FINE4050

Strategic Financial Planning for Individuals

(a.k.a. Personal Finance)

Winter 2024 (14:30 pm, Monday)

Afshin Cheraghi
Schulich School of Business
York University

Parts of Slides by Moshe Milevsky

Copyright @ 2020 by M.A. Milevsky
 Introduction

• About me
• Office hours: Monday 12pm-2pm (by appointment)
• Email: [email protected]
• I will do my best to respond within 24hrs

2
 Class Structure

• We will have 2 segments per lecture each about 75 mins

• 15 minutes break between each two segments

• Some materials might be posted on Canvas and should be

reviewed asynchronously

3
 Deliverables and Important Dates
• Budget & time allocations for the next 4 months:
• Class Participation and Engagement (10%)
• HW#1 (10%): will be handed out on Jan/13
– Due via CANVAS on Jan/29 (14:30pm)
• HW#2 (20%): will be handed out on Feb/13
– Due via CANVAS on Feb/26 (14:30pm)
• Group Project (20%):
– Presentation: Mar/18 & Mar/25 (All Members MUST present)
– Project Summary: due on the last class (Apr/1, 14:30pm)
• Take Home Exam (40%):
– Sometime in April (TBA). 4
The textbook…

• In this course, FINE4050 we only

use (cover) chapters 1-12
• Also, we exclude the actuarial
material in chapter #7 and #8.

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 Technical skills required
(to get an A+) in the course…
• This is not a mathematics course, but you should be fully
knowledgeable in all aspects of the time value of money (TVM), PV,
FV, etc.

• We will review some basics of TVM later today

• Ability to work with formulas and data in Excel. Have it ready in

classes.

• Read the book as we progress.

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 Major Course Topics (Modules)
• Topic #1: Personal Finance: Industry & Background and TVM
• Topic #2: Measuring Your Financial Health
• Topic #3: How Much (and When) to Save
• Topic #4: Prudent Debt Management, Home and Mortgage
• Topic #5: Basic Income Taxes
• Topic #6: Income Tax Strategies
• Topic #7: Protecting with Insurance
• Topic #8: Investments and Portfolio Management
• Topic #9: Retirement Income Planning

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 What is Personal Finance About?
(A.) Spend less (today) or more (later)?

(E.) How do I pick an

investment portfolio, (B.) How much
that’s right for me? can and should I
borrow?

(D.) What economic (C.) How do I

risks do I face, and minimize tax costs
which should I insure? over my entire
lifetime?

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 Ok, so why do we need a course on
financial planning (in a business school)?

• The only (maybe) course that focuses on YOU

• More choices, more decisions, more risk.

• Growing scope, reach & complexity of taxes.

• Increased volatility in global financial markets

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 Why do you need this course?
• Near 8,000-10,000 Canadians declare themselves insolvent and/or file for
bankruptcy protection each month.

Year #Insolvencies Insolvencies/Population Consumer Proposals/Insolvencies

2021 92,572 0.24% 69.5%
2020 99,244 0.26% 65.9%
2019 (Start of Covid) 137,000 0.36% 60.3%

• The current pattern shows that on average 15% of the population would
experience insolvency throughout a 50-year period.
• The share of consumer proposals was about 15% a decade ago.

Source: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br04090.html
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 Why do you need this course?
• Growing concern about the Financial health of Canadians

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 Why do you need this course?
• Growing concern about the Financial health of Canadians

According to the latest survey by MNP in Sep. 2021:

• 58 percent of Canadians are likely to take on

more consumer debt before the end of 2021

• 37 percent of them said their credit card is

already carrying a balance

• 9 percent of them said they are considering a

payday loan

• 46 percent of those polled said they are within

$200 or less away from not being able to meet
their financial obligations

Source: https://www.bnnbloomberg.ca/canadians-can-t-shake-their-thirst-for-debt-poll-1.1661398 12
 Why do you need this course?

A survey was done by Angus Reid

Institute in Sep-Oct 2021:

• More than one-third (37 percent) of

people said it’s been "difficult" to
afford enough food to feed their
household
• Nine percent said it’s been "very
difficult"

Source: https://www.bnnbloomberg.ca/many-canadians-report-difficulty-feeding-their-family-poll-1.1668894 13
 Why do you need this course?

• High levels of debt are even more challenging for seniors.

– The median debt-to-income ratio more than doubled

from 0.24 in 1999 to 0.52 in 2016 among seniors

– Ratio of senior families having a debt-to-income ratio of at

least 1.0 has increased from 21% in 1999 to 36% in 2016

Source: https://www150.statcan.gc.ca/n1/pub/75-006-x/2019001/article/00005-eng.htm
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 Why do you need this course?
• Should you be worried about it at this age? Yes, 24% of them are under 35.

Source: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br04358.html 15
 Why do you need this course?
• Could they avoid insolvency?

Source: https://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br04358.html 16
 Takeaway #1 for Today

Personal Finance (a.k.a. Strategic Wealth Management)

isn’t a course about making you rich(er), but rather the
opposite – avoiding the mistakes that can make you
poor(er).

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 Why do you need this course?

• You might want to become a financial advisor

– Get: Education, Knowledge (and Passion.)
– Pass: Certification and Industry Exams.
– Obtain: Experience and Financial Maturity.

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 Common “Financial Advisor” Designations
Acronym … Full Name… % of Advisors with
Designation
CFP Certified Financial Planner
50%
PFP Personal Financial Planner
10%
FCSI Fellow of the Canadian
Securities Institute 15%
CLU Chartered Life Underwriter
7%
CFA Chartered Financial Analyst
3%
CIM Canadian Investment
Manager 10%
Ch.P. (FMA)* Chartered Professional
Strategic Wealth (CSI) 7%
CA* Chartered Accountant
3%
* No longer available

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 How Do Financial Advisors Get Paid?

SOURCE OF REVENUE… AVERAGE…

Fee for Service (Hourly or Flat Rate)…
5%
Asset-Based Fee (% of Investments)…
50%
Transaction Based (i.e., Commissions)…
30%
Salary Based (only)…
15%
Source: M.A. Milevsky based on Statistics from Investment Executive (2019)
Average across Brokerages, MF Dealerships, Banks and insurance Agencies.

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 Takeaway #2 for Today

If you are working with (or hiring, or even talking to) a

financial planner – or whatever they want to call
themselves -- make sure you understand exactly how they
are compensated.

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Review of Time Value of Money

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 Single Cash Flow

𝑁
𝐹𝑉 ( 𝑣 , 𝑁 )=(1+𝑣 )
• Present value:
δ
θ
• Future value:
-1 0 1 2 3 4 N-1 N

1
𝑃𝑉 ( 𝑣 , 𝑁 ) = 𝑁
(1+𝑣 )

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 Perpetuity
• Perpetuity: Infinite series of cash flows occurring regularly
• Present value of Perpetuity:

Where C is the amount of the first cash flow, v is discount rate and g
is the growth rate

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 Exercise 1
• Microsoft pays $0.56 quarterly as dividend. Assuming the
dividend growth rate of 6% and the discount rate of 8% per year,
what is the stock price today?

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 Annuity
• Annuity: finite number of cash flows occurring regularly

– Ordinary annuity: cash flows occur at the end of each period

– Annuity due: cash flows occur at the beginning of each period

– Regular growth: the growth of cash flows starts from the end of the first period
(assume regular if it was not mentioned explicitly)
– Delayed growth: the growth of cash flows starts from the end of the second period

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 Annuity Formula
• Present value of Annuity:
θ

 Inputs: β
• : FIRST cash flow of annuity
t-1 t t+1 t+2 t+3 t+4 t+N-1 t+N
• N: Number of cash flows
• g: Growth rate of annuity
• v: Interest rate
 Output:
• : Transformation of annuity to a single cash flow
– P: present value of annuity (present means at time 0)

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 Annuity Formulas (Page 25)
θ
A =
1. Ordinary Annuity (OA)
-1 0 1 2 3 4 N-1 N

θ
2. Annuity Due (AD) A =
-1 0 1 2 3 4 N-1 N

[ ]
( 1+ 𝑔 ) 𝑁
A(1+g) 1−
3. Regular Growth Ordinary Annuity (1+𝑣) 𝑁
(RGOA) 𝑷 = 𝜽 = 𝑨 (𝟏+ 𝒈)
-1 0 1 2 3 4 N-1 N 𝑣 −𝑔

[ ]
( 1+ 𝑔 ) 𝑁
A A(1+g) 1−
4. Delayed Growth Ordinary Annuity (1+ 𝑣) 𝑁
(DGOA) 𝑷 =𝜽= 𝑨
-1 0 1 2 3 4 N-1 N 𝑣−𝑔

θ
5. Regular Growth Annuity Due (RGAD) A
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-1 0 1 2 3 4 N-1 N
 Factor Calculations?

You can use the excel file that will be

shared with you on Canvas.

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 Exercise 2
• Assume that you are earning a salary of $5,000 per month, paid at the end of the
month. This grows by g = 0.03 per year (due to inflation). What is the present
value of your lifetime salary assuming a yearly valuation rate of 6% and that you
work for another N = 30 years?

The annuity factor is:

So,

Salary on retirement:

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 Exercise 3
• In contrast to the previous question, assume that you are paid $60,000 at the end
of the year growing at g=3% with inflation. What is the present value of your
salaries at v=6% valuation rate over N=30 years?

The annuity factor is:

So,

Notice that PV increased slightly by compounding less frequently

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 Exercise 4
• You won $1,000,000 lottery which you are saving in bank account earning v=5%
per year. You plan to withdraw cash flows of $70,000 per year, at year-end. How
many years will the money last?
P= 1,000,000 A=70,000 g=0 v=0.05 N=?
You must find the value of N that solves the following equation:

Trick: Taking logarithm from both sides of equation:

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 Exercise 5
• You won $1,000,000 lottery which you are saving in bank account earning v=5% per year.
You plan to withdraw cash flows at the end of the year for exactly 25 years, where .
What is ?

You must find the value of that solves the following equation:

The first cash flow withdrawal will be:

The second cash flow withdrawal will be:

The last cash flow withdrawal will be:

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 Exercise 6
• You won $1,000,000 lottery which you are saving in bank account earning v=5% per year.
You plan to withdraw cash flows at the end of the year for exactly 25 years, where .
What is ?

Answer:
- Since the growth starts from the second period, it has delayed growth (DGOA).
- You must find the value of that solves the following equation:

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 Final Remarks
Please remember the following:
• Please read chapter 2 of the textbook.
• If you are dealing with a situation in which cash flows occur at different time
frames, don't panic; modify g and v and choose the right formula.
• There are many techniques and routines that can be used to solve for the growth
rate g, valuation rate v, number of periods N, or PVA and FVA factors. Make sure
you understand what you are doing, and carefully review Chapter #2 in the book.
• Don't let the mathematics distract you from the (bigger) picture. This course is
about personal finance and wealth management, but we can't really solve any
problems without the above-noted mathematics.

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