CHAPTER VI.

PERSONAL FINANCE

FBF – FTU
CHAPTER STRUCTURE

1) Overview of Personal Finance

2) Personal Financial Statements
3) Personal Income Tax
1) Overview of Personal Finance

u Personal finance (also referred to as personal financial planning) is

the process of planning your spending, financing, and investing to
optimize your financial situation.
u Fact: Personal finance is more than just making money. Many people
won lottery but went bankrupt eventually ⇒ need to balance what you
make (or have) with what you spend.

u A personal financial plan specifies your financial goals and describes

the spending, financing, and investing plans that are intended to
achieve those goals.
u Fact: Personal finance may not help you earn more, but it can help you
use the money you do earn to achieve your financial goals.
1) Overview of Personal Finance

u Steps in developing your financial plan:

u Step 1: Establish your financial goals.

u Step 2: Consider your current financial position

u Step 3: Develop a plan of action.

u Step 4: Select and implement the best plan for achieving your goals.

u Step 5: Evaluate and revise your financial plan.

Step 1: Establish Financial Goals

u Fact: You can’t get what you want if you don’t know what you want.
u Firstly, identify your general goals in life because general goals
influence financial goals.

u If you want to have a family, one of your financial goal would be you
earn enough income and save enough money over time to
financially support a family.

u If you want a large home, one of your financial goals should be that
you earn enough income and save enough money over time to
make a substantial real estate purchase
Step 1: Establish Financial Goals

u Secondly, goals must be realistic. You need to be realistic about your

goals so that you can have a strong likelihood of achieving them.

u It’s a bit unrealistic to plan for a $100,000 Porsche on an income of

$15,000 a year.
u When this overly ambitious plan fails, you may become
discouraged and lose interest in planning.

u Thirdly, timing of goals is important. Financial goals can be

characterized as short-term (within the next year), intermediate-term
(typically between one and five years), or long-term (beyond five
years).
Step 2: Consider Current Financial Position

u Your financial position influences your decision. A person with little

debt and many assets will clearly make different decisions than a
person with mounting debt and few assets.

u Answering questions:

u How much money do you make?

u How much are you spending, and what are you spending it on?

u To see your whole financial picture, which requires careful record

keeping, especially when it comes to spending.
Step 3: Develop a Plan of Action

u Given your financial goals (in Step 1), you need a financial plan that
could help move you from your existing financial position (in Step 2)
toward achieving your financial goals.

u All sound financial plans include several key factors:

u Flexibility: Your financial plan must be flexible enough to respond
to changes in your life and unexpected events.
u Liquidity: Dealing with unplanned events requires more than just
flexibility. Sometimes it requires immediate access to cash.
u Protection: Liquidity enables you to carry on during an unexpected
event, but a good financial plan includes enough insurance, at
reasonable rates, to prevent unexpected catastrophic events.

u Minimization of taxes: Financial plan must take taxes into account

Step 4: Implement The Plan

u The hardest part is to stick to your financial plan.

u Remember that your financial plan not as punishment but as a road
map. Your destination may change

u Your financial plan is not the goal; it is the tool you use to achieve your
goals.
Step 5: Evaluate and Revise Financial Plan

u After you develop and implement each component of your financial

plan, you must monitor your progress to ensure that the plan is
working as you intended.

u As time passes, your financial position will change, especially with

specific events such as: graduating, marriage, a career change, or the
birth of a child ⇒ As your financial position changes, your financial
goals may change as well ⇒ Need to revise your financial plan to
reflect such changes in your means and priorities.
2) Personal Financial Statements

u Psychology can discourage many individuals from assessing their

financial position! Why? Because they are afraid the assessment will
lead to a conclusion that they should not make specific purchases at
this time.
⇒ Personal financial statements can help you to assess your financial
position.

u There are two types of personal financial statements:

u Personal Cash Flow Statement: A financial statement that
measures a person’s cash inflows and cash outflows
u Personal Balance Sheet: A summary of your assets (what you
own), your liabilities (what you owe), and your net worth (assets
minus liabilities).
Personal Cash Flow Statement

u Personal cash flow statement allows you to estimate how much you
need to save each period to make specific purchases in the future with
cash instead of borrowing money.

u Comparing your cash inflows and outflows allows you to monitor your
spending and determine the amount of cash that you can allocate
toward savings or other purposes.
Personal Cash Flow Statement

u Cash inflow: The main source of cash inflows for working people is
their salary, but there can be other important sources of income (from
investment)

u Cash outflow: Cash outflows represent all your expenses, which are
the result of your spending decisions.
u Net cash flows are equal to the cash inflows minus the cash outflows
which let you know how much excess cash you have to allocate to
savings or other purposes.
Personal Cash Flow Statement
u Example: Create personal
cash flow statement using
following information
Personal Balance Sheet

u A cash flow statement tracks your cash flows over a given period of
time, whereas a personal balance sheet provides an overall snapshot of
your wealth at a specific point in time.

u Assets: The assets on a balance sheet can be classified into:

u Liquid assets: Assets that can be easily sold without a loss in value.
For example: Cash, checking accounts, or saving accounts.

u Household assets: Items normally owned by a household, For

example: a home, car, and furniture
u Investments: Some of the more common investments are in bonds,
stocks, and rental property.
Personal Balance Sheet

u Liabilities represent debt (what you owe) and can be segmented into:
u Current liabilities: Debt that you will pay off in the near future
(within a year). For example: Credit card balance.

u Long-term liabilities: Debt that will be paid over a period beyond

one year. For example: Student loan, car loan, or mortgage loan.

u Net worth is the difference between what you own and what you owe:

Net Worth = Value of Total Assets - Value of Total Liabilites

⇒ Net worth is a measure of wealth because it represents what you own
after deducting any money that you owe
Personal Balance Sheet
Personal Balance Sheet

u How cash flow affect the personal balance sheet.

u If you use net cash flows to invest in more assets, you increase the
value of your assets without increasing your liabilities.

u You can also increase your net worth by using net cash flows to reduce
your liabilities.
Analysis of Personal Financial Statements

u Analyzing some financial characteristics within your personal balance

sheet to monitor your level of liquidity, your amount of debt, and your
ability to save.

u Liquidity Ratio represents your access to funds to cover any short-

term cash needs ⇒ Monitor your liquidity over time to ensure that you
have sufficient funds when they are needed:

Liquidity Ratio = Liquid Assets/Current Liabilities

u A high liquidity ratio indicates a high degree of liquidity.

u A liquidity ratio of less than 1.0 means that you do not have
sufficient liquid assets to cover your upcoming payments ⇒ need to
borrow.
Analysis of Personal Financial Statements

u Debt-to-asset Ratio indicates debt level over asset ⇒ Ensure that it

does not become so high that you are unable to cover your debt
payments:

Debt-to-Asset Ratio = Total Liabilities/Total Assets

u A high debt ratio indicates an excessive amount of debt and should

be reduced over time to avoid any debt repayment problems.
u Saving Rate determines the proportion of disposable income that you
save ⇒ Measure your savings over a particular period in comparison to
your disposable income:

Savings Rate = Savings /Disposable Income

3) Personal Income Tax

u “In this world nothing can be said to be certain, except death and
taxes” – Benjamin Franklin.
u Taxes are dues that we pay for membership in our society because
they are a significant source of funding for governments ⇒ Taxes are
used to pay for a wide variety of governmental services and programs
⇒ They’re the cost of living in this country.

u Calculation of personal income taxes (PIT) can be different between

countries. In this course, we focus on Vietnamese laws.
3) Personal Income Tax
u Taxable incomes of individuals include the following kinds of income:
u Incomes from salaries or wages receivable by employees from
their employer.
u Incomes from production or business activities.
u Incomes from capital investment. For example: Dividends from
stocks, coupon payments from bonds.
u Incomes from capital transfer, including. For example: Capital gain
from investing in stocks, bonds.
u Incomes from transfer of real estate.
u Incomes from won prizes in cash or in kind. For example: Lottery
winnings
u Each kinds of income will be taxed differently. But in this course, we
focus on taxes on incomes from employments.
3) Personal Income Tax

u Steps to calculate PIT from employments:

u Step 1: Identify taxpayers.

u Step 2: Identify taxable incomes (After deducting tax-exempt

income)

u Step 3: Identify assessable incomes (After deducting: Personal

deductions and insurance premiums)

u Step 4: Apply the Progressive Tax Table to calculate tax.

Step 1: Identify taxpayers

u Taxpayers are resident individuals and non-residents:

u Resident individuals are people present in Vietnam for 183 days
or longer in a calendar year. Taxable incomes earned by residents
are the incomes earned within or outside Vietnam’s territory,
regardless of locations or payment and receipt.

u Non-residual individual are people present in Vietnam for less

than 183 days in a calendar year. Taxable incomes earned by non-
residents are the incomes earned within Vietnam’s territory,
regardless of the location of payment and receipt
Step 2: Identify Taxable Incomes
u Earned incomes from employments are incomes from wages and
remunerations paid to employees from employers.
u However, there are kinds of incomes from employer are tax–free, it
means they are not included in taxable income. For example:
u Scholarships funded by government budget or public schools.

u Incomes from the additional payments for working at night or

working overtime in excess of wages according to the Labor Code.

Taxable incomes = Earned Incomes – Tax-free incomes

Step 3: Identify Assessable Incomes
u Assessable income is determined by taxable income after deducting personal
deductions and insurance premiums.

Assessable incomes = Taxable Incomes – Personal Deductions –

Insurance Premiums
u Personal deductions: Personal deduction is the amount deducted from the
taxable income before tax calculation. Under current articles, level of
personal deduction is 11 million VND/month for a taxpayer and 4.4 million
VND/month for each dependent.

u For example: Mrs. Nguyen is a taxpayer, she has two dependent

daughters. Her family deduction is 11 million for herself and 8.8 million
for two dependents, her total personal deductions is 19.8 million/month.
If her salary is less than 19.8 million/month, she does not have to pay tax.
Step 3: Identify Assessable Incomes
u Insurance premiums include social insurance, health insurance,
unemployment insurance, and occupational liability insurance for a
number of occupations requiring compulsory insurance.

Insurance premiums = Taxable income × Premium rate

u Under current article, the total insurance premium rate is 10.3%.

Social insurance Unemployment Health insurance

insurance
8% 1% 1.5%
Step 3: Identify Assessable Incomes
u Example: Ms. Kim has an income of 20 million VND from employment
in a month and pays insurance premiums of: 8% social insurance, 1%
unemployment insurance and 1.5% health insurance on taxable
incomes. Ms. Kim raised 2 small children registered as dependents.
What would be Ms. Kim’s assessable incomes?
Step 4: Apply the Progressive Tax Table
u Personal income tax on incomes from employments is the total tax on
each level of income. The tax on each level of income equals the
assessable income of that level multiplied by (x) the corresponding
tax rate of that level.

Assessable Assessable
Level income/year income/month Tax rate (%)
(million VND) (million VND)
1 Up to 60 Up to 5 5
2 Over 60 to 120 Over 5 to 10 10
3 Over 120 to 216 Over 10 to 18 15
4 Over 216 to 384 Over 18 to 32 20
5 Over 384 to 624 Over 32 to 52 25
6 Over 624 to 960 Over 52 to 80 30
7 Over 960 Over 80 35
Step 4: Apply the Progressive Tax Table

u Example: Ms. Kim has an income of 20 million VND from employment

in a month and pays insurance premiums of: 8% social insurance, 1%
unemployment insurance and 1.5% health insurance on salary. Ms.
Kim raised 2 small children registered as dependents. What would be
Ms. Kim’s personal income tax?