MPU 2322 Personal Financial Planning - Study Notes
Chapter 1: Introduction to Financial Planning
1.1 What is Financial Planning
• Financial planning involves asking questions about your future, your dreams, and goals.
• It is thinking about what you want to do in your life, such as getting married, buying a car or
a house, having children and planning for their education.
• In financial planning, you look at how you will be budgeting, saving, and spending your
money over time.
1.2 The 6 Steps in Financial Planning
Steps Details
1. Establish your financial goals What are your:
• Short term: less than a year
• Intermediate: from 1 to 3 years
• Long terms: more than 3 years
2. Consider your current financial position • How much do you have in savings?
• What is the value of investment?
• What is your net worth?
3. Identify and evaluate alternative plans • How can you obtain the necessary funds
to achieve your goals?
• Will you need to reduce your spending to
save money?
• Will you need to make investment that
generate higher rat if return?
4. Select and implement the best plan • What are the advantages and
disadvantages of each alternative plan
throughout your goals?
5. Evaluate your financial plan • Is the financial plan work properly?
6. Review your financial plan as needed • Habe your financial goal changes?
• Should you plan to revise the plan to
achieve your financial goal?
1.3 Benefits of Financial Planning
• Sense of freedom from financial worries, as we have planned for future and presume the
expense and achievable in persona goals
• More effective in obtaining, using, and protecting financial resources.
1.4 Simple interest vs Compound interest
Simple Interest Compound Interest
Interest earned on the initial investment Interest earned on the initial investment
(principal) (principal) AND interest earned on interest
, MPU 2322 Personal Financial Planning - Study Notes
Used in legal proceeding Used in most financial contracts
E.g.: $5000 invested n 3 years at 12% simple E.g.: $5000 invested in 3 years at 12%
interest compound interest
Year Interest Earned Cumulative Total Year Interest Earned Cumulative Total
Interest Earned Interest Earned
Earned Earned
1 5000x0.12=600 600 5600 1 5000x0.12=600 600 5600
2 5000x0.12=600 1200 6200 2 5600x0.12=672 1272 6272
3 5000x0.12=600 1800 6800 3 6272x0.12=752.74 2024.64 7024.64
*Only initial get interest * Initial and interest get interest
1.5 Time value of money/ Present discounted value Scenario
Suppose that $10,000 is deposit in 5% interest earning service accounts. Calculate the simple
interest, the compound interest, and the total balance respectively for 3 years.
Simple interest
Year Interest Earned Total Earned
1 $10,000 x 0.05 = 500 $10,000 + 500 = 10500
2 $10,000 x 0.05 = 500 $10,500 + 500 = 11000
3 $10,000 x 0.05 = 500 $11,000 + 500 = 11500
Compound interest
Year Interest Earned Total Earned
1 $10,000 x 0.05 = 500 $10,000 + 500 = 10500
2 $10,500x 0.05 = 525 $10,500 + 525 = 11025
3 $11,025x 0.05 = 551.25 $11,025x + 551.25 = 11576.25
Present Value vs Future Value
Year 0 Year 1 Year 2 Year 3
PV=$10000 FV=?
i=5%
PV: Present value
FV: Future value
Solution
i=interest rate
𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
n=compounding period
𝐹𝑉 = 10,000 (1 + 0.05)3
Formula:
• 𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
𝐹𝑉
• 𝑃𝑉 = (1+𝑖)𝑛
, MPU 2322 Personal Financial Planning - Study Notes
1.6 Other Compounding Period
Annually n x 1 (1 year in a year)
Semi annually n x 2 (2 six-months in a year)
Quarterly n x 4 (4 quarters in a year)
Monthly n x 12 (12 months in a year)
Weekly n x 52 (52 weeks in a year)
Daily n x 365 (365 days in a year)
1.7 Compounding Interest Advantage and Disadvantage
• Advantage: return on more in our investment, earn more interest
• Disadvantage: paying more interest
Chapter 1: Introduction to Financial Planning
1.1 What is Financial Planning
• Financial planning involves asking questions about your future, your dreams, and goals.
• It is thinking about what you want to do in your life, such as getting married, buying a car or
a house, having children and planning for their education.
• In financial planning, you look at how you will be budgeting, saving, and spending your
money over time.
1.2 The 6 Steps in Financial Planning
Steps Details
1. Establish your financial goals What are your:
• Short term: less than a year
• Intermediate: from 1 to 3 years
• Long terms: more than 3 years
2. Consider your current financial position • How much do you have in savings?
• What is the value of investment?
• What is your net worth?
3. Identify and evaluate alternative plans • How can you obtain the necessary funds
to achieve your goals?
• Will you need to reduce your spending to
save money?
• Will you need to make investment that
generate higher rat if return?
4. Select and implement the best plan • What are the advantages and
disadvantages of each alternative plan
throughout your goals?
5. Evaluate your financial plan • Is the financial plan work properly?
6. Review your financial plan as needed • Habe your financial goal changes?
• Should you plan to revise the plan to
achieve your financial goal?
1.3 Benefits of Financial Planning
• Sense of freedom from financial worries, as we have planned for future and presume the
expense and achievable in persona goals
• More effective in obtaining, using, and protecting financial resources.
1.4 Simple interest vs Compound interest
Simple Interest Compound Interest
Interest earned on the initial investment Interest earned on the initial investment
(principal) (principal) AND interest earned on interest
, MPU 2322 Personal Financial Planning - Study Notes
Used in legal proceeding Used in most financial contracts
E.g.: $5000 invested n 3 years at 12% simple E.g.: $5000 invested in 3 years at 12%
interest compound interest
Year Interest Earned Cumulative Total Year Interest Earned Cumulative Total
Interest Earned Interest Earned
Earned Earned
1 5000x0.12=600 600 5600 1 5000x0.12=600 600 5600
2 5000x0.12=600 1200 6200 2 5600x0.12=672 1272 6272
3 5000x0.12=600 1800 6800 3 6272x0.12=752.74 2024.64 7024.64
*Only initial get interest * Initial and interest get interest
1.5 Time value of money/ Present discounted value Scenario
Suppose that $10,000 is deposit in 5% interest earning service accounts. Calculate the simple
interest, the compound interest, and the total balance respectively for 3 years.
Simple interest
Year Interest Earned Total Earned
1 $10,000 x 0.05 = 500 $10,000 + 500 = 10500
2 $10,000 x 0.05 = 500 $10,500 + 500 = 11000
3 $10,000 x 0.05 = 500 $11,000 + 500 = 11500
Compound interest
Year Interest Earned Total Earned
1 $10,000 x 0.05 = 500 $10,000 + 500 = 10500
2 $10,500x 0.05 = 525 $10,500 + 525 = 11025
3 $11,025x 0.05 = 551.25 $11,025x + 551.25 = 11576.25
Present Value vs Future Value
Year 0 Year 1 Year 2 Year 3
PV=$10000 FV=?
i=5%
PV: Present value
FV: Future value
Solution
i=interest rate
𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
n=compounding period
𝐹𝑉 = 10,000 (1 + 0.05)3
Formula:
• 𝐹𝑉 = 𝑃𝑉(1 + 𝑖)𝑛
𝐹𝑉
• 𝑃𝑉 = (1+𝑖)𝑛
, MPU 2322 Personal Financial Planning - Study Notes
1.6 Other Compounding Period
Annually n x 1 (1 year in a year)
Semi annually n x 2 (2 six-months in a year)
Quarterly n x 4 (4 quarters in a year)
Monthly n x 12 (12 months in a year)
Weekly n x 52 (52 weeks in a year)
Daily n x 365 (365 days in a year)
1.7 Compounding Interest Advantage and Disadvantage
• Advantage: return on more in our investment, earn more interest
• Disadvantage: paying more interest
