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LIBF Unit 2 > 5. Financial Planning > Flashcards

5. Financial Planning Flashcards

1
Q

What is budgeting?

A
  • the process of planning monthly income + expenditure
  • putting a monthly budget together is called ‘cash flow analysis’ - looks at cash inflows + outflows and calculates the net balance at the end of the specified time period
  • drawing up a monthly budget allows someone to manage + keep control over their money + to achieve short term objectives
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2
Q

What is a cash flow forecast?

A
  • financing a large item of future expenditure or accumulating a fund for the future takes a long time unless someone comes into a lot of money unexpectedly
  • ## a cash flow forecast brings together the monthly figures into an annual statement + forecasts for several years can be combined to plan how a large item of expenditure is going to be financed
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3
Q

How does the short term affect the long term and vice versa?

A
  • the ability to achieve long term objectives is determined to some extent by what happens in the short term - e.g. control of expenditure in the short term to making savings for a house deposit
  • short term situations are also affected by the long term goals - e.g. someone who has already taken out a mortgage + has to make monthly payments will affect their monthly budget
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4
Q

Why do people plan in the medium term + long term?

A
  • life events-> people anticipate + plan for future events such as going to uni, buying a car or house, wedding, starting a family, cruise
  • retirement -> people hope to live long enough to retire + to enjoy comfort + leisure in their old age - they need to save in a pension fund or long term investments over a longer period of years in order to have a sufficient income when they stop work
  • death-> someone who doesn’t have a family may feel they don’t need to make plans for this event - however, someone with a spouse, children or other dependents need to consider how their death will affect others + make plans accordingly - dependants have an income after death, their debts are paid off, inheritance left to children or grandchildren
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5
Q

What factors affect the events a person plans for?

A
  • their family situation
  • their financial situation
  • their current lifestyle + expenditure - how this might change
  • their personality
  • their attitude to risk
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6
Q

Why should people plan for unexpected events?

A
  • if such event occurs, they will have the financial resources to deal with it
  • if nothing unforeseen happens, they will have avoided the stress of worrying about emergencies + will have extra cash to spare
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7
Q

What are positive unplanned events?

A
  • ones that bring in more money, such as winning money or being promoted to a higher position at work with a higher salary
  • might also be happy events that have a radical effect on a budget, such as getting married or having children
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8
Q

What are negative unplanned events?

A
  • ones that mean spending money, such as car breakdown
  • or ones that result in a loss of income, such as redundancy or illness
  • could also be life event such as divorce
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9
Q

How does having a financial plan help achieve aspirations?

A
  • having a plan to show how their chosen wants and aspirations can be achieved puts a certain amount of discipline into someone’s financial affairs, as they set themselves a goal which they then try to achieve
  • this is especially food for some who isn’t good at saving or lives spontaneously rather than planning for the future
  • however, because not all events are predictable - people need to build some flexibility into their medium term + long term plans to fulfil their aspirations
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10
Q

Features of an effective financial plan

A
  • realistic
  • clear
  • timely
  • flexible
  • documented
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11
Q

Possible forms of income in a monthly budget?

A
  • main salary (after deductions)
  • overtime hours
  • child benefit
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12
Q

Possible forms of expenditure in a monthly budget?

A
  • mortgage payments
  • groceries + household items
  • clothes + toiletries
  • petrol
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13
Q

Monitoring in a budget

A
  • in order to draw up a plan, a person must find out exactly what their monthly receipts + payments are
  • it is better to monitor the amounts coming in from various sources + the amounts going out on various mandatory, essential and discretionary expenditures than to wait until the end of the month to discover how much money is left in the bank account
  • monitoring allows people to know in advance what their balance is likely to be at the end of the period - whether it is likely to be a surplus or deficit
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14
Q

Saving/borrowing in planning

A
  • if the plan involves saving money each month + the balance is less than they had budgeted for, then person is not keeping up with their target + they need to find out why this happened
  • if the plan involves borrowing + repaying gradually, again a deficit is the problem - as the current income is not sufficient to allow the debt to be paid
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15
Q

What are the stages of planning?

A
  • decide on the aspirations you really want to achieve
  • establish realistic timescales
  • establish a starting position
  • establish priorities
  • document your plan
  • implement the plan
  • review progress
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16
Q

How to decide on realistic aspirations?

A
  • to achieve aspirations, a person must have a target
  • as well as the cultural + other factors that affect people’s aspirations, other more immediate factors may have an impact
  • e.g. someone might have health problems + this might lower their risk appetite + make their aspirations less ambitious, or in a period of unemployment a person might have a more cautious attitude
  • these external factors can change over time + affect what people hope to achieve
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17
Q

Establishing time scales for a financial plan

A
  • they also have different time scales for different goals which occur at different points of a life cycle
  • short term goal = paying off overdraft in three months time
  • medium term = saving up for a deposit to buy a house in 3 years
  • long term = retire to a warm country in 40 years
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18
Q

How are aspirations different for people?

A
  • people have different aspirations at different stages in their life cycle
  • e.g. young person aspires uni
  • middle aged to pay off mortgage
  • older person might aspire to leave money for their grandchildren
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19
Q

Why does a financial plan need to be realistic + clear?

A

if not enough time for saving a desired sum for paying off an outstanding debt, they will be frustrated if the realities of life force them to extent their timescale

20
Q

Establishing a starting position

A

A person needs to make an audit of their current resources:
- balance of their current account + any savings accounts
- current income + expenditure
- assets they currently own e.g. savings, property, cars, furniture
- liabilities they currently owe, e.g. an overdraft on their current account, outstanding balance on credit cards, any other unpaid loans
- net worth - difference between total assets + their total liabilities - could be positive or negative figure
- any current provisions for unforeseen circumstances - e.g. insurance policies, or for planned or certain events - e.g. retirement pension

21
Q

What is the most important factor in establishing a starting position?

A
  • income
  • people need to consider whether it is sufficient to support their lifestyle + also to save money or to repay loans
  • they need to know whether there is any scope for increasing it by having a pay rise or promotion or by finding a different job
  • in a time of high unemployment, jobs might be at risk + need emergency plans to cope with a loss of income
22
Q

What does MoneyHelper provide?

A

A step-by-step guide to ‘financial fitness’ - covering:
- managing a budget
- staying on top of bills + payments
- cutting costs
- building up savings

  • the tools + calculators section includes guidance to specific circumstances + events such as buying a car, taking out a credit card or loan, planning for a baby or saving for a pension
  • there is also a web chat feature
23
Q

Why should people establish priorities?

A
  • income is limited + so people can not achieve a long list of goods and services to purchase
  • therefore, items need to be set out in order of priority
24
Q

How should someone establish priorities?

A
  • narrowing down the list of goals + choosing one or two realistic ones to focus on - If there is more than one priority they should be set in order - allowing people to be clearer about their wider aspirations
  • consider opportunity cost - e.g. if someone is saving up for a deposit to buy their own home, they give up their social life in order to save - giving up opportunities to make friends + meet a life partner
  • not to cut out less important but smaller wants to motivate themselves - more likely to stay committed to the plan if they are able to enjoy short term pleasures along the way
  • considerations to security + protection - people should provide for a negative event but setting up a safety net + for those who depend on them
25
Q

What should people document in their plan?

A
  • their starting point + snapshot of their financial position - they can make six monthly or annually comparisons with this to check on their progress
  • the goals that they set, the timescales for their achievement + the order of priorities
  • the risks to the plan + the areas where flexibility has been built in
  • the actions they must take + changes they need to make in order to achieve their goal
26
Q

Implementing the plan

A
  • the way in which someone manages the monthly budget they have set themselves will affect their chances of achieving their medium-term or long-term plan
  • if they are saving towards a stated goal - expenditure must be limited to less than income to achieve a monthly surplus
  • if a person doesn’t achieve desired level of savings during one particular month because of unexpected expenditure, they might try to save more during the next month -> but catching up after a slippage in a savings plan can be very hard due to small adjustments accumulating the total savings needed
27
Q

What are the consequences of a slippage?

A
  • serious when the plan involves repaying a loan + a person doesn’t have the same degree of flexibility as saving
  • they will have set up a direct debt or standing order to pay the lender monthly repayment + they will be in trouble if they can’t meet this
28
Q

Consequences of missing loan repayments?

A
  • miss one or more payments means that person has to make double repayments later - will be very hard to do if they are already having difficulties in making a single payment
  • the interest owing will accumulate + make the debt bigger + more difficult to pay off
  • the lender may add penalty charges if repayments are not maintained as agreed
  • the borrower may get an adverse credit report with a credit reference agency + this will make it harder for them to borrow money in the future
29
Q

What should a person do if they have trouble repaying a loan?

A

Approach lender + discuss position

30
Q

Why should a person review their plan?

A
  • financial planning is an ongoing process - a person needs to review it regularly before because there may be changes in the wider financial environment that affect them
  • their wants + aspirations might also change + their priorities will change to reflect this
  • these changes might be positive or negative
  • making regular checks helps people see whether the goals they have set are likely to be achieved
31
Q

Why will a person use financial products to fulfil an aspiration?

A
  • planning for expenditure to fulfil an aspiration assumes that the money will not be coming out of a short term fund
  • it will involve saving, borrowing, insurance or a combination
32
Q

How are savings used to fulfil an aspiration?

A
  • involves putting away a certain amount of money each month for a particular length of time until the amount is achieved
  • the person needs to take into account that the price of the item might of risen by the time they can afford it - interest earned will contribute to some, if not all of the additional cost
  • it’s not a problem if it takes longer than expected to save the required amount but it does mean the goal is postponed
  • people can choose from a wide range of medium term + long term savings + investment products which allow them to choose the balance between risk and reward that best suits them
33
Q

How is borrowing used to fulfil a goal?

A
  • involves getting into debt to achieve the aspiration now but it means that a certain amount of future income has been earmarked to make the repayments
  • the plan must allow for meeting these repayments, which might mean giving up other expenditure
  • the total amount repaid will be greater than the cost of the item (due to interest + fees)
  • it is a serious problem if repayments aren’t met - getting into trouble with lender + possibly being refused credit in the future -> with a secured loan (mortgage or hire purchase) the property or good could be repossessed
34
Q

How is insurance used to fulfil an aspiration?

A
  • life assurance + pension funds are ways that many people save to achieve their long-term aspirations
  • a range of policies are also available to allow people to cover the risk of not being able to pay back their debt
35
Q

Different approaches by people to financial planning?

A
  • some like to draw up budgets + forecasts in lots of detail - involving complex calculations of income + expenditure —> if there income diverges off plan they become worried + do whatever is necessary to get budget back on track
  • others do no planning at all - they might check their bank account when the monthly statement arrives + hope for the best, they might save extra money or spend it
  • neither of these extremes are desirable —> flexibility is a desirable feature of a good budget instead of stressing about an exact budget, but equally a budget shouldn’t be left to chance
36
Q

Consequences for people who do not have a budget?

A
  • they are less likely to be able to achieve their wants + aspirations in any timescale but especially medium-term and long-term -> saving up for something expensive over a prolonged period requires patience + determination, it is motivation seeing a sum build up + being able to monitor progress - they can also take action if there is a slip
  • they are not in control of their finances + may not even be aware of how much they are spending each month - they could be running up a substantial credit card balance which they are not paying off, ignoring the debt building up
37
Q

Consequences of failing to repay borrowing products?

A
  • can cause problems in the future because of the ‘financial footprint’ - person’s financial reputation or creditworthiness
  • if someone gets a bad rep with a credit scoring agency for not paying back what they have borrowed, they can be refused credit in the future, perhaps at a point when they desperately need to borrow
38
Q

Impact of not having a financial plan in the future?

A
  • serious conquences when the person is old - if a person gets into debt when they are young, they still have time to restore their financial position - but once they stop working or retiring this is not an option
  • they depend on their pension - if they have not saved in a pension fund, they will have a state pension + other benefits they are entitled to so their standards of living will not be very high
  • they might be forced to continue working longer but this will depend on them being fit enough and on finding a job
39
Q

Why should a financial plan be realistic

A
  • the goal that someone sets should be realistic within the context of their income + expenditure
  • could be disappointing or financially damaging if a person tries to save up or borrow for something that is out of their range
40
Q

Why should a financial plan be clear?

A
  • need to be clear about how much it will cost
  • and an accurate idea about how long it will take to save up for it or how much it might cost to finance it with credit
41
Q

Why should a financial plan be timely?

A
  • timescales need to applied to a budget - the longer the timescale = more planning needs to be done
  • the earlier the better - as time passes there is less scope to turning a negative situation around
  • people have different aspirations at different times of life cycle
42
Q

Why should a financial plan be documented?

A
  • good idea to write down the financial plan so it becomes a fact of life
  • easier to keep to it than if it is a vague idea in someone’s mind
  • also easier to monitor progress
43
Q

Why should a financial plan be flexible?

A
  • can’t predict future exactly
  • plans can be affected by unexpected events or changes in priorities
  • financial plan should take such event into account + people should be able to make changes to the plan if necessary
44
Q

Problems with getting behind repayments

A
  • getting behind in saving or repaying debt for one or two months might not be a problem but needs to be addressed soon or it will become too big a problem to correct
  • this involves increasing income or expenditure over a few months in order to restore the savings balance or to make up for debt arrears
45
Q

What to do if you have a bigger surplus then expected?

A
  • if there is a bigger surplus than expected - not a problem but the person needs to check that it is correct
  • if no error, the money can be added to savings or spent on other discretionary expenditure

LIBF Unit 2 (10 decks)

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