FIN2602
SUMMARY AND EXAM PREP NOTES
,Study unit 1: Personal financial planning
What is meant by financial independence?
Such independence does not mean that an individual must have accumulated great wealth over his or her
lifetime, but in fact means that the retired person will not be dependent on the state, family or friends
for survival. Such a person should also not have to continue working after retirement, but should be able
to survive financially by virtue of his or her investments made over a lifetime
Uncertainty is created by the following factors:
- Changing legislation
- The development of new financial products
- The influence of the media both as a marketing tool and an advisor
Personal financial planning consists of a number of different planning areas. Investment
planning is one of those areas
Financial independence does not necessarily suggest great wealth, but rather that the
individual has made optimum use of his or her income, irrespective of the level of that
income
Reason for the increasing complexity of Personal financial planning:
- Changing economic conditions
- The changing political climate
- Inflation
- The large number of financial institutions
- Advertisements in the media
- A multitude of financial instruments and products
- Conflicting financial advice
Household resources:
- assets,
- skills,
- trained persons,
- knowledge,
- money,
- equipment
- entrepreneurial spirit
The financial function of an enterprise comprises the flow of funds to and from the
enterprise. It consists of the acquisition of funds and the employment of funds in order to
achieve the primary objective of the enterprise: maximum prosperity for the owners of the
enterprise over the long term.
In a household, the financial function comprises the flow of funds to and from the household.
Funds have to be acquired and employed in order to achieve the primary objective of the
household: to attain financial independence after retirement
,Management
Planning, organising, leading and controlling
- Planning reduces risk and uncertainty and helps to avoid crisis management. It
involves goal setting and the development of plans to attain these goals. Consider
your financial strong and weak points, and the threats and opportunities in your
environment
- Organising involves the allocation of resources in order to execute the plans, the
clarification of authority and responsibility and the division of work between
household members
- Leading: the person who manages the households money must also take the lead in
financial matters
- Controlling involves a comparison between the goals and the actual performance
(results) of the individual or household. Concentrate on serious deviations only
“Personal financial planning is the organisation of an individual’s financial and personal data
for the purpose of developing a strategic plan to constructively manage income, assets and
liabilities to meet near and long-term goals and objectives”
“Personal financial planning involves the determination of immediate, short-, medium- and
long term goals by means of a personal financial planning process based on your own
identified lifestyle, phase of the lifecycle, risks and needs in all the various personal financial
planning areas in order to be able to retire with financial independence”
The phase of the human life cycle: youthful years (20- 30); family tears (40-50); pre-
retirements years
(50-60); retirement years (55+)
A prerequisite for planning and a budget is an efficient system of household records in which
all documentary evidence of income, expenses, agreements, guarantees, investments and
loans are kept
Your financial needs (risks) differ: they are constant; increasing, decreasing, fluctuating,
permanent, temporary or future
Risks: loss of income; loss of property; personal liability; business risks; estate duty; estate
administration costs; retirement; estate planning; too much debt accumulated in pursuit of
desires; inflation; income tax; constantly changing legislation; interest rate risk; market risk;
business risk; financial risk; exchange risk; national risk; health risk
To determine your financials goals- where you want to go, you first have to determine where
you are
Knowledge of family particulars; death and disability benefits; pension benefits; group
benefits; expected inheritances; and current and potential sources of income are required for
planning
, Immediate goals precede the setting and achievement of short- medium and long-term goals
External influences must be taken into account
Methods of meeting goals: reduction of spending, securing credit, risk avoidance, loss
prevention and control, different kinds of insurance, retirement annuities and other
investments
The personal financial planning process
The formal order would be to…..
- Determine the financial position of the individual/household
- Identify needs
- Determine short-, medium- and long-term goals.
- Identify limitations or threats
- Compare one’s present financial situation with the needs identified
- Analyse investment opportunities
- Develop a financial or investment plan
- Balance the budget
- Implement a personal financial plan
- Revise the plan periodically
3 activities that you need to do: analysing your present situation; setting financial objectives
and preparing a budget for the achievement of objectives
Gathering information and preparing personal financial statements
- Information needs to be gathered. Everybody should be able to determine their
present financial position since all further decisions or plans will be based upon these
aspects. The next step would be to prepare a personal income statement and a
balance sheet. A personal income statement indicates the financial activities that
took place over a specific period and includes income, expenditure and contribution
towards savings and/or investments. A personal balance sheet indicates your
welfare, which is reflected in the way in which assets are funded and not by the
number of assets owned. Equity capital is calculated by deducting TA(Total assets)-
TL(Total liabilities)
Identification of objectives and needs
- Evaluation and persons involved
- The formulation of objectives is a statement by a person of the prospects for his
financial future
- Immediate or short-term objectives are aspired to in the early stage of the life cycle
and must be very specific. Funds for such objectives are generated from current
income and/or savings or investment plans
- Medium term objectives usually occur during the working years and stretch over the
largest part of the life cycle. The achievement of objectives during this stage is a
prerequisite for achievement of objectives in the long term. Spending patterns could
be adjusted to provide for needs over the medium term
SUMMARY AND EXAM PREP NOTES
,Study unit 1: Personal financial planning
What is meant by financial independence?
Such independence does not mean that an individual must have accumulated great wealth over his or her
lifetime, but in fact means that the retired person will not be dependent on the state, family or friends
for survival. Such a person should also not have to continue working after retirement, but should be able
to survive financially by virtue of his or her investments made over a lifetime
Uncertainty is created by the following factors:
- Changing legislation
- The development of new financial products
- The influence of the media both as a marketing tool and an advisor
Personal financial planning consists of a number of different planning areas. Investment
planning is one of those areas
Financial independence does not necessarily suggest great wealth, but rather that the
individual has made optimum use of his or her income, irrespective of the level of that
income
Reason for the increasing complexity of Personal financial planning:
- Changing economic conditions
- The changing political climate
- Inflation
- The large number of financial institutions
- Advertisements in the media
- A multitude of financial instruments and products
- Conflicting financial advice
Household resources:
- assets,
- skills,
- trained persons,
- knowledge,
- money,
- equipment
- entrepreneurial spirit
The financial function of an enterprise comprises the flow of funds to and from the
enterprise. It consists of the acquisition of funds and the employment of funds in order to
achieve the primary objective of the enterprise: maximum prosperity for the owners of the
enterprise over the long term.
In a household, the financial function comprises the flow of funds to and from the household.
Funds have to be acquired and employed in order to achieve the primary objective of the
household: to attain financial independence after retirement
,Management
Planning, organising, leading and controlling
- Planning reduces risk and uncertainty and helps to avoid crisis management. It
involves goal setting and the development of plans to attain these goals. Consider
your financial strong and weak points, and the threats and opportunities in your
environment
- Organising involves the allocation of resources in order to execute the plans, the
clarification of authority and responsibility and the division of work between
household members
- Leading: the person who manages the households money must also take the lead in
financial matters
- Controlling involves a comparison between the goals and the actual performance
(results) of the individual or household. Concentrate on serious deviations only
“Personal financial planning is the organisation of an individual’s financial and personal data
for the purpose of developing a strategic plan to constructively manage income, assets and
liabilities to meet near and long-term goals and objectives”
“Personal financial planning involves the determination of immediate, short-, medium- and
long term goals by means of a personal financial planning process based on your own
identified lifestyle, phase of the lifecycle, risks and needs in all the various personal financial
planning areas in order to be able to retire with financial independence”
The phase of the human life cycle: youthful years (20- 30); family tears (40-50); pre-
retirements years
(50-60); retirement years (55+)
A prerequisite for planning and a budget is an efficient system of household records in which
all documentary evidence of income, expenses, agreements, guarantees, investments and
loans are kept
Your financial needs (risks) differ: they are constant; increasing, decreasing, fluctuating,
permanent, temporary or future
Risks: loss of income; loss of property; personal liability; business risks; estate duty; estate
administration costs; retirement; estate planning; too much debt accumulated in pursuit of
desires; inflation; income tax; constantly changing legislation; interest rate risk; market risk;
business risk; financial risk; exchange risk; national risk; health risk
To determine your financials goals- where you want to go, you first have to determine where
you are
Knowledge of family particulars; death and disability benefits; pension benefits; group
benefits; expected inheritances; and current and potential sources of income are required for
planning
, Immediate goals precede the setting and achievement of short- medium and long-term goals
External influences must be taken into account
Methods of meeting goals: reduction of spending, securing credit, risk avoidance, loss
prevention and control, different kinds of insurance, retirement annuities and other
investments
The personal financial planning process
The formal order would be to…..
- Determine the financial position of the individual/household
- Identify needs
- Determine short-, medium- and long-term goals.
- Identify limitations or threats
- Compare one’s present financial situation with the needs identified
- Analyse investment opportunities
- Develop a financial or investment plan
- Balance the budget
- Implement a personal financial plan
- Revise the plan periodically
3 activities that you need to do: analysing your present situation; setting financial objectives
and preparing a budget for the achievement of objectives
Gathering information and preparing personal financial statements
- Information needs to be gathered. Everybody should be able to determine their
present financial position since all further decisions or plans will be based upon these
aspects. The next step would be to prepare a personal income statement and a
balance sheet. A personal income statement indicates the financial activities that
took place over a specific period and includes income, expenditure and contribution
towards savings and/or investments. A personal balance sheet indicates your
welfare, which is reflected in the way in which assets are funded and not by the
number of assets owned. Equity capital is calculated by deducting TA(Total assets)-
TL(Total liabilities)
Identification of objectives and needs
- Evaluation and persons involved
- The formulation of objectives is a statement by a person of the prospects for his
financial future
- Immediate or short-term objectives are aspired to in the early stage of the life cycle
and must be very specific. Funds for such objectives are generated from current
income and/or savings or investment plans
- Medium term objectives usually occur during the working years and stretch over the
largest part of the life cycle. The achievement of objectives during this stage is a
prerequisite for achievement of objectives in the long term. Spending patterns could
be adjusted to provide for needs over the medium term
