Personal Financial Planning Flashcards
Personal financial planning process
Collect client’s information
Analyse information
lead to appropriate recommendations on debt reduction and financial management strategies
collection of client information
Personal financial statements
Cash flow
Debt levels
Assets and liabilities
Education and emergency fund provisions
Analysing information
Living within their means
Emergency fund adequate
Demands on cash flow
Importance of Personal Financial Planning
- Trends can be identified by gathering and recording client information year-on-year
- Allows financial planner and client to identify areas of excessive spending and to rectify situation
- Identifies cash available for new investments
- Enables effective debt management
- Client can determine whether they are on track to meet long-term financial goals and objectives
What is Budgeting?
- Reflects spending decisions made by an individual or household, usually on an annual basis.
- Allows client to identify areas of overspending
- Provides client with a sense of control and insight over their current financial affairs
Budget vs Cash flow statement
- A cash flow statement reflects the actual income received and expenses incurred by the client.
- A budget is an estimate of future income and expenditure by client
Benefits of budgeting
- Facilitates accurate and effective financial planning.
- Encourage involvement from all family members and identifies each individual’s personal objectives.
- Plan for current needs and make provision for future.
- Client more conscious of what is spent ,how it is spent and how it can be controlled.
- Identifies problems at early stage.
- Identifies available financial resources.
- Assists in identifying priorities and ranking expenses according to level of importance.
- Develops a sense of financial responsibility.
- Plays a role in educating children from a young age on how to handle money and financial responsibility.
Drawing up a budget
- Prepare a budget
- Calculate the estimated income from all source
- Calculate expenses
- Compare income and expenses
- Suggest a biannual review process
Emergency fund planning
You can have the best financial plan and budget and all it takes is one unforeseen event
Reasons for emergency fund planning
Loss of employment
Disability
Car accident
Theft
Unforeseen medical expenses
Legal costs
What every individual needs to have in place is an emergency fund.
3 – 6 times monthly expenses
Funds MUST be liquid
Invested in low risk investments
Alternatives to an emergency fund
Credit card – will have an influence on budget
Personal loan – also an influence on budget
Solvency Ratio
Relative to individuals stage in a life cycle
Liquidity ratio
Compares the amount of liquid assets (cash) with current debt
multiply ratio by 12 months
savings ratio
Level of savings as a percentage of total income
Depends on circumstances of individuals
Debt service ratio
used to indicate the effect of any debt management strategies
Debt commitments (taxes)
gross income (income besides salary)
Debt management consists of
Credit
Debt
Credit
The National Credit Act of 34 of 2005 defines credit as the “deferral of payment owed to a person, or a promise to defer such payment”.
Credit is the power to buy or borrow on trust.
Debit
Something that is owed” or a “state of obligation to pay something owed.”
Reasons why individuals go into debt.
Mismanagement of funds
Undisciplined buying habits
Poor advice
Excessive lifestyle
Retrenchment
Unexpected medical expenses.
Debt Management Strategies
- Determine the interest rates that are being charged on the credit, pay off the debt with the highest interest rate first
- If possible transfer most expensive debt to debt with a lower interest rate.
- Consolidate smaller loans into one larger loan.
- In certain cases liquidate investments.
- Sell non-essential assets and use the proceeds to pay off debts.
- If possible pay any additional amounts of money received into a mortgage bond.
- Communicate with creditors and keep them informed of the situation.
- In severe situations apply for a loan to repay original debt. This may allow for a longer period of time to repay debt.
- If all else fails declare insolvency!
Debt consolidation
Paying all your short-term/medium term debt by increasing your bond amount.
Advantage and disadvantage of debt consolidation
A: can improve the cash flow situation.
D: interest cost is generally higher
How to know if debt consolidation should be used
compare the monthly payments before and after and compare interest paid before and after
