Personal Financial Planning

1. Personal Financial Planning
CHAPTER II
Compiled and created by: Liezyl Avancena-Kuhail, MBA

2. Investment
➔ Long-term objective
Provision of a retirement
income
➔ Short-term objective
Holidays, home improvements,
cars, deposits for house
purchase, children’s education
old age and general security
Saving for a pension
(PENSION FUND)
- Low return investments

3. 2017
The life expectancy for
the Philippines was
70.87 years, a 0.23%
increase from 2016.
2018
The life expectancy for
the Philippines was
71.03 years, a 0.23%
increase from 2017.
2019
The life expectancy for
the Philippines was
71.16 years, a 0.18%
increase from 2018.
2020
The life expectancy for
the Philippines was
71.28 years, a 0.18%
increase from 2019.
11.01.XX
PHILIPPINE
LIFE
EXPECTANCY
UN Data 2020
projections and do not
include any impacts of
the COVID-19 Series

5. How to invest?
★ STOCK MARKET INVESTMENTS - SHARES
For example: 1,000 invested at 4% over 40 years will grow to
4,801, whereas at 8% it would grow to 21,725.
Implication: The income receipts from stock market investments
maybe more stable than the interest receipts on bank or building
society deposits.

6. Functions of
Financial
Systems
1. Settling payments.
2. Investing surplus funds.
3. Raising capital.
4. Transferring funds from surplus
units (savers) to deficit units
(borrowers).
5. Managing financial risk.
6. Pooling resources.
7. Dividing ownership.
8. Producing information.
9. Dealing with incentive problems.

7. FUNCTION OF FINANCIAL SYSTEMS
1. Settling payments. This refers to the mechanisms for payments. Mechanisms include cash,
cheques, credit cards, and so forth. This relates to investment only in so far as there needs to
be mechanism of paying for investments.
2. Investing surplus funds. This is the investment process. Investors have varied needs and
wishes concerning risk, return, liquidity, and other characteristics of investments. A financial
system should provide a wide range of investment choices so that individuals can satisfy
their investment objectives.

8. FUNCTION OF FINANCIAL SYSTEMS
3. Raising capital. Some people or organizations have expenditure that exceeds their
income. They would need to raise capital by borrowing or selling shares. A financial system
should provide suitable financial instruments for obtaining funds. Such instruments would
include bank loans, various forms of bond, and various types of share.
4. Transferring funds from surplus units to deficit units. This brings functions 2 & 3 together.
Not only should there be suitable financial instruments for investors and those raising
capital, but there should be markets or intermediaries for bringing them together.

9. FUNCTION OF FINANCIAL SYSTEMS
5. Managing financial risk. Most people or organizations that
invest or raise funds face risks from price movements.
6. Pooling resources. When businesses and governments
borrow they want to raise large sums of money. Individuals
normally have small sums to invest.

10. FUNCTION OF FINANCIAL SYSTEMS
7. Dividing ownership. When an investor buys shares in a company, the investor becomes part owner of the
company. Share issuance is a means of dividing the ownership of a company among a large number of investors.
The transfer of ownership to investors entails the transfer of risks as well as prospective profits.
8. Producing information. The common form of information produced by financial systems is information about
prices. This would include prices of shares, bonds, and money (interest rates are prices of money Information
about prices allows investors to measure their wealth, and helps them to take decisions about how to allocate
their wealth between different types of investment. Interest rates are likely to influence decisions about saving and
borrowing.

11. FUNCTION OF FINANCIAL SYSTEMS
9. Dealing with incentive problems. Incentive problems include principal-agent,
moral hazard, and adverse selection problems. It is in relation to such matters that
regulation can be particularly important.

12. The cash flows are illustrated by Figure 1.1.
Savers invest by depositing money in banks
(or building societies), by buying bonds, or
by buying shares.
The borrowers may be individuals who
obtain bank loans or mortgages,
governments that sell bonds, or private
companies that raise money by both of
these means plus the sale of shares. The
money passes from investors to borrowers
through the intermediation of banks or
stock exchanges.

13. PERSONAL FINANCIAL PLANNING
★ PERSONAL FINANCIAL PLANNING
Is the process of planning one’s spending, financing, and
investing so as to optimise one’s financial situation.
A personal financial plan specifies ones’ financial aims and
objectives. It also describes the saving, financing, and investing
that are used to achieve those goals.

14. A financial plan should contain personal finance
decisions related to the following components:
1. Budgeting - concerns the division of income
between spending and saving.
2. Managing Liquidity - is readily available cash,
or other means of making purchases.
3. Financing Large Purchases - may be generated
by saving, or by borrowing.
4. Long-term Investing - some other reasons for
long-term saving, such as funding children’s
education or provision of a legacy to pass on to
one’s heirs, the most important is the
provisIon of a retirement income.
5. Insurance - entails making payments to an
isurer for financial protection.

15. THE NATURE OF INVESTMENT RISK
★ CAPITAL RISK
is the risk that the value of the investment might fall.
Stock market investments, shares and bonds, are subject to
capital risk since the prices of such investment can fall.

16. THE NATURE OF INVESTMENT RISK
★ INFLATION RISK
Is the risk that the purchasing power value of assets can be
eroded by inflation
★ INCOME RISK
The apparent risk-free nature of bank and building society
deposits is called further into doubt when income risk is
considered.
*Bank and building society accounts are not the only investments
that suffer from inflation risk and income risk.

17. Core Principles
of Personal
Financial
Planning
C - Circumstances
O - Objectives
R - Risk
E - Expenditure