Personal Financial Management

1. Personal Financial Situation

A. Financial Planning Process

  1. Establishing and defining the client-advisor relationship.
  1. Gathering client data, including goals.

3.Analysing and evaluating the client’s financial status.

  1. Developing and presenting recommendations and alternatives.
  1. Implementing the recommendations.
  1. Reviewing and monitoring progress toward goal-achievement.

Gather information as both :-

  • Qualitative data deals with goals, risk profile, anticipated lifestyle changes – including those pertinent to income and expenditures.
  • Quantitative data includes things such as asset and liabilities, cash flows, insurance policies, current investments, retirement and other government or employer-sponsored benefits and tax information.

B. Financial Planning Knowledge Categorizes

  1. Financial Planning Principles, Process and Skills
  1. Financial Management
  1. Tax Principles and Optimization
  1. Investment Planning / Asset Management
  1. Risk Management and Insurance Planning
  1. Retirement Planning
  1. Estate Planning and Wealth transfer
  1. Integrated Financial Planning

2. Tools

Balance sheet (statement of financial position),

Cash flow statement (statement of cash in and cash out)

Budget

The statement of financial position will identify whether a client’s net worth remains the same, increases or decreases.
Net Worth = Assets – Liabilities

3. Assets

Invested Assets
Items such as stocks, bonds, mutual funds or unit trusts (pooled/collective investments), commodities, investment real estate (i.e. not the person’s residence), etc.

Use Assets
Any asset that the owner does not plan to sell.
Includes a person’s house, cars, boats and personal property, such as furniture, clothing, jewelry, artwork and other assets.
FMV is the amount a willing buyer would pay a willing seller.

Liquid Assets (Cash / Cash Equivalents like bank certificates and money market funds)
Liquidity means being readily available and convertible into cash

4. Liabilities
Current Debts

Any overdue amounts, plus additional interest and penalties
Categorized as either short term or long term.

5. Net Worth

  • Difference between assets and liabilities is net worth.
  • Net worth statement aka a balance sheet or statement of financial position
  • Add all assets together, subtract all liabilities, and you have net worth

C. Statement of financial position

A statement of financial position is a picture of the individual’s finances at a specific point in time. It shows assets and liabilities and is also known as a net worth statement.

Net Present Value (NPV) calculates the present or discounted value of all future cash inflows, after subtracting the initial (and any future) cash outflows (i.e., money used to purchase, maintain and improve the asset) at a reasonable discount rate (i.e., the required rate of return).

Common financial management dangers
One of the common dangers is the assumption that life will continue as it has without any roadblocks