BBA III

Semester V
Unit I: Personal Financial Planning
Introduction
Meaning and Concept of Personal Financial Planning
Need and Importance of Personal Financial Planning
Process of Personal Financial Planning
Financial Planner as a Profession
Notes Compiled By- Raghunandan Shrivas
Personal Financial Planning
An Introduction:
Why is it important to have a plan before making a financial
decision?
What is aNest egg?
Nest Egg - A substantial sum of money that has been saved or
invested for a specific purpose. A nest egg is generally earmarked for
longer-term objectives, the most common being retirement, buying a
home and education. It can also refer to money kept aside as a reserve
to deal with unexpected emergencies such as a medical problem or
urgent housing repairs. ―Nest egg‖ has been used to refer to savings
since the late 17th century. The term is believed to have been derived
from poultry farmers’ tactic of placing eggs – both real and fake – in
hens’ nests to induce them to lay more eggs, which meant more
income for these farmers.
Do not put all your eggs in one basket – diversify your investments. If
you invest in one item or stock and it looses all of its value, you have
lost your investment.
Meaning and Concept of Personal Financial Planning:
What is Personal Finance?
Personal Financial Planning – Arranging to spend, save and
invest money to live comfortable, have financial security and achieve
goals.

Other aspects of personal finance include banking, budgeting,

retirement planning, insurance, and estate planning, and more.

The term can stand for the entire financial industry in an

individual’s life. This includes all the institutions that offer financial
services to an individual. Personal finance focuses mainly on meeting
the individual or a person and caters for both long and short term
financial goals. Whether you have enough money for your essential
monthly bills or you want to plan for your retirement, this is all
personal finance. Being financially literate helps a person to
distinguish between financial decisions that will be beneficial, and
that will be detrimental to their financial future. Having a plan for
your finances will help you meet your short and long-term needs,
without going beyond your income limits.

The sooner someone starts to plan their finances, the better. To

ensure all your assets, your income and expenditure are catered for,
and you can use useful tools such as Personal Capital that will cost
you nothing.

Goals –

Things that you want to accomplish

Examples:

Getting a college education

Buying a car

Starting a Business

Planning for your personal finances is important because it will help

you to reach your goals, no matter what they are.

Benefits of Financial planning

1. Increase effectiveness in obtaining, using and protecting your

financial resources throughout your life.

2. Increased control of your finances by avoiding too much debt,

bankruptcy and dependence on others.

3. Improved personal relationship gained from well-planned and

well-communicated financial decisions.

4. A sense of freedom from financial worries gained from looking

to the future, anticipating expenses and achieving personal
economic goals.
Need and Importance of Personal Financial Planning:
1. Ensures That You Meet Your Money Needs

We should have a plan that establishes how much our income is,
what are our expenses, what plans we have, as well as our financial
future goals. This way, you will think beyond just working to earn
money. Some of the topics that you should understand in personal
finance include:

 How to create and stick to a budget

 Timely payment of bills
 Managing loans
 Net Income vs. Gross
 Saving for your retirement
 Time value of money
 Credit cards and credit scores
 Inflation, and more.

When you possess the proper personal financial knowledge and

skills, it gives you an advantage when facing financial challenges,
opportunities, and responsibilities that will come your way.

2. Easily Manage Your Income

If you don’t plan for your income, you will end up overspending
or spending on unnecessary items. With a proper financial plan, you
will be able to manage your income effectively. This way, you will
spend on what is necessary and save or invest the rest.

Being able to manage your income will help you to know which
expenses to handle first and which ones come later. Also, you can
effectively know how much is necessary for tax payments, savings, or
clear your monthly bills.
3. Budgeting, Spending, and Saving

Personal finance skills help you to understand how much you

earn, what are your monthly expenses, and help you to budget within
that income.

According to Defined Sight, ―a closely watched budget can be

the one thing that prevents you from overspending on status symbols
and luxuries like expensive cars.‖

Living stingy or sticking to what your budget indicates, helps

you avoid so many overspending temptations that you otherwise
would have ignored.

For example, you can avoid moving to a luxurious

neighbourhood to fit in a friends club, by referring to your budget and
checking if that is in your list.

If your income doesn’t allow, or you had some other things

planned for, you can forego the shifting. This is only possible if you
have a budget and stick to it.

Personal finance affects even the little necessary things like transport
bills, and grocery, as well as the longer-term goals like saving and
investments.

As Dave Ramsey said, “Don’t spend more than you earn!”

4. Personal Finance and Cash Flow

Another reason why personal finance is essential is that it can

help you to increase your cash flow. When you keep track of your
expenditures and your spending patterns, you can easily be able to
increase your cash flows.

Thing helps you to grow your cash flow include:

 Tax planning,
 prudent spending and
 Careful budgeting

All these will ensure that you do not lose your hard-earned money to
unnecessary expenses. Therefore, having a personal financial plan is
vital to ensure you are on the right financial track.

5. Offering Family Security

Financial security for you and your family is something that

most people long for. Everyone wants to know that they can cater to
the money needs of their family, whether the economy is failing or
not.

No one wants to think of their families suffering due to a lack of

money, especially when they are not around to help. And for this
reason, everyone is struggling to make sure that they earn enough
money that can offer them a sense of security.

If you want to have financial freedom and have a sense of

financial security, then you must plan for your finances.

If you have the right insurance policy, you have invested, and
make a proper saving, it helps to offer peace of mind both for you and
your family.
6. Offers Better Financial Understanding

Yet another importance of personal finance in life is providing a

better understanding of your finances.
It is possible to achieve a better understanding of your finances,
when you put in place measurable goals, understand the effects of
your decisions, as well as review the results of such.
This gives you a completely new approach towards budgeting
and provides better control over your finances.

7. Keeps You Off Unmanageable Debts

Having a few debts is not a problem. Being overly in debt,

however, is dangerous to your future finances. It’s vital to be able to
manage one’s debts in a way that guarantees no harm is done to your
futures financial stability.

If you want to grow your wealth quickly, you must know how to
manage your debts. That is why personal finance is critical to ensure
that this happens.

One way to stay off debts is to avoid overspending or spending

more than what you are earning.

For example, most people tend to change their lifestyle when they
have an increase in income, but in a higher proportion than
their income increase. This only leads to getting into more debts.

Also, when you overuse your credit card, it means that you are
adding more to your debts. Therefore, this is another reason why
personal finance is essential.
 Through personal finance education, you learn how to manage
your money and break out of detrimental financial habits.

8. Growing Your Assets

Owning assets rather than asking for assets from someone

else as a form of the financial cushion is always a desire for many
people. However, many assets will come attached with some
liabilities.

This makes it very important to have adequate knowledge of

your finances. One must be able to determine the real value of a
specific asset.

Knowing how to cancel or settle liabilities only comes through

understanding your finances, and this only possible through personal
finance.

This way, you will be able to grow your assets, being sure that
they will not turn out to be a financial burden in the future.

9. Raising Your Standards of Living

Another importance of financial planning is helping you to

increase your living standards. But how does personal finance help
you to do this?

Well, the more you plan for your finances, the more your
savings will be. This means that instead of more money going to
unplanned expenses, more will be saved.

Higher savings can help to cushion you during financially

challenging times.
Process of Personal Financial Planning:
Six steps to financial planning

 Most people want to handle their finances so that they get full
satisfaction from each available dollar. Typical financial goals
include such things as a new car, a larger home, advanced career
training, extended travel, and self-sufficiency during working
and retirement years.
 To achieve these and other goals, people need to identify and set
priorities. Financial and personal satisfaction are the result of an
organized process that is commonly referred to as personal
money management or personal financial planning.
 Personal financial planning is the process of managing your
money to achieve personal economic satisfaction. This planning
process allows you to control your financial situation. Every
person, family, or household has a unique financial position, and
any financial activity therefore must also be carefully planned to
meet specific needs and goals.
 A comprehensive financial plan can enhance the quality of your
life and increase your satisfaction by reducing uncertainty about
your future needs and resources. The specific advantages of
personal financial planning include
 Increased effectiveness in obtaining, using, and protecting your
financial resources throughout your lifetime.
 Increased control of your financial affairs by avoiding excessive
debt, bankruptcy, and dependence on others for economic
security.
 Improved personal relationships resulting from well-planned
and effectively communicated financial decisions.
 A sense of freedom from financial worries obtained by looking
to the future, anticipating expenses, and achieving your personal
economic goals.
 We all make hundreds of decisions each day. Most of these
decisions are quite simple and have few consequences. Some are
complex and have long-term effects on our personal and financial
situations. The financial planning process is a logical, six-step
procedure:

(1) determining your current financial situation

(2) developing financial goals

(3) identifying alternative courses of action

(4) evaluating alternatives

(5) creating and implementing a financial action plan, and

(6) re-evaluating and revising the plan.

Step 1: Determine Your Current Financial Situation

 In this first step of the financial planning process, you will

determine your current financial situation with regard to income,
savings, living expenses, and debts. Preparing a list of current
asset and debt balances and amounts spent for various items
gives you a foundation for financial planning activities.

Step 2: Develop Financial Goals

 You should periodically analyze your financial values and goals.

This involves identifying how you feel about money and why
you feel that way. The purpose of this analysis is to differentiate
your needs from your wants.
 Specific financial goals are vital to financial planning. Others
can suggest financial goals for you; however, you must decide
which goals to pursue. Your financial goals can range from
spending all of your current income to developing an extensive
 savings and investment program for your future financial
security.

Step 3: Identify Alternative Courses of Action

 Developing alternatives is crucial for making good decisions.

Although many factors will influence the available alternatives,
possible courses of action usually fall into these categories:
 Continue the same course of action.
 Expand the current situation.
 Change the current situation.
 Take a new course of action.
 Not all of these categories will apply to every decision situation;
however, they do represent possible courses of action.
 Creativity in decision making is vital to effective choices.
Considering all of the possible alternatives will help you make
more effective and satisfying decisions.

Step 4: Evaluate Alternatives

 You need to evaluate possible courses of action, taking into

consideration your life situation, personal values, and current
economic conditions.
 Consequences of Choices. Every decision closes off
alternatives. For example, a decision to invest in stock may
mean you cannot take a vacation. A decision to go to school full
time may mean you cannot work full time. Opportunity cost is
what you give up by making a choice. This cost, commonly
referred to as the trade-off of a decision, cannot always be
measured in dollars.
 Decision making will be an ongoing part of your personal and
financial situation. Thus, you will need to consider the lost
opportunities that will result from your decisions.
 Evaluating Risk

 Uncertainty is a part of every decision. Selecting a college major

and choosing a career field involve risk. What if you don’t like
working in this field or cannot obtain employment in it?
 Other decisions involve a very low degree of risk, such as
putting money in a savings account or purchasing items that cost
only a few dollars. Your chances of losing something of great
value are low in these situations.
 In many financial decisions, identifying and evaluating risk is
difficult. The best way to consider risk is to gather information
based on your experience and the experiences of others and to
use financial planning information sources.

Financial Planning Information Sources

 Relevant information is required at each stage of the decision-

making process. Changing personal, social, and economic
conditions will require that you continually supplement and
update your knowledge.

Step 5: Create and Implement a Financial Action Plan

 In this step of the financial planning process, you develop an

action plan. This requires choosing ways to achieve your goals.
As you achieve your immediate or short-term goals, the goals
next in priority will come into focus.
 To implement your financial action plan, you may need
assistance from others. For example, you may use the services
of an insurance agent to purchase property insurance or the
services of an investment broker to purchase stocks, bonds, or
mutual funds.
Step 6: Re-evaluate and Revise Your Plan

 Financial planning is a dynamic process that does not end when

you take a particular action. You need to regularly assess your
financial decisions. Changing personal, social, and economic
factors may require more frequent assessments.
 When life events affect your financial needs, this financial
planning process will provide a vehicle for adapting to those
changes. Regularly reviewing this decision-making process will
help you make priority adjustments that will bring your financial
goals and activities in line with your current life situation.
Financial Planner as a Profession:
Financial planners help people manage their money while
sorting through their financial matters. Like financial advisors, they
help their clients develop financial goals for the long-term. These
professionals assess their clients' stage of life, risk tolerance, along
with potential investments.

Financial planners also earn a living by helping people sort

through and choose investments, insurance, and other financial
products. Because many financial planners also specialize in specific
areas, they may provide tailored services for their clients. Some of
these services include—but aren't limited to—retirement planning,
general investment analysis, estate planning, tax planning, and
education planning.

Financial planning employers look for candidates with a bachelor's

degree in accounting, finance, economics, business, mathematics, or
law. Courses in investments, taxes, estate planning, and risk
management are also helpful. Programs in financial planning are
becoming more widely available in colleges and universities.

Financial analysts may also seek special designations like

the Certified Financial Planner (CFP), the Chartered Financial
Analyst (CFA) and the Chartered Financial Consultant
(ChFC) designations. More than half of all financial advisors work for
finance and insurance companies, including securities and commodity
brokers, banks, insurance carriers, and financial investment firms.
However, four out of 10 personal financial advisors are self-
employed, operating small investment advisory firms, usually in
urban areas.

According to the Bureau of Labor Statistics, the overall

employment of financial analysts and personal financial advisors is
expected to increase 7% between 2018 and 2028, faster than the
average for all occupations. This is a result of the increased
investment by businesses and individuals, the rising number of self-
directed retirement plans and the growing number of seniors. Personal
financial advisors will benefit even more than financial analysts
as baby boomers save for retirement and as a better-educated and
wealthier population requires investment advice. In addition, people
are living longer and must plan to finance more years of retirement.

Key Points :-

 Financial planners help people manage their money while

sorting through their financial matters.
 Finding clients and building a customer base is crucial to
experiencing success as a financial planner.
 Becoming a financial planner requires a bachelor's degree,
along with courses in investments, taxes, estate planning,
and risk management.
 If you're comfortable with sales, are great with people, have
excellent analytical and communication skills, and can work
independently, financial planning may be right for you.