Personal Financial Planning ebook

Personal Financial Planning
Foundation Course on
Insurance & Takaful Based
By Azmy Salih
BA (Cey), M.HRM (Colombo), AII (India), AITD (SL), MCPM (CPM),
Dip. Islamic Studies (Islamic Online University), Dip. Modern HRM, Dip. Translation Studies (CPA),
Certified HR Auditor, Certified NLP Practitioner, Certified Life Coach

Compiled By Azmy Salih 2

Normally, people always think it is not really
possible to fulfill all their goals or dreams without
having a High Salary or belonging to a rich family.
But it is not the truth. With the help of Financial
Planning you can achieve all your life goals or
dreams.
DO YOU WANT TO KNOW HOW?

There are only 3 major components in the Financial Planning process:
Current Resources (CR)
Investment Options (IO)
Financial Goals (FG)
The Financial Planner first makes a note of your financial goals
and its priorities. Then the planner analyses your current financial
situation, recommends the right plan with proper asset allocation,
monitoring it regularly, rebalance your portfolio from time to time
based on your changing life style and investment opportunities.
Let us first know - what is Financial Planning?
Financial Planning: CR + IO = FG
What does a Financial Planner do?

Ideal Foundation
Wealth Creation
Emergency & Debt
Planning
Protection/Risk Management
Foundation of
Planning
Investment
Debt Reduction
Emergency Fund
Insurance (protection)
Net worth, Cash Flow, Risk Tolerance
Goal
Insurance (Savings +
Protection)
Investment
Risky Foundation
The following process is important in
Financial Planning:
• Protection Planning ( Insurance )
• Emergency Cash Flow Planning
( Emergency Fund )
• Debt Reduction Planning ( Loan )
• Investment Planning
( Achieving Goal )
The Financial Pyramid

Steps for setting
Financial Goals:
1. Write your goals and be specific:
2. Identify your time-specific goals:
Short -Term Goals: The goals which you want to achieve within
1 year. For example: your child’s play school admission.
Medium–Term Goals: You want to achieve these goals within 5
years. For example: your child’s school admission.
Long–Term Goals: Goals that you want to achieve after 5 years. For example:
Retirement, Child’s Education and Marriage.
3. Priority
.
When you write your financial goals it will help you to visualize
them. It should be specific and realistic.
After listing your Financial Goals, it’s time to number them
according to your priority.

Personal Financial Planning4. Analysis of your Current Financial Situation
It will give you the full information of your income and expenditure.
Net Worth is an overall statement of your assets and liabilities.
Net Worth = Asset – Liabilities
Cash Flow Statement
Net Worth
Both the Cash Flow and Net worth Statements will give you a real picture of your present situation and help you make
realistic financial goals. Update it regularly. These two vital documents do not replace each other; but they are supportive
documents to each other.
In financial planning, budgeting plays a very vital and important part. Budgeting
will give you the exact picture of your expenses and spending habits. This will help
you to plan your expenses and spending habits more efficiently. If you do not know
where you are spending your money just keep a track on your spending habits on a
monthly basis. This sounds ridiculous, but believe us, this will definitely help you to
reduce your unnecessary spending.
Budgeting
Importance of Cash Flow Statement and Net Worth in Financial Planning
Proper usage of credit card:
It’s an unique tool for cash free purchase payment for interest-free grace period with
redemption points.

Time Value of Money

Time Value of Money (TVOM)
• What will Rs.500 placed in a savings
account earning 3% return be worth in 5 or
10 years?
5 years
Rs.579.64
10 Years
Rs.671.96

Why so much more?
• Because our return will earn return
Rs. today
x
(1+ Growth rate %)5
=
Rs. tomorrow

Okay: This can work backwards too
Think of a goal:
• Say I want to have Rs.1000 in five years and I
can earn 5%, how much do I have to put in
today?
Rs.783.53
How did we get this?
1000/(1.05)^5
(fv)/(1+%)(years)

Two Key Concepts
(Discounting)
Present
Value
(Compounding)
Future
Value
Increases in an amount of money as a
result of interest earned

Two Key Concepts
• Compounding
– When something earns interest the interest
then earns interest
– This increases the value exponentially
• Discounting
– The fact that the interest earned interest needs
to be factored into determining the past value
of an item
– Assume we know something is compounded
– Exponential function must also be considered

Three Types of Amounts
• Lump Sum
– One time payment
– Put something in, get something out
• Annuity
– Fixed, recurring payment
– Adding Rs regularly, receive regularly
– Payment is always same
• Series of Cash Flows
– Recurring, but not fixed

Timeline: FV/PV of Lump Sum
FV
N I/Yr
PV

How do we do this?
The relationship can be
shown algebraically:
FV(LS) = PV(1+r)n
PV (LS) = FV/(1+r)n
n=number of periods
r =Profit rate

Timeline: FV of Annuity
FV
N I/YR
PMT

Timeline: PV of Annuity
PMT
N I/Yr
PV

How do we do this?
• The relationship can be shown
algebraically:
n=number of periods
r = Profit rate
FV (Pmt) =PMT[(1+r)n-1]/r
PV (Pmt) =PMT[1-1/(1+r)n]/r

However, we can use a
financial calculator
• N= the number of periods
• I/Y = interest rate per year
• PV = present value or value in the
past (investment amount)
• Pmt=payment, recurring investment or
annuity amount
• FV=future value
www.zenwealth.com
TVM Calculator
I am going to use
the TI BA II +

Others to check out
www.ultimatecalculators.com
Compound Interest Calculator
www.investopedia.com
Calculator

Tips on TVOM Problems
• Draw a cash flow chart
• Break the problem into one of four types or
into variations of them
• Figure out what information you have
• Determine what you are solving for

Rule of 72
• Can be used to determine the length of
time it will take for an investment to
double
– Given the rate of return
– An approximation
• Formula
Years to double = 72 / interest rate

Rule of 69
• Can be used to determine the length of
time it will take for an investment to
double
– Given the rate of return
– An approximation
• Formula
Years to double = 0.35+69/r

Example
• If Sufyan can earn 6.5% annually, how long
would it take for his Rs.10,000 investment
to double?
Could do
10000 +/- PV
N= 11
6.5 I/Yr 20000 FV
OR
72/6.5 = 11

Ratios of financial stability
1. Basic Liquidity Ratio
Indicates the ability to cover monthly expenses in an emergency.
Eg. Job Loss
Cash & Near Cash/Monthly Expenses
Recommended Value – 3 - 6

2. Liquid Assets to Net Worth Ratio
Indicates the ability to cover emergency funding like
hospitalization.
Cash & Near Cash/Net Worth
Recommended Value – 15%

3. Savings Ratio
Indicates the ability to fund for future capital and retirement goals.
Savings/Gross Income (annual)
Recommended Value – 15% - 20%

4. Debt to Asset Ratio
Indicates the ability to meet the liabilities.
Total Liabilities/Total Assets
Recommended Value – 50% (Max)

5. Solvency Ratio
Indicates the ability to meet the liabilities and indicates whether
the person has borrowed excessively.
Total Net worth/Total Assets
Recommended Value – 50% (Min)

6. Debt Service Ratio
Indicates the ability to service debt repayments.
Total Annual Debt Repayment/Annual Take Home Income

7. Debt Service Ratio - 2
Indicates the ability to service lifestyle related debt repayments.
Total Annual Non Mortgage Debt Repayment/Annual Take Home
Income

8. Net Investment to Net Worth Ratio
Indicates how well investment assets have been accumulated for
retirement and other needs.
Total Invested Assets/Net Worth
Recommended Value – 50% (Min)

9. Net Worth Ratio
Starting point to set up a financial plan and help determine how
much insurance coverage is required to protect ones assets.
Total Assets-Total Liabilities
The Net Worth Thumb Rule = Age X Gross Annual Income/10

Retirement Planning – Case Study
Client : Mr.Mubarak
Age : 47
Requirement : 70% of the salary as pension
Expected Salary Growth : 5%
Current Monthly Salary : Rs.65,000/-
How much does he need as pension for a year at the age of 60?
How much he has to invest from now onwards?

Retirement Planning – Case Study Calculation
Future Value = Present Value (1+r)nX70%
Future Value = Present Value (1+r)nX70%
Future Value = (65,000X12)(1+0.05)13X0.7
Future Value = (65,000X12)(1+0.05)13X0.7
Future Value = (780,000)(1.05)13X0.7
Future Value = (780,000)X(1.885)X0.7
Future Value = 1,029,564.43 (Pension Per Annum)
What is the monthly pension ?
1,029,564.43 / 12 = 85,797.00
How much he has
to invest from
now onwards?

Insurance Needs Assessment – Human Life Value
Client : Mr.Faizer
Age : 40
Planning to retire at the age : 60
Expected Salary Growth : 5%
Earning Per Annum : Rs.2,000,000/-
Expected Return from Investment : 8%
Existing Life Cover : Rs. 500,000/-
How much additional Cover He Needs?

PV = C X {1 – (1+g)n }
( r – g ) { (1+r)n }
PV = 2,000,000 X {1 – (1+0.05)20 }
( 0.08 – 0.05 ) { (1+0.08)20 }
PV = 2,000,000 X {1 – (1.05)20 }
( 0.03 ) { (1.08)20 }
PV = 2,000,000 X {1 – (1.05)20 }
( 0.03 ) { (1.08)20 }

PV = 2,000,000 X {1 – (1.05)20 }
( 0.03 ) { (1.08)20 }
PV = 66,666,666 X {1 – (2.653)
(4.660)
PV = 66,666,666 X {1 – (2.653)
(4.660)
PV = 66,666,666 X {1 – (2.653)
(4.660)
PV = 28, 712, 446.06

PV = 28, 712, 446.06
Human Life Value = PV of All Future Net Income + Liabilities + Funeral Expenses –
Current Assets
Human Life Value = 28, 712, 446.06 – 500,000
28, 212, 446.06

Insurance Needs Assessment – Multiple Approach
Client : Mr.Cader
Age : 40
Planning to retire in : 20 years
Earning Per Annum : Rs.2,000,000/-
Expected Return from Investment : 8%
What is the amount of Life Cover he needs at present?

Insurance Needs Assessment – Multiple Approach
Life Insurance Required by him will be = 2,000,000 / 8%
= 2,000,000 / 0.08
= 25,000,000
If you invest = 25,000,000
For return rate of = 8%
Amount of return = 25,000,000 x 0.08
= 2,000,000

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