more frequent adjustments. It's also easier to stay motivated when you can see that you are meeting short term benchmarks. 1.8 Important Aspects to be Taken into Account in Goal Setting ‘he financial goals that one sets shall follow the “SMART” principles. Specific: The goal should be specific and not vague. For example, “I want to be a wealthy person” is not specific because we are not sure for how much amount of money one can be termed wealthy. Measurable: “What gets measured gets managed” - Peter Drucker. If we have no measurement, we will not be sure about the quantity. Hence, we have to quantify the goal in monetary terms, “I want to have %5 crores”. Achievable: It is said that the goal we set should be such that it is a little beyond reach but not that level to discourage. Hence, it should be challenging but within reach. Realistic: The goal that we set should be realistic. I want to have %100 crores in the next two years is not realistic, . Time-bound: While setting a goal, we should specify the time by when it shall be achieved. For example, if one says that I want to buy a three bedroom house costing @1 crore. This goal satisfies all other aspects of SMART goal except the time. If we add “in the next four years’, it becomes complete. y =ce and Planning 10 {| Personal Finan Austation of « SMART Goal Fn + Goal: I want to purchase @ Residentis b fT ae Specific: I plan to save for the down payment inl aad wired is €10 lakhs. Je: The down payment red! : peer Iplan to save every month %40,000 from my salary. : ae 1 an save this amount from my current salary of $90,000 p.m, + Realistic: Ic ‘Time-bound: I want to purchase this flat in the next two years from now, | + Time-l . | ‘Asample checklist for reference: 1. _ | Paying off debts: Pay off all debts (215 lakhs) in 6 year 2, _ | Buying Own House Save @2crore in 12 years, for a 3BHK home in Delhi, -year Emergency Fund Save %6 lakhs for Emergency Fund in 3 years, to use in aay on eaiaeeet there is NO income for 1 year. : meal 4, | Upgrading Car Exchange and replace the old car with a new one worth ti lakhs in 5 years. ' 5, _ | Financial Independence Attain financial independence in 18 years by investing witha| holistic financial plan. 6. _ | Children's Wedding Save %8 lakhs for children’s wedding expenses in 4 years, 7.___| Revamp House Save 72 lakhs to revamp house in 3 years. 8.__| Child’s Education Fund Save %30 lakhs for child’s higher education in 15 years. Summary In conclusion, it can be said that if finance is means for everything, financial goals is the end f everything. Without financial goals no individual can achieve whatever he or she wants to achive. So cone must start planning financial goals from a youn, yhould encourage their fener ire younger age, even parents shou! ig hildren: Be __ Review Questions : A 1. Define financial goals? Define th of finar e different types of financial goals. 2, What are the steps followed to set the individual goals? 3. How we can achieve our financial goals in life? 4. What are the reasons for seting up of financial goal? ' Concept of financial planning, > Steps in the financial planning process, > Building blocks of financial planning, > Importance of financial planning, > Principal of good financial planning. 2.1 Introduction You all have many financial goals in your mind. Like buying a car or the latest smart phone or wealth accumulation... You need to have an adequate amount of money to fulfil your goals and desires. Whether you have a lot of money or not enough, you still need personal financial planning. If you have enough money, planning can help you spend and invest it wisely. If your income seems inadequate, taking steps to plan your financial activities will lead to an improved lifestyle. More importantly, you need to have money at the right point in time. Everyone—including recent college graduates, single professionals, young married couples, single parents, mid-career married breadwinners, and senior corporate executives— needs to develop a personal financial plan. Knowing what you need to accomplish financially, and how You intend to do it, gives you an edge over someone who merely reacts to financial events as they unfold. For example, if you want to build up a corpus of €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.12 || Personal Finance and Planning ‘The financial planning not only just about increasing savings Ge lea the expenses, planning is a lot more than that. This includes achieving your | on goals. In this chapter pe discussing about the financial planning and the steps in the financial planning process, & 2.2 Financial Planning Financial Planning is the process of meeting your goals through the proper management of your f Or we can say an fone planning is the planning which deals with money. A financial pl = a guide as you go through lifes journey: Essentially, it helps you be in control of your income, expen and investments such that you can manage your money and achieve your.goals. You need to have adequate amount of money to fulfil your goals and desires. More importantly, you need to have nin at the right point in time. Financial planning normally restricts tothe financial aspect. Financial planning is done both by individuals for their own future life and business people to know about the funds required for ft period and the sources of funds available. Whether an individual is in college getting ready to grad at the peak of his or her career, or close to retirement, everyone needs to think about their financ: future. Everyone makes financial decisions every day. Few people consider how to make better decisio toachieve a higher level of personal economic satisfaction. Financial planning is a step-by-step appro to meet one’s life goals. 23 Personal Financial Planning (Wealth Management) Personal financial planning refers to the proper planning and implementation of well coordinated pls to achieve financial objectives. The savings and investment made today should match the future goals « Taking conscientious and systematic steps towards fulfilling ones financial goals. «The process of meeting life’s goals through proper management of finances. Life goals can incu buying a home, saving for child’s education or planning for retirement. «Personal finance involves much more than managing and investing money. Italso includes snake all the pieces of your financial life fit together; it means lifting yourself out of financial ili! Like planning a vacation, managing your personal finances means forming a plan for making best use of your limited time and money. For example, purchasing a new car immediately after graduation may be an important goal fort But buying car isa major expenditure involving a large initial cash outlay and additional consume that must be repaid over time. It therefore warrants careful planning, Moreover, some dealers 2 low-interest loans but charge higher prices for their cars. Knowing all your costs in advance fond the best dea. Using personal financial planning concepts toceachall your financial gos" similar positive benefits. lee ‘There are two ways you can deal with finance in your life: 1, Without Planning wherein at some point of time in. will decide how to-use that for your ee oftime in future, peo! you will have money andt i 4 ; | 2, With Planning, you decide wel in advance what are your goals and how you wanacier eae |_ Financial Planning || 13 Financial Planning: 'S YOU more clay decision. Ithelps you to provide the Tight balance beeen eet i Financial planning will answer three important + What are your financial goals? + Where you are today in relation + How will you get from where yo ind meaning to jour financial ‘Sen your present and future lifestyle, questions: to your goals? "are today to your goals? Today, time is with you. But will you be al th ife? Wi reste ee eal ob ough out your life? Will your le to live on t r our i these questions and then think for Financial Manning." AMEE afer you rete? Answer ble to Continue at the same t{ 24 Steps in the Financial Planning Process Hyoutakea closerlook at financial planning, you'll se that th i into specific financial plans, which then helps you impleme traces alates Personal financial goals i ‘ou implement those plans through financi, i The financial planning process involves the six steps : ae 1, Understand your current financial ° i situation: In this first step of the financial planning Process, you will determine your current financial situation with regard to income, savings, living expenses, and debts. Preparing a list of current asset and debt balances and amounts spent for various items gives you a foundation for financial planning activities. This is the first step in financial Planning, as it gives you a good sense on the state of your finances and ways to improve. » Write down your financial goals: Ask yourself: ‘What are the different financial goals I wish to achieve in life?” Write them on a piece of paper. Dont hesitate to put down any goal because no Boal is too small or too big. However, make sure that your goals are specific. For instance, here are some achievable goals: ‘I want to purchase an SUV worth 213 lakh in the next 18 months’ or ‘T want to buy an apartment worth %80 lakh in the next 5 years. Specific financial goals are Vital to financial planning. Others can suggest financial goals for you; however, you must decide Which goals to pursue. Your financial goals can range from spending all of your current income to developing an extensive savings and investment program for your future financial security. 3. Look at the different investment options: There are numerous investment options available to investors. You can invest in equity, debt, bond, mutual funds and derivatives. In the mutual fund market alone, you can choose from nearly 2,000 schemes. Different one venues help investors to achieve different goals. For example, equity funds ane ie ae Boals like retirement planning, child's education, etc. If you are interested in relatively st aay 7 ‘i to invest in debt mutual funds, Equity Lin a eee When it comes to investing, many financial Saving Scheme (ELSS fund) are good to save tax. pects Wise ease een experts have highlighted the importance of mutual fun S 7 io 1S over a longer period can help you achieve your sesams a ae ee ee au ie epeelpngetaes aber oe eee re ere Such as your goals, age, risk appet vail the services ofa financial advisor. These are you need to select for your portfolio, you can a xv *14 |] Personal Finance and Planning : jonals who help investors make the right investment choices, Th SE eee ike anes retirement planning, estate planning and taxation” aly hay 5, Monitor your financial plan regularly: The financial planning process does not end on, * invest your money. You also need to monitor how the funds are Performing regularly don't perform, you may need to replace them with better performing funds, You also need follow your plan because as you grow older, your goals and dreams evolve. For instance, | financial priorities may change after the birth ofa child. Now, you need to accommodsy) wl expenses and objectives of a new member in your family. 6, Re-evaluate and Revise Your Plan: Financial planiing is a dynamic process that does ng, | end when you take a particular action. You need to regularly assess your financial decisions | Changing persona), social, and economic factors may require more frequent assessments, Way life events affect your financial needs, this financial planning process will provide a Vehicle | fo sping to those changes. Regularly reviewing tis decision-making process will ep yy | make priority adjustments that will bring your financial goals and activities in line with your current life situation. - eA 2.5 Preparing a Financial Plan — Practical Considerations Each individual or family is different so will have their own financial plans. One cannot expect to have same financial plan as another even if two People are earning the same salary. This is because financial situations and risk taking ability are different. Suppose a Person already has to pay a housing loan instalment (EMI) and take care of other personal responsibilities, then his risk taking ability would be | ‘much lower than a person who does not have to repay a loan, | How exactly do you go about preparing a financial plan? + Assess your finances, Make alist of your bank accounts, shares etc, investments, fixed deposits, mutual funds, + What are your expenses per month? How mu your kids’ education, monthly kitchen expense sand 50 on, You willbe able to understand where you are with reg + Now the nest step would be to lst down your gol Jong term. Your short-term goals could be buying . the next 5 years. Your medium-term goals could be your nit elucation ts Presume in Setting up your own business. This could be planned for may be 9-1 buying a house, of You could plan for 20 years afer and think oftetrement, dering sf Fr longeterm gal ect to your income, expenses and savings. IS which could be sho : rt term, medium term or a car or Boing on a yz m term money aside for emergency, ‘ans and keeping some | . arameters which you have to consider ~ti Sil are three p y nme Money you can save and the - return. te of + Based on your goals and your risk taking ability, you can divers your money ita ‘Y AMoy i asset categories such as shares, bonds, fixed deposit and cash. "8 iereny En LaeFinancial Planning \| 15 2.6 Building Block of Financial Planning omprehensive statement or a map which not only list all the objective and goals charts a path as to how to achieve these goals. The first two blocks: contingency Janning is known as risk management. Also in a layman's term, it is the cial planning, Once this is in place, you are not worried as it takes care of all (contingency planning) as well as your insurance requirements (that is your health insurance, life insurance and other insurance). Once your risk is managed, you can then safely move on to the higher levels to plan for your goals. The next two levels are investment planning and retirement planning collectively known as goal planning. Let us start with the foundation and the first of the two levels in risk management. Financial Planning is a ¢ ofan individual but also planning and insurance p foundation of a good finan: your emergency situations / ESTATE PLANNING CONTINGENCY PLANNING (Source: The Economic Times) Figure 2.1: Building Block of Financial Planning (i) Contingency Planning See planning = 7 is the planning for your emergency funds. In case of any untoward events ee eee months of mandatory expenses in the form of emergency or contingency ee to next level. t has been emphasised time and again that @ Setingency Pan or an emergency plan has to be in place before starting to plan for other goals. Why? Etetbencies can come anytime or anyplace especially when we least expect it We cannot predict it or Prevent it but what we can do is buffer ourselves against it so that our life does not go for a toss dueTT 16 || Personal Finance and Planning | : i that you have play ing for a rainy day. So once eee ne move ahead to the next level of the financial a to the emergency: Itis basi or unpredicted eventualitie (i Plannin: / (i) mer foran oe amount of! insurane Ant it acon 2 : ; otend fale e eds to also plan for health insurance, disabl! ity ce d property nua E alone. One needs to t and everyone should try to incorporate them in their insurance yj; insurances are very importan ortant fact. Insurance is not ¢ ln | First and foremo: ry i 0 know one very imp i it is very important t know one very rst a eee is for risk management and invest iP and vice versa. Never try i the crux of your decision-making when buying j, i . Thi J onan ere re puynvurance just because someone advises you to buy. Try and understand the pl Pe relate it with your needs and requirements and only then £0 for it. So how much is uc adequate? number of components 0 into 24 Itis the pl the calculations in finding the adequate amount of insurance. (iii) Investments Planning smvestments of your hard eared money should aivays be done considering your goals and the tine| frame in which you want to achieve your goals. You need to start with writing down your goals and the time frame in which you would like to achieve them. This forms the base of your investments. To make the task simpler, you can break down your goals into three different sections: «Responsibilities: Providing for your Dependent Parents; Funding for your Children's Education and Marriage; Funding for Marriage of your Siblings, etc. - «Needs: Buying a House, Saving for Retirement, Buying Office Space and any Other Needs you ‘May Have. + Dreams: Finally, Your Dreams or Your Aspirations which can Range Anywhere from Buying Solitaire for Your Wife to Going on a World Tour to Buying a Sports Car. ‘The next step is the time frame in which you would like to achieve it. Let me explain the importance e this via an example. Let us say you want to save for a down payment for the dream car, which you are a lansing to buy after a year and a half. You start saving by investing regularly in equity mutual funds. = re jus news ies oe frame you have set for yourself, you decide to redeem the investment cae ashes. orget ¢ profit, your initial investments too has halved in value. Equities are goed imminent bt onl when ou have the tin frame of more than eight Year ‘Then you can bere your investments will earn on an average 13 per cent to 15 per cent return (iv) Retirement Planning Mostly people ; plnningisa veya mietanda tirement Planning is done if one has taken Pension Plan. Retiemet! Inflation etc. It is the bese ‘one has to evaluate factors like expected age, current life-style: standar® phase) & retirement period eens of Financial Planning as your working period (accumulatio! (distribution phase) are almost equal in current context. (v) Estate Planning - or Will Planning Estate Planning is still un in Indi common in India unfortunately. Despite increasing awareness 1 oti 8 igh the tip of do not give will 7 will planning even 2 minutes por y berg but again a very important part ste oee ns ‘unfortunate but true. AlthoutFinancial Planning || 17 47. Importance of Financial Planning ‘The importance your savings an of personal financial planning in India cannot be ignored. It is not just about increasing d reducing your expenses. Financial planning is a lot more than that. This includes Mpieving your future goals, such as: 1. » s a Increase your savings: It may be possible to save money without having a financial plan, But it may not be the most efficient way to go about it. When you create a financial plan, you get a good deal of insight into your income and expenses. You can track and cut down your costs consciously. This automatically increases your savings in the long run. Enjoy a better standard of living: Most people assume that they would have to sacrifice their standard of living if their monthly bills and EMI repayments are to be addressed. On the contrary, with a good financial plan, you would not need to compromise your lifestyle. It is possible to achieve your goals while living in relative comfort. Be prepared for emergencies: Creating an emergency fund is a critical aspect of financial planning. Here, you need to ensure that you have a fund that is equal to at least 6 months of your monthly salary. This way, you don't have to worry about procuring funds in case of a family emergency or a job loss. ‘The emergency fund can help you pay for varied expenses on time. Attain peace of mind: With adequate funds at hand, you can cover your monthly expenses, invest for your future goals and splurge a little for yourself and your family, without worry. Financial planning helps you manage your money efficiently and enjoy peace of mind. Don't worry if you have not yet reached this stage. If you are on the path of financial planning, the destination of financial peace is not very far away. Saving tax: Every year, you are probably paying a substantial amount as tax. But you can now lower your tax outgo legally. The Indian Income Tax Act provides various provisions for people to reduce their tax outgo. By planning your taxes in advance, you can identify the best avenues to invest your money and reduce your taxable income. Mutual funds provide a tax efficient avenue for investing for your life goals. . To tackle inflation: Remember the time you went to a multiplex with your family. You must have probably heard your grandparents say: ‘Everything was so cheap back then’ It’s true. ‘Twenty years ago, the cost of movie tickets was around 240, not %500 as it is today. Similarly, chocolates, coffee, clothes, petrol and other regular goods were much cheaper ‘back then’ This phenomenon of prices rising over the years is known as inflation. Itis the steady increase in the Price of goods and services over time. And if you are not careful, it can eat into your savings in no time. Here's a simple example to illustrate its effect. Imagine a chocolate bar costs £10 today and you have 7100. With this amount, you can buy 10 chocolate bars. Over the next one year, imagine you keep 7100 in a bank that offers you an annual interest rate of 5%. At the end of the year, you have 7105 with you. But over one year, let’s assume that the price of the chocolate bar increases to 11. This means you have to pay 110 to purchase the same 10 chocolate bars next year. But since you have only %105, you fall short of 85, This is how inflation eats into one’s savings. It reduces purchasing power over time, and18 || Personal Finance and Planning you have to pay more money to buy the same goods. You can combat inflation by investin ‘i avenues that offer you better returns over time. But for this, financial planning is critical. 7. To manage your money in the best possible manner: Satisfying the needs of your family members can be tricky..Your teenage son may want to go to a space camp during the summer personal finance, planning is vital. It not while your oldest child is ready to go to college. In only helps you understand the needs of different family members but also how you can achiew them, But for this, you need to manage your money in the best possible manner. For instance, parking your savings in a bank account is better than spending all of it. However this is not the best way to deploy your money. In comparison, avenues like mutual funds cout; provide better annual yields. So, when you identify your family’s needs and make your mone work actively to achieve them, you may expect to see good results. 2.8 Principles of Good Personal Financial Planning 1. Make Saving a Habit: The first principle is that we should make savings a habit. Savings shoul not be at random on months when the expenses are lesser than income. We know the sayin “Habits die hard”, Good habits are welcome and it should be practised. If savings become: habit, then it would help in building the long-term corpus and help in meeting the variou financial goals. Maintain a Personal Diary: It is always good to have record of events in the form of a diary. Iti suggested that we have two diaries, one to record the events at the office and the other to recor that of family/domestic life. Maintain a diary of due dates of various deposits and investment (month wise) and see it before the beginning of the month and take appropriate action. 3. Prepare a Budget: Budget helps in knowing in advance the income and expenses that are' be received in the ensuing period. This helps in planning the source of funds for months whe a deficit is anticipated or to reduce the discretionary expenses in the months where the defic might occur. 4, Have Separate Files for Various Important Items: We should maintain file for importa documents pertaining to family. A separate file should be kept for income tax, house propert bills and receipts of assets purchased, statement of account of Savings Accounts, demat accout statements, all guarantee/warranty cards of assets acquired etc. 5. Diversify Your Investments: Do not invest all your money in any one type of asset say ban deposits, shares and securities, real estate, gold, etc. It is good to have investment in all class assets so that the risk is spread. Remember the proverb“Do not put all eggs in onebasket’. 6. Enjoy ‘Present’: Yesterday is History, Tomorrow is a Mystery and Today is the ‘Present-Te much of tightening of expenses at the cost of health or enjoyment (moderate level) is not goo ‘After all, whatever we earn during our lifetime, we should also enjoy and only keep so” balance for our kith and kin. 7. Help Others When You Can: Doing charities (whatever little one can) is like individual's soci! responsibility. Lot of organizations have been celebrating a month in a year as ‘Joy of Givi Participate in them or do your own way like giving donations for studies of a poor studentFinancial Planning | 19 1, Define financial planning? What are the steps to be followed in financial planning process? 2, Explain why it is important to set realistically attainable financial goals. Select one of your personal financial goals and develop a brief financial plan for achieving it. 3. What are the importance of financial planning? 4, What are the principal of financial planning? Q003 Time Value of Money Learning Outcomes Bs After studying this chapter, students will be able to understand: > Know the definition and importance of the time value of money Know the formula for calculating present value and future value of money > Solve a life question using the formula mentioned above 3.1 Introduction ‘The time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. ‘This is true because money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future. (Also, with future money, there is the additional risk that the money may never actually be received, for one reason or another.) The time value of money concept helps in arriving at the comparable value of the different Points of time into equivalent values at particular points of time, present or future. ‘There are two ways by which the cash flows arising at different points of time can be made comparable: first by compounding the present money to a future date, and second by discounting the future money receipts to present date. In financial decision-making, interest on funds plays a very crucial role. The TVM concept explains as to why the interest is paid on money borrowed. ‘The time value of money can work for you or against you. For example, if you are deciding between buying a new phone for *50000, or invest in a stock for example that yields 10% per year. If you buy the Phone, you have just incurred an opportunity cost of 10%. In this chapter, we discussed about the time Value of money techniques and its application in our life.221 personal Financ and Pi ey Works 7 the time value of money. Assume that someone of 3.2 How the Time Value of Mon ig for them: They will ether pay you 1,999 ,5) 9 P, ab ty toshow cxamplecanbe sed ae doin simple : simp some wor? one oftwo ways for ‘one year from now. Wi I a 71,100 is 110 the money at the: Ee money by investing it over the next year, you should OPt to take than a 10% yet a ifyou dont think you could earn more than 9% in the next year by aon ete ore pope of 2100-35165 00 athe ey \e money, youthen. 33 Reason for Time Value of Money Suppose ofr you the choice of taking 1,00,000 from me today, or taking this same sum from mesfy ser tao i oo make? yo chose tke he sum today, you've made therigt eh “There are some reasons why taking up the fist option is better | 1. Inflation: Because of inflation, its safe to consider that an amount of money can get us mo, services and goods tan it can inthe future. You have chosen the fist option in the previog example because you understand that %1,00,000 can get you more things today than it will # you year later y 2. Risks Involved: What ifn the previous example, you chose to receive the money a year late on ke? It depends on what kind of investment retur; sav 5 of 00, then if you believe you gan é lake theta 3. ine onto ‘Th 7” YoU cay Meany eat but when you approach me then, I dort have any money to give to you? ‘This could also happen to you if you lend money to someone, but they go bankrupt before tht can repay you. This shows that there i a certain level of risk involved if you choose to get you money at a later date, 3. Preference for current consumption: In this example you choose the present consumptit to future consumption In general, people are always found to have preference for curl (q, consumption. The ind it more satsyng to use money for their present needs of buying oa) clothing, shelter, etc, rather than deferring them to the future. Asa result, you prefer money Itis hand rather than that to be received in future, = PA ise ) . pict viene you resve the money today, you will invest that mone) (8 ng, 7 Teceived tomorroy i it h return investment tat inthe format ia ft after a certain period of time) throug! | Wit er ith these four reasons, we can justify the existence of the concept of the time value of mon 3.4 Importance of Time Value of Money The time value of money (TVM) j | relation to time. Iisa ue Useful tool in helping you understand the worth of monéYye Time Value of Money || 23 ‘The time value of money is important because it allows investors to make a more informed decision it what to. do with their money. The TVM can help you understand which option may be best based interest inflation, risk and return. It can also be used to help you understand how much money to oa nan account if you have a certain goal in mind, such as saving %2,00,000 in five years if the account ro percent compound interest each year earns 45 Components of Time Value of Money seley components areas mentioned below: ok 1, Interest/Discount Rate (i) - Its the rate of discounting or compounding that we apply to an amount of money to calculate its present or future value. 2, Time Periods (n) ~ It refers to the whole number of time periods for which we want to calculate the present or future value of a sum. These time periods can be annually, semi-annually, quarterly, monthly, weekly etc, 3, Present value (PV) - The present value is known as the current value of a sum of money that we will receive in the future. The amount of money that we obtain by applying a discounting rate on the future value of any cash flow. 4, Future value (FV) - The future value is known as the future value of a sum of money that we invested today. The amount of money that we obtain by applying a compounding rate on the present value of any cash flow. 5. Installments/Annuity (PMT) - Installments represent payments to be paid periodically or received during each period. The value is positive when payments have been received and becomes negative when payments are made. 36 Techniques of Time Value of Money Compounding 'tisa process of computing the future value of an investment made today or series of investment made ‘ret a period of time. The process of investing money as well as reinvesting the interest earned thereon Scaled compounding, The future value or compounded value of an investment after n years when the ‘nletest rate is r percent is: FV, = PV(1+1)" Where, FV = Future value, PV = Present value, T= Interest rate, n= Time a= 2A || Personal Finance and Planning Time Value of Money || 25 is equation (I+1)"is called the future value interest factor or simply the We: eens value directly or we can use the compounded value factor ‘a ft tales Tisalclaton sei for investors and busineses who want to know the fie : ome Teoma potential investments to make a good investment ie ‘This forma requires only three things 1. What amount of money do 2. What's the assumed interest ate of 12% compounded interes for years What would be the Interest squarely, semi-annually and monthly? solution: as the interests semi-annually then min? | mato to pay using Magnetic Secure Transm While contactless payments can be more dificult to find, ‘Magnetic Secure Transmission payments, aera80 || Personal Finance and Plannin Bengal i Phoebe i mal ingul 20d more. Therefore making it easier acked by The Reserve Bank of India (RBI) and launched by The National Payments bably one of the best digital wallets in India based om UPL. BHIM the quest to make India a cashless economy. This digital wallet in that BHIM lets you send and receive money transact without disclosing your bank details. lows merchants to transact with customers by using fingerprint scanner which Aadhaar database. Also, you dont need to worry about security issues as your seconds of inactivity to minimize inappropriate and fraudulent use of your data also provides you a transaction history to make sure that you keep a check on your ugh the app. ‘ he app digi payment app. ny app you geal the enmoney transfers and dues through additional service of ae Ly di largest "ugh YONOs digtal wales ine nts and offers puts some of Indi largest range o een fe mobile phone, you get exc a make secure digit Mu invest and bank digitally, ou can alo book RTC ting igh inlay the ap ele ine t eceeamecen genet | sm 13, Ola Money 1c ofthe fastest-growing startups in India and in 2015 it launched i let They've 2 i iMate get ae | dee oPh way of transacting through digital wallets in| india. We can use this digital wallet to pay for i ne es Olam era made cashless teveinga dream come tue i mere ceries flight tickets, and much more. The Ola Money app lets you transact with your eyo Bn the Ola Money dia wallet tr oe S arious onlin merchant ing about Ola Money's digital wallets in India is that you can withdraw your Ola Money xccount. And the app also lets you avail offers with partner merchants like MyBusTickete. ‘Money looks to partner with more and more merchantsin the near future to ge you more ‘browse through the app. 28 onc anyone in your phone bok through set app fan secure and convenient carryout dig ae noney again and again in your PayZapp digital Digital wallet offers: «A aster payment process thanks to the non-requirement of specifying lengthy information. «+ Round:-the-clock banking services. «+ Rewards and discounts. sets store their mong, ingh and Upasana Tala, «+ An economical mode of conducting transactions the ordered commodities, especially with respect to e-commerce third-party purchases through Mobikwiks digital buy digital god 12. YONO SBI YONO bisa digital wallet in India that languages. Subsequently, YONG for non-SBI consumers. tis one of the best digital wallets in India thonke to ge oo Bank Of nda, With YONO SBI your convenience is met by making digtal py ‘The users can send money via the digital wallet of YONO SBI to other bank accounts, book lows you to store your broad term for software tat allows youto ore Fe ire shopping online ‘wallets can help you pay when you're: mM your phone atthe petrol pump. Digital wallet can be ac ssa mobile device.“A mobile wallet i type of digital wallet that accesible through 22277 on mg (eseally 3 pone). You can use 2 mobile wallet 0 ap to pay” when youre checking out osvenent alternative to paying with ash ve carrying around a bevy of physical cards, “iota ser boarding pases and concer tikes to mobile vellets can, 2. What are the diferent types of digital wallet? 4. List six online platform to use the digital wallet? 4 Are digital wallet sf forthe customer for online transactions? 5, Whatis the iference between digital walle and mobile wallet? Security and Precaution against Financial and Online Frauds Learning Outcomes ' After studyin + Know about ponzi scheme and precautions taken to avid the pont scheme > Understand the concept of phishing and its working. a ~ l! ill soon. Entire businesses, organizations and ‘cement helps people to enjoy the advantages Technology comes its vulnerabilities. Digital mney. There are risk involved in fetim to online financial fraud. years the incidence of online ‘eases of fraudulent usage of ie was reported in India. Despite sr to be the most widely reported frm of cybercrime contin potential isk involved in online banking along So, it becomes crucial for usersa 36 sna Fa es. However, with pro to protect these PE care rs ey ost wnt (oT aed, In this chap We BEE discus ial and ealine Ce “The sect ns against these frauds ang ‘with necessary meas ions the finance nd th erent pes ofan and discussed here. 8.2 Pondi Scheme heoperstor anindividualorano ee ees what aly area than from profit earned through lei, ‘romised on the original investment. The fraudsters roy eallapses wth ter ivestors receiving noth Ponzi schemes as well. The largest Ponzi schem® was run by Bernard Madoff, who was arrested « itis important to check the authority. son general public. Guaranteing high inves he nestnent shouldbe Kentified a5 red as, oot rae vomake sure that their assets are always held by alegitimate entity, nt coer ne deposed cre ney estore se tot money soe em meg Precutin to od the Poni Scheme Trop + youre considering ay typeof investment seck advice and do esearch before investing 1 poi fouders we vague technical argons to describe their non-existent investments, such as ah pd insert programme’ of obal currency arbitrage. Doi get dazzled or swayed, «Always aksinple questions bout the company ad the scheme. Be on high alert and, ‘to dodge questions, be more persistent. eer + Ask about the board of directors who are managing the scheme and ask to meet at least one of them, 3 Phishing ete hing hy ing in hewn of stn hen te wo (oh peter ranir Cad iy dt CVV numer ct hough ema and other mews st adn et i Me eine a Firs make unautored ais % How the Pisin is Done & Sonties piss i use | nc fo ca hale ahi 20 SS Shingo captare sch {Se fom cn hee pos fc orate Ne oe asking hem to ugeny vey or update thelr aout information aly Security a Ward Precaution against Financial and Online Frauds | 87 nce clicked, hebans oedthelink takes the individual toa fake website that appeatsto mt al guts, Howe at he nformatonentredthereieapedby the raster ot etal imag te asks do nt send any ema sing the India 0 so heir bank or card issuer tthe alien A gota ee uh ema OF SMS, they mus conse calls a Vctim and claims they area BSP employes (or felis on aale satorty) isan eme: ceman, of from a public authority) and that tere isan emergency (Putting psychological pressure onthe victim). By clakming that there is sk that a huge sum ofthe vctmis money may et om, the vic pets further cared Howto Protect Yourself from Phishing bank or creditcard web. ts extremely important to check UP on the URLS sand for secre which indicate Next, check the Padlock symbol at the upper right or bottom corner of your browser window. Existence of Padlock ensures a security certificate for that website. Dos «For logging in, itis always better to type the website address in your web browser address bar rather than clicking on any link. + Make sure you have updated the lates version of anti-virus, anti-spyware installed on your system with a firewall and other security patches. Donts «Do not click on any link received in your email which is appearing to be suspicious or from unknown sources, ted to a bank account or card details from authorities like the Income Tax + Do not send across any sensitive information espec through email or on phone, even if the the Department, RBI or any other governmes «+ Do not make an attempt to make financial transactions through access net banking or credit oF debit card from computers in public places including ey 8.4 Credit Card Cloning / Skimming Cloning can happen online 25 well sf ei ca espectly at ATMs oe ata merchant establish Cloning is tick used to install an ATM card reader extracts all the information with help of = ego information to clone card 1 be extra vigilant while using credit and ‘where the siping machine is used. Card Slot where itis swiped. The card reader attached tothe cards. A hacker transfers this