Lecture 2-Financial Planning

Question 1

What is the definition of financial planning?

Answer 1

-The process of determining whether and
how an individual can meet life goals
through the proper management of
financial resources

Question 2

The importance of personal financial planning

Answer 2

• People with personal financial plan are more confident about their financial situation
• Plan provides context for financial decisions=Remind yourself of the bigger picture and life goals will keep you on track and stay disciplined
• Financial plan is an estimate for the future, assumption likely to be wrong
• Written plans measure progress even if some years are off course.-celebrating this will protect confidence

-Review of financial plan from time to time enables to
introduce necessary amendments for successful
achievement of financial goals.

Question 3

Confidence as a reason to plan

Answer 3

• To measure progress

- Stay on track

Question 4

Clarity as a reason to plan

Answer 4

• Written goals

- Action plan

Question 5

-Context as a reason to plan

Answer 5

• Financial planning policies

- Spending discipline

Question 6

Life stages and financial planning

Answer 6

-Life stages can also be influenced by cultural
norms, religion, gender, family circumstances
and personal preferences.

• No family means fewer demand on money compared with someone who does having implications on housing, lifestyle and education costs
• Working beyond retirement age more realistic financial goal than someone who wants to be financially stable by 55.

Financial plans need to be reviewed at transition from one life stage to another.

• A review will enable understanding the changes that need to be introduced

Question 7

Life stages in financial planning

Answer 7

• Stage one:Protection against risk
• Stage 2: Saving for future needs
• Stage 3: Achieve and maintain desired standard of living
• Fourth: Provide for desired retirement lifestyle
• 5:Estate planning

Question 8

What are the 3 principles of planning?

Answer 8

• How you see money
• Compound interest
• Inflation

Question 9

How you see money as a planning principle

Answer 9

• It is important to understand where the money comes from, i.e. labour, land, and capital
• Income as money for spending, you are unlikely to build meaningful wealth as you are spending whatever money flows in
• See money as assets which produce future cashflow, mindset different as you will see the importance of investing income into financial assets
• Budgeting is the key for financial freedom, choice and securities are based

Question 10

Compound interest as a principle of planning

Answer 10

-Compound interest is the addition of interest to
the principal sum of a loan or deposit.

• That additional interest earns more future
returns for the investor.

-Important to start saving as soon as you can, so you can have the longest holding period and therefore maximise the effect of compounding

Question 11

The rule of 72 for compounding

Answer 11

• 72/compound rate of return

- Is the number os years it will take to double the investment

Question 12

Inflation as a principle of planning

Answer 12

• The price of goods and services can stay the same, fall or rise from year to year.
• Prices most commonly rise over time=Mild positive inflation is measured by ongoing monitoring of the prices of a broad range of goods and services

Question 13

What is positive inflation?

Answer 13

• The amount of money in future buys less than it does today.
• If you had £100 this year to spend on good and prices doubled in the next year, you would only be able to buy half the goods. Thus reducing your purchasing power

Question 14

What is the nominal rate of return?

Answer 14

-the amount of money

generated by an investment before taking inflation into account.

Question 15

What is the real rate of return

Answer 15

• return generated from an
  investment after taking into account the impact of
  inflation.

Question 16

How to combat inflation in relation to assets?

Answer 16

• Need investments and savings which have a higher rate of return than the inflation rate.
• Thus, the real rate of return should be positive when you minus the nominal rate of return from the inflation rate.
• If this is a negative number then you buying power is reduced.

Question 17

15 ways to achieve your financial goals

Answer 17

• Watch your spending
• Pay yourself first
• Good debt not bad debt
• Tax is not everything
• The media not your friend
• Keep costs low and diversify
• Build a cash reserve
• Protect income
• Keep it simple
• If it looks too good
• Invest in yourself
• Join a pension plan
• Don’t rush to buy property
• repay debt
• Invest in equities and property.

Question 18

Watch your spending as a way to achieve financial goals

Answer 18

-It is important to save money, regardless of how much one earns. If you
spend all you earn, your wealth will never increase.

• Track where your money goes through banking apps
• Small but regular changes in expenditure can free up cash to be used in financial security

Question 19

-Pay yourself first as a way of achieving your financial goals

Answer 19

• Secure your financial future before making any spending. One must spend what is left after savings.
• Develop a habit of savings from small amount first.
• Gradually increase the amount later on.

Question 20

Good debt not bad debt as a way of achieving your financial goals

Answer 20

• Debts for student loans for education and mortgages for housing (brings in more than it costs) are effective debts
• Although interest will reduce ability to save and capital needs to be repaid.
• Borrowing on credit or payday loans must be avoided if using to finance consumption. Affect cashflow and affect ability to accumulate assets that generate cashflow

Question 21

Tax is not everything as a way of achieving your financial goals

Answer 21

-It is not possible to completely avoid taxes. However, there are some legitimate techniques for tax reduction that can be used.

Question 22

How media affects our financial goals?

Answer 22

• Negative or sensationalist ‘get rich quick’ ideas because they are newsworthy
• Such is misleading and are only publicised to make the newspapers more marketable, leading people to make poor financial decisions.

Question 23

Keep costs low and diversify as a way of achieving our financial goals

Answer 23

-Better to make low cost diverse investments, rather than making one or few expensive investments. This is due to costs being certain whereas returns are not.

Question 24

Building a cash reserve as a way of achieving our financial goals

Answer 24

-It is important to develop an emergency fund for dealing with contingencies
and commitments in life. It is ideal to develop a cash reserve covering 3 to 12
months’ monthly expenditure.

-Reserve for a house deposit or education

Question 25

Protect your income as a way of achieving your financial goals

Answer 25

-Human capital at start of life is the most important asset

-They may lose their
source of income due to accident/sickness or unemployment. It is important for them to buy an insurance providing some cover against the loss of income, if such an event takes place.

Question 26

Keep it simple as a way of achieving your financial goals

Answer 26

-Personal financial planning should be kept simple and easy to implement

Question 27

If it looks too good to be true as a way of achieving your financial goals

Answer 27

-Be wary of all those investment avenues that seem risk-free but give a very high return

Question 28

Invest in yourself as away of achieving your financial goals

Answer 28

-Continuous professional development is invaluable. Keep on enhancing your
skills continuously.

Question 29

Join pension plan as a way of achieving your financial goals

Answer 29

• It is important to have a financial provision for old age and retirement.
• One must start investing in a pension plan as soon as possible. To get the most out of your pension

Question 30

Dont rush to buy property as a way of achieving your financial goals

Answer 30

-Buying and selling property is expensive and includes many transaction
costs and tax payments. It is best to make a buying decision once you are
certain about your earning power and income/investment potential along
with your long term life plans.

-If have to sell when house prices decrease, then at risk of negative equity

Question 31

Repay debt as a way of achieving your financial goals

Answer 31

-Debt from formal financial institutions is costly and must be avoided
unless it is absolutely essential.

-Or if capable borrow interest free off family members

Question 32

Invest your long-term money in equities and property

Answer 32

-Long term investments can be made in a diverse portfolio of stocks,
shares and property.

Question 33

Components of a financial plan

Answer 33

• Understanding your financial goals
• Analysing your current situation
• Gap analysis§
• Devising financial planning policies
• Strategy and action plan

Question 34

Understanding your financial goals as a component of a financial plan

Answer 34

Need to be SMART goals: Specific, measurable, attainable, relevant and timely

It is imperative to understand your financial goals and objectives.
• Financial goals should be clearly defined, and prioritised.
• Goals – need to consider what the end goal one is aiming for
– Goals can change during life course

– Different people have different goals and goals change over life-course

– Goals can be short, medium or long term

-Prioritising:Working out what is most important and when
• i.e. Holiday or a car? –

Question 35

Analysis of current situation as a component in financial plan

Answer 35

-An assessment of your current financial
situation will indicate whether you can
achieve your financial goals or not.

• You can make an assessment about your
current situation by

– Analysing your current income and expenditure
(income statement)

– Analysing your assets and liabilities (balance
sheet)

Question 36

Gap analysis as a component in a financial plan

Answer 36

After ascertaining current financial position, it must be analysed if financial goals can be achieved by sticking
on the existing financial track.

• A financial plan thus needs to be developed for
achieving financial goals with existing financial
resources.

• Any shortfalls between what you need to achieve and
what you have should be identified.

• Any shortfalls should be appropriately addressed by
introducing necessary changes in the financial plan for achieving the desired goals

Question 37

Financial planning policy as a component of a financial plan.

Answer 37

A financial planning policy is a decision rule
that embodies client goals and values with
financial planning best practices.

beleif-goal-policy-action

Question 38

What is a policy?

Answer 38

-principle of action adopted or proposed by an organization or individual

Question 39

Strategy and action plan as a component of a financial plan

Answer 39

After having determined the financial goals, financial
position, gap analysis, and developing financial planning
policy, the next step is to formulate strategy and action plan.

• Financial strategy takes into account individual’s
expenditure, income, savings, emergency budget, liabilities,
insurance, taxation and estate planning.

• Individual must start working on that strategy as soon as it is devised.
• Financial strategy needs to be reviewed at regular intervals.

• Changes can be introduced in financial strategy if individual
fails to successfully implement it or if external
circumstances change.