Question

Demonstrate your understanding of the following concepts in a Financial Action Plan: Time Value of Money Taxation Credit Life Insurance Investing Your paper should reflect upon the importance of each of the above concepts, your financial goals, and the actions you can take to increase the probability that you will reach the desired outcomes in detail.

Answer 1

Answer: In today's era of inflation, changing economic conditions it is important to draft a strong Financial Action Plan to ensure stability in such drastically changing economic market. But to draft a solid Financial Action Plan it is necessary to have an understanding of your financial goals and some basic terms used in financial management.

Time Value of Money: It is the idea that the money available at the present time is worth more than the same amount in the future, due to its potential earning capacity. Money loses its value over time which makes it more desirable to have it now rather than later. Considering TVM while drafting Financial Action Plan is important to take into account the risk, loss and uncertainty involved in receiving money in future.

Taxation: Tax is the amount required to be paid to the government from the earnings one make during a particular period. It is important to consider the tax impact of every investment, expense one does to derive at net earnings. Financial Action Plan should outline a financial portfolio which minimizes taxation impact. For e.g. by investing your money in tax free securities, one can reduce their tax liability.

Credit: Credit usage has become an essential part of financial management. It enables you to acquire something without having necessary funds at a given point of time. But it is important to use credit judiciously. On time repayment of credit is essential. Being careless with credit can lead to a debt trap. While making your financial action plan it is important to analysis your credibility and your ability to pay off credit on timely basis. Plan the credit you can take on basis of your earning capacity and by understanding the terms of credit.

Life Insurance: Insurance in terms of financial planning is a risk mitigation tool. It is not an investment that will provide you return in short run. It protects your health and financial future of your family. The thumb rule is to buy a combination of policies. Taking life insurance secures the financial future of your family and yours and ensures your financial stability during your old age. The life cover should be 10 times your annual income.

Thus it is important to understand some crucial concepts in financial management to draft a strong Financial Action Plan.