Study unit 1: Personal financial planning
f f f f f
Whatfisfmeantfbyffinancialfindependence?
Suchfindependencefdoesfnotfmeanfthatfanfindividualfmustfhavefaccumulatedfgreatfwealthfoverfhisforfherflif
etime,fbutfinffactfmeansfthatfthefretiredfpersonfwillfnotfbefdependentfonfthefstate,ffamilyforffriendsfforfsurvi
val.fSuchfafpersonfshouldfalsofnotfhaveftofcontinuefworkingfafterfretirement,fbutfshouldfbefableftofsurviveffi
nanciallyfbyfvirtuefoffhisforfherfinvestmentsfmadefoverfaflifetime
Uncertaintyfisfcreatedfbyftheffollowingffactors:
- Changingflegislation
- Thefdevelopmentfoffnewffinancialfproducts
- Thefinfluencefoffthefmediafbothfasfafmarketingftoolfandfanfadvisor
Personalffinancialfplanningfconsistsfoffafnumberfoffdifferentfplanningfareas.fInvestmentfplanning
f isfonef offthosef areas
Financialfindependencefdoesfnotfnecessarilyfsuggestfgreatfwealth,fbutfratherfthatfthefindividualf
hasfmadefoptimumfusefoffhisforfherfincome,firrespectivefofftheflevelfoffthatfincome
ReasonfforfthefincreasingfcomplexityfoffPersonalffinancialfplanning:
- Changingfeconomicfconditions
- Thefchangingfpoliticalfclimate
- Inflation
- Theflargefnumberfofffinancialfinstitutions
- Advertisementsfinfthefmedia
- Afmultitudefofffinancialfinstrumentsfandfproducts
- Conflictingffinancialfadvice
Householdfresources:
- assets,f
- skills,f
- trainedfpersons,f
- knowledge,f
- money,f
- equipment
- entrepreneurialfspirit
Theffinancialffunctionfoffanfenterprisefcomprisesfthefflowfofffundsftofandffromfthefenterprise.fItfco
nsistsfoffthefacquisitionfofffundsfandfthefemploymentfofffundsfinforderftofachievefthefprimaryfobje
ctivefoffthefenterprise:fmaximumfprosperityfforfthefownersfoffthefenterprisefoverftheflongfterm.
Infafhousehold,ftheffinancialffunctionfcomprisesfthefflowfofffundsftofandffromfthefhousehold.fFund
sfhaveftofbefacquiredfandfemployedfinforderftofachievefthefprimaryfobjectivefoffthefhousehold:ftof
attainffinancialfindependencefafterfretirement
Management
,Planning,forganising,fleadingfandfcontrolling
- Planningfreducesfriskfandfuncertaintyfandfhelpsftofavoidfcrisisfmanagement.fItfinvolvesfg
oalfsettingfandfthefdevelopmentfoffplansftofattainfthesefgoals.fConsiderfyourffinancialfstro
ngfandfweakfpoints,fandfthefthreatsfandfopportunitiesfinfyourfenvironment
- Organisingfinvolvesfthefallocationfoffresourcesfinforderftofexecutefthefplans,fthefclarificati
onfoffauthorityfandfresponsibilityfandfthefdivisionfoffworkfbetweenfhouseholdfmembers
- Leading:fthefpersonfwhofmanagesfthefhouseholdsfmoneyfmustfalsoftakefthefleadfinffinan
cialfmatters
- Controllingfinvolvesfafcomparisonfbetweenfthefgoalsfandfthefactualfperformancef(results
)foffthefindividualforfhousehold.fConcentratefonfseriousfdeviationsfonly
“Personalffinancialfplanningfisftheforganisationfoffanfindividual’sffinancialfandfpersonalfdatafforfth
efpurposefoffdevelopingfafstrategicfplanftofconstructivelyfmanagefincome,fassetsfandfliabilitiesfto
fmeetf nearf andf long-termfgoalsf andfobjectives”
“Personalffinancialfplanningfinvolvesfthefdeterminationfoffimmediate,fshort-,fmedium-
f andflongftermfgoalsf byfmeansf offaf personalffinancialfplanningf processf basedfonf yourfownf identifi
edflifestyle,fphasefofftheflifecycle,frisksfandfneedsfinfallfthefvariousfpersonalffinancialfplanningfar
easfinforderftofbefableftofretirefwithffinancialfindependence”
Thefphasefoffthefhumanflifefcycle:fyouthfulfyearsf(20-f30);ffamilyftearsf(40-50);fpre-
retirementsfyears
(50-60);fretirementfyearsf(55+)
Afprerequisitefforfplanningfandfafbudgetfisfanfefficientfsystemfoffhouseholdfrecordsfinfwhichfallfdo
cumentaryfevidencefoffincome,fexpenses,fagreements,fguarantees,finvestmentsfandfloansfaref
kept
Yourffinancialfneedsf(risks)fdiffer:ftheyfarefconstant;fincreasing,fdecreasing,ffluctuating,fperman
ent,ftemporaryforffuture
Risks:flossfoffincome;flossfoffproperty;fpersonalfliability;fbusinessfrisks;festatefduty;festatefadmin
istrationfcosts;fretirement;festatefplanning;ftoofmuchfdebtfaccumulatedfinfpursuitfoffdesires;finflat
ion;fincomeftax;fconstantlyfchangingflegislation;finterestfratefrisk;fmarketfrisk;fbusinessfrisk;ffina
ncialfrisk;fexchangefrisk;fnationalfrisk;fhealthfrisk
Tofdeterminefyourffinancialsfgoals-
f wheref youf wantf tofgo,f youffirstf havef tofdeterminef wheref youf are
Knowledgefofffamilyfparticulars;fdeathfandfdisabilityfbenefits;fpensionfbenefits;fgroupfbenefits;fe
xpectedfinheritances;fandfcurrentfandfpotentialfsourcesfoffincomefarefrequiredfforfplanning
Immediatefgoalsfprecedefthefsettingfandfachievementfoffshort-fmediumfandflong-termfgoals
Externalfinfluencesfmustfbeftakenfintofaccount
,Methodsfoffmeetingfgoals:freductionfoffspending,fsecuringfcredit,friskfavoidance,flossfpreventio
nfandfcontrol,fdifferentfkindsfoffinsurance,fretirementfannuitiesfandfotherfinvestments
Thefpersonalffinancialfplanningfprocess
Thefformalforderfwouldfbefto…..
- Determineftheffinancialfpositionfoffthefindividual/household
- Identifyfneeds
- Determinefshort-,fmedium-fandflong-termfgoals.
- Identifyflimitationsforfthreats
- Comparefone’sfpresentffinancialfsituationfwithfthefneedsfidentified
- Analysefinvestmentfopportunities
- Developfaffinancialforfinvestmentfplan
- Balancefthefbudget
- Implementfafpersonalffinancialfplan
- Revisefthefplanfperiodically
3factivitiesfthatfyoufneedftofdo:fanalysingfyourfpresentfsituation;fsettingffinancialfobjectivesfandfp
reparingfafbudgetfforfthefachievementfoffobjectives
Gatheringfinformationfandfpreparingfpersonalffinancialfstatements
- Informationfneedsftofbefgathered.fEverybodyfshouldfbefableftofdetermineftheirfpresentffi
nancialfpositionfsincefallffurtherfdecisionsforfplansfwillfbefbasedfuponfthesefaspects.fThef
nextfstepfwouldfbeftofpreparefafpersonalfincomefstatementfandfafbalancefsheet.fAfperso
nalfincomefstatementfindicatesftheffinancialfactivitiesfthatftookfplacefoverfafspecificfperio
dfandfincludesfincome,fexpenditurefandfcontributionftowardsfsavingsfand/orfinvestment
s.fAfpersonalfbalancefsheetfindicatesfyourfwelfare,fwhichfisfreflectedfinfthefwayfinfwhichfa
ssetsfareffundedfandfnotfbyfthefnumberfoffassetsfowned.fEquityfcapitalfisfcalculatedfbyfd
eductingfTA(Totalfassets)-TL(Totalfliabilities)
Identificationfoffobjectivesfandfneeds
- Evaluationfandfpersonsfinvolved
- Thefformulationfoffobjectivesfisfafstatementfbyfafpersonfoffthefprospectsfforfhisffinancialff
uture
- Immediateforfshort-
termfobjectivesfarefaspiredftofinfthefearlyfstagefofftheflifefcyclefandfmustfbefveryfspecific.f
Fundsfforfsuchfobjectivesfarefgeneratedffromfcurrentfincomefand/orfsavingsforfinvestme
ntfplans
- Mediumftermfobjectivesfusuallyfoccurfduringfthefworkingfyearsfandfstretchfoverftheflarge
stfpartfofftheflifefcycle.fThefachievementfoffobjectivesfduringfthisfstagefisfafprerequisiteffor
f achievementf offobjectivesf inf thef longfterm.f Spendingf patternsfcouldf bef adjustedftof provid
efforfneedsfoverfthefmediumfterm
- Long-
termfobjectivesfprovidefthefgreatestfflexibilityfduringfplanning.fRetirementfplanningfisfusu
allyfthefmostfimportantfplanningfcomponentfofftheflastfstagefofftheflifefcycle
- Listingfoffpriorities:fafdistinctionfmustfbefmadefbetweenfurgentfandfimportantfneeds.fHigh
erfpriorityfmustfbefgivenftofimportantfneeds
, Comparisonfoffcurrentfsituationfwithfidentifiedfneeds
- Afcomparisonfbetweenfthefcurrentfsituationfandfallfidentifiedfneedsfindicatesfwhichfneed
sfhavefalreadyfbeenfprovidedffor,fandfwhichfneedsfstillfhaveftofbefprovidedffor.
Analysisfoffinvestmentfopportunities
- Itfisfessentialftofexaminefthefpurposefoffeachfinvestmentfalternative,fasfwellfasfthefadvant
agesfandfdisadvantagesfinvolvedfinfeach.
Developmentfofftheffinancialforfinvestmentfplan
- Afpersonfmustfdecidefwhichfinvestmentfwillfprovidefforfwhichfneed.
- Needsfarefexpressedfinftermsfoffthefrisksfinvolvedfinfthefoccurrencefoffcertainfevents
Balancingfthefbudget
- Afsurplusfoffdeficitfinfthefbudgetfindicatesfthatfthefplanningfprocessfrequiresffurtherfattent
ion
Implementationfoffthefplan
- Nofplanfcanfbefimplementedfifftherefarefnotfsufficientffunds!
Periodicfrevisionfoffthefplan
- Thefplanfshouldfbefrevisedfoncefafyear
Thefadvantagesfoffpersonalffinancialfplanning
- Financialfneedsfarefidentified
- Householdfrisksfarefidentified
- Reasonsfforfcashfflowfproblemsfarefidentified
- Therefisfbudgetingfregardingfexpensesfandfinvestmentftofreachfimmediate,fshort,fmediu
mfandflongftermfgoals
- Financialfcrisesfarefidentifiedfinftime
- Thefuncertaintyfregardingfretirementfplanningfisfremoved
- Provisionfisfmadefforfthefmaintenancefoffafparticularfstandardfofflivingfbeforefandfafterfret
irement
- Thefentirefhouseholdfisfinvolvedfandflearnsfmorefaboutffinancialfmatters
Personalffinancialfplanningfareas
- Careerfplanning
- Incomeftaxfplanning
- Estatefplanning
- Investmentfplanning
- Protectionfplanning
- Creditfplanning
- Productivityfplanning
- Healthcarefplanning
- Retirementfplanning
- Emigrationfplanning
f f f f f
Whatfisfmeantfbyffinancialfindependence?
Suchfindependencefdoesfnotfmeanfthatfanfindividualfmustfhavefaccumulatedfgreatfwealthfoverfhisforfherflif
etime,fbutfinffactfmeansfthatfthefretiredfpersonfwillfnotfbefdependentfonfthefstate,ffamilyforffriendsfforfsurvi
val.fSuchfafpersonfshouldfalsofnotfhaveftofcontinuefworkingfafterfretirement,fbutfshouldfbefableftofsurviveffi
nanciallyfbyfvirtuefoffhisforfherfinvestmentsfmadefoverfaflifetime
Uncertaintyfisfcreatedfbyftheffollowingffactors:
- Changingflegislation
- Thefdevelopmentfoffnewffinancialfproducts
- Thefinfluencefoffthefmediafbothfasfafmarketingftoolfandfanfadvisor
Personalffinancialfplanningfconsistsfoffafnumberfoffdifferentfplanningfareas.fInvestmentfplanning
f isfonef offthosef areas
Financialfindependencefdoesfnotfnecessarilyfsuggestfgreatfwealth,fbutfratherfthatfthefindividualf
hasfmadefoptimumfusefoffhisforfherfincome,firrespectivefofftheflevelfoffthatfincome
ReasonfforfthefincreasingfcomplexityfoffPersonalffinancialfplanning:
- Changingfeconomicfconditions
- Thefchangingfpoliticalfclimate
- Inflation
- Theflargefnumberfofffinancialfinstitutions
- Advertisementsfinfthefmedia
- Afmultitudefofffinancialfinstrumentsfandfproducts
- Conflictingffinancialfadvice
Householdfresources:
- assets,f
- skills,f
- trainedfpersons,f
- knowledge,f
- money,f
- equipment
- entrepreneurialfspirit
Theffinancialffunctionfoffanfenterprisefcomprisesfthefflowfofffundsftofandffromfthefenterprise.fItfco
nsistsfoffthefacquisitionfofffundsfandfthefemploymentfofffundsfinforderftofachievefthefprimaryfobje
ctivefoffthefenterprise:fmaximumfprosperityfforfthefownersfoffthefenterprisefoverftheflongfterm.
Infafhousehold,ftheffinancialffunctionfcomprisesfthefflowfofffundsftofandffromfthefhousehold.fFund
sfhaveftofbefacquiredfandfemployedfinforderftofachievefthefprimaryfobjectivefoffthefhousehold:ftof
attainffinancialfindependencefafterfretirement
Management
,Planning,forganising,fleadingfandfcontrolling
- Planningfreducesfriskfandfuncertaintyfandfhelpsftofavoidfcrisisfmanagement.fItfinvolvesfg
oalfsettingfandfthefdevelopmentfoffplansftofattainfthesefgoals.fConsiderfyourffinancialfstro
ngfandfweakfpoints,fandfthefthreatsfandfopportunitiesfinfyourfenvironment
- Organisingfinvolvesfthefallocationfoffresourcesfinforderftofexecutefthefplans,fthefclarificati
onfoffauthorityfandfresponsibilityfandfthefdivisionfoffworkfbetweenfhouseholdfmembers
- Leading:fthefpersonfwhofmanagesfthefhouseholdsfmoneyfmustfalsoftakefthefleadfinffinan
cialfmatters
- Controllingfinvolvesfafcomparisonfbetweenfthefgoalsfandfthefactualfperformancef(results
)foffthefindividualforfhousehold.fConcentratefonfseriousfdeviationsfonly
“Personalffinancialfplanningfisftheforganisationfoffanfindividual’sffinancialfandfpersonalfdatafforfth
efpurposefoffdevelopingfafstrategicfplanftofconstructivelyfmanagefincome,fassetsfandfliabilitiesfto
fmeetf nearf andf long-termfgoalsf andfobjectives”
“Personalffinancialfplanningfinvolvesfthefdeterminationfoffimmediate,fshort-,fmedium-
f andflongftermfgoalsf byfmeansf offaf personalffinancialfplanningf processf basedfonf yourfownf identifi
edflifestyle,fphasefofftheflifecycle,frisksfandfneedsfinfallfthefvariousfpersonalffinancialfplanningfar
easfinforderftofbefableftofretirefwithffinancialfindependence”
Thefphasefoffthefhumanflifefcycle:fyouthfulfyearsf(20-f30);ffamilyftearsf(40-50);fpre-
retirementsfyears
(50-60);fretirementfyearsf(55+)
Afprerequisitefforfplanningfandfafbudgetfisfanfefficientfsystemfoffhouseholdfrecordsfinfwhichfallfdo
cumentaryfevidencefoffincome,fexpenses,fagreements,fguarantees,finvestmentsfandfloansfaref
kept
Yourffinancialfneedsf(risks)fdiffer:ftheyfarefconstant;fincreasing,fdecreasing,ffluctuating,fperman
ent,ftemporaryforffuture
Risks:flossfoffincome;flossfoffproperty;fpersonalfliability;fbusinessfrisks;festatefduty;festatefadmin
istrationfcosts;fretirement;festatefplanning;ftoofmuchfdebtfaccumulatedfinfpursuitfoffdesires;finflat
ion;fincomeftax;fconstantlyfchangingflegislation;finterestfratefrisk;fmarketfrisk;fbusinessfrisk;ffina
ncialfrisk;fexchangefrisk;fnationalfrisk;fhealthfrisk
Tofdeterminefyourffinancialsfgoals-
f wheref youf wantf tofgo,f youffirstf havef tofdeterminef wheref youf are
Knowledgefofffamilyfparticulars;fdeathfandfdisabilityfbenefits;fpensionfbenefits;fgroupfbenefits;fe
xpectedfinheritances;fandfcurrentfandfpotentialfsourcesfoffincomefarefrequiredfforfplanning
Immediatefgoalsfprecedefthefsettingfandfachievementfoffshort-fmediumfandflong-termfgoals
Externalfinfluencesfmustfbeftakenfintofaccount
,Methodsfoffmeetingfgoals:freductionfoffspending,fsecuringfcredit,friskfavoidance,flossfpreventio
nfandfcontrol,fdifferentfkindsfoffinsurance,fretirementfannuitiesfandfotherfinvestments
Thefpersonalffinancialfplanningfprocess
Thefformalforderfwouldfbefto…..
- Determineftheffinancialfpositionfoffthefindividual/household
- Identifyfneeds
- Determinefshort-,fmedium-fandflong-termfgoals.
- Identifyflimitationsforfthreats
- Comparefone’sfpresentffinancialfsituationfwithfthefneedsfidentified
- Analysefinvestmentfopportunities
- Developfaffinancialforfinvestmentfplan
- Balancefthefbudget
- Implementfafpersonalffinancialfplan
- Revisefthefplanfperiodically
3factivitiesfthatfyoufneedftofdo:fanalysingfyourfpresentfsituation;fsettingffinancialfobjectivesfandfp
reparingfafbudgetfforfthefachievementfoffobjectives
Gatheringfinformationfandfpreparingfpersonalffinancialfstatements
- Informationfneedsftofbefgathered.fEverybodyfshouldfbefableftofdetermineftheirfpresentffi
nancialfpositionfsincefallffurtherfdecisionsforfplansfwillfbefbasedfuponfthesefaspects.fThef
nextfstepfwouldfbeftofpreparefafpersonalfincomefstatementfandfafbalancefsheet.fAfperso
nalfincomefstatementfindicatesftheffinancialfactivitiesfthatftookfplacefoverfafspecificfperio
dfandfincludesfincome,fexpenditurefandfcontributionftowardsfsavingsfand/orfinvestment
s.fAfpersonalfbalancefsheetfindicatesfyourfwelfare,fwhichfisfreflectedfinfthefwayfinfwhichfa
ssetsfareffundedfandfnotfbyfthefnumberfoffassetsfowned.fEquityfcapitalfisfcalculatedfbyfd
eductingfTA(Totalfassets)-TL(Totalfliabilities)
Identificationfoffobjectivesfandfneeds
- Evaluationfandfpersonsfinvolved
- Thefformulationfoffobjectivesfisfafstatementfbyfafpersonfoffthefprospectsfforfhisffinancialff
uture
- Immediateforfshort-
termfobjectivesfarefaspiredftofinfthefearlyfstagefofftheflifefcyclefandfmustfbefveryfspecific.f
Fundsfforfsuchfobjectivesfarefgeneratedffromfcurrentfincomefand/orfsavingsforfinvestme
ntfplans
- Mediumftermfobjectivesfusuallyfoccurfduringfthefworkingfyearsfandfstretchfoverftheflarge
stfpartfofftheflifefcycle.fThefachievementfoffobjectivesfduringfthisfstagefisfafprerequisiteffor
f achievementf offobjectivesf inf thef longfterm.f Spendingf patternsfcouldf bef adjustedftof provid
efforfneedsfoverfthefmediumfterm
- Long-
termfobjectivesfprovidefthefgreatestfflexibilityfduringfplanning.fRetirementfplanningfisfusu
allyfthefmostfimportantfplanningfcomponentfofftheflastfstagefofftheflifefcycle
- Listingfoffpriorities:fafdistinctionfmustfbefmadefbetweenfurgentfandfimportantfneeds.fHigh
erfpriorityfmustfbefgivenftofimportantfneeds
, Comparisonfoffcurrentfsituationfwithfidentifiedfneeds
- Afcomparisonfbetweenfthefcurrentfsituationfandfallfidentifiedfneedsfindicatesfwhichfneed
sfhavefalreadyfbeenfprovidedffor,fandfwhichfneedsfstillfhaveftofbefprovidedffor.
Analysisfoffinvestmentfopportunities
- Itfisfessentialftofexaminefthefpurposefoffeachfinvestmentfalternative,fasfwellfasfthefadvant
agesfandfdisadvantagesfinvolvedfinfeach.
Developmentfofftheffinancialforfinvestmentfplan
- Afpersonfmustfdecidefwhichfinvestmentfwillfprovidefforfwhichfneed.
- Needsfarefexpressedfinftermsfoffthefrisksfinvolvedfinfthefoccurrencefoffcertainfevents
Balancingfthefbudget
- Afsurplusfoffdeficitfinfthefbudgetfindicatesfthatfthefplanningfprocessfrequiresffurtherfattent
ion
Implementationfoffthefplan
- Nofplanfcanfbefimplementedfifftherefarefnotfsufficientffunds!
Periodicfrevisionfoffthefplan
- Thefplanfshouldfbefrevisedfoncefafyear
Thefadvantagesfoffpersonalffinancialfplanning
- Financialfneedsfarefidentified
- Householdfrisksfarefidentified
- Reasonsfforfcashfflowfproblemsfarefidentified
- Therefisfbudgetingfregardingfexpensesfandfinvestmentftofreachfimmediate,fshort,fmediu
mfandflongftermfgoals
- Financialfcrisesfarefidentifiedfinftime
- Thefuncertaintyfregardingfretirementfplanningfisfremoved
- Provisionfisfmadefforfthefmaintenancefoffafparticularfstandardfofflivingfbeforefandfafterfret
irement
- Thefentirefhouseholdfisfinvolvedfandflearnsfmorefaboutffinancialfmatters
Personalffinancialfplanningfareas
- Careerfplanning
- Incomeftaxfplanning
- Estatefplanning
- Investmentfplanning
- Protectionfplanning
- Creditfplanning
- Productivityfplanning
- Healthcarefplanning
- Retirementfplanning
- Emigrationfplanning
