Financial Literacy:
Financial literacy the term is strongly associated with the
concept saving, investment, financial services and
retirement planning in most of the countries of the globe.
Urge for financial literacy has gained the attention of
wide range of entities like financial services,
organization, community interest groups and education
institutes in recent years in developed as well as
developing countries after the global financial crisis.
India continues to remain one of the highest savers
among the emerging market economies and Gross
Domestic Savings (GDS) of the nation constitutes 33.7%
of total National Gross Domestic Product (GDP).
Financial literacy was one of the reason for crisis
Apart from thisIncreased risk in financial products
Low return from financial markets
Change in pension landscape
Financial Literacy and Personal finance:
The processes, by which financial consumers/investors
improve their understanding of financial products and
concepts and, through information, instruction and/or
objective advice, develop the skills and confidence to
become more aware of financial risks and opportunities, to
make informed choices, to know where to go for help, and
to take other effective actions to improve their financial
wellbeing.
OECD, (2005, 13)
Chapter: 1
Personal Finance
Basics and the Time
Value of Money
Topic Covered-
(I)
(II)
(III)
Awareness about the element of
Personal finance
Setting of Personal Financial goals
Time Value of money
Learning Objectives-
(I)
(II)
(III)
(IV)
(V)
Analyse process for personal financial
decisions
Develop personal finance goals
Assess personal and economic factors
Determine
personal
and
financial
opportunity cost
Identify strategies for achieving personal
finance goals
Concept:
Personal Financial Planning:
Personal Financial Planning is a process of
managing money to achieve personal
economic satisfaction.
Personal financial planning
denotes the
process of determining whether and how an
individual can meet life goals through the
proper management of financial sources
(CFP Board, 2005).
Personal Financial Planning (PFP) is the
result of financial literacy.
Advantages of personal financial planning:
Increase effectiveness in obtaining, using
protecting your financial resources.
and
Increase control of your financial affairs.
Improve personal relationships.
A sense of freedom from financial
obtained by looking to the future.
worries
1)
2)
3)
4)
5)
6)
The Financial Planning Process
Determine your current financial situation.
Develop your financial goals.
Identify alternative courses of action.
Evaluate your alternatives.
Create and implement your financial action
plan.
Review and revise your plan.
Consequences of Choices: Opportunity Cost
Opportunity
cost - What you give up when you
make a choice
The
cost, or trade-of of a decision, cannot always
be measured in rupees. Sometimes the cost is your
time.
Every Financial Decision Involves Evaluating
Types of Risk:
Inflation risk
Rising prices cause lost buying power.
Interest-rate risk
Effect costs of borrowing and rate of return.
Income risk
The loss of a job.
Personal risk
Health, safety, or costs.
Liquidity risk
Higher return may mean less liquidity .
Financial Planning Information Sources:
Printed materials.
Financial institutions.
School courses and educational seminars.
The internet, online sources, computer
software.
Financial specialists.
Financial planners, bankers, accountants,
insurance agents, lawyers and tax preparers.
Developing Personal Financial Goals
Financial goals include those...
Influenced by the time frame in which you want
to achieve your goals.
1. Short-term
2. Intermediate
3. Long-term
Influenced by the financial need that drives
your goals.
4. Consumer product
5. Durable product
Goal-Setting Guidelines:
Goals must be SMART
Goals
Goals
Goals
Goals
Goals
should
should
should
should
should
be stated in Specific terms
be Measurable
indicate the Action to be taken
be Realistic
have a Time frame
Influences on Personal Financial Planning
Life situation and personal values
Adult life cycle stage.
Marital status, household size, and employment.
Major events.
Graduation, marriage, children, retirement, etc.
Values.
What values are important to you?
Economic
Factors
Global influences
Changing Economic Conditions
Consumer The value of the dollar
prices changes in inflation.
Consumer
spending
The demand for goods
and services by individuals
and households.
Interest rates
The cost of money; cost of
credit when you borrow; return
on your money when you save
or invest.
Money Supply The dollars available for
spending in our economy.
Unemployment The number of individuals
without employment who are
willing and able to work.
Housing starts Number of new homes being
built.
GDP: Gross
Total value of goods and
Domestic Product
services produced in a
country.
Trade balance
Difference between a
countrys exports and
imports.
Market indexes
The relative value of
stocks as represented by
the index, such as the
Dow Jones Average or the
S&P 500.
Developing a Flexible Financial Plan
A financial plan is a formalized report that...
Summarizes your current financial situation.
Analyzes your financial needs.
Recommends future financial activities.
Your financial plan can be created by you, with
assistance from a financial planner, or made
using a money management software package.
Components of Financial Planning
Obtaining
Planning
Saving
Borrowing
Spending
Managing risk
Investing
Retirement and estate planning
Implementing Your Financial Plan
Develop good financial habits.
Use a well conceived spending plan to help you
stay within your income, while allowing you to
save and invest for the future.
Have appropriate insurance protection to
prevent financial disasters.
Become informed about tax and investment
alternatives.
Study personal finance.
Achieving your financial objectives requires two
things.
A willingness to learn.
Appropriate information sources.
