Question

1. Differentiate between Common Stock and Preference Stock

2. Discuss the importance of a Personal Financial Planning Process?

3. How Budgeting can help us to improve our financial health. Explain with examples.  

Answer 1

1.

Common Stock	Preference Stock
They have voting rights in the company	They do not have voting rights
Dividend is paid after payments to preference stockholders are made.	Often, dividend is paid on predetermined fixed rate
They are last to get claims from asset in case of default of the company	They can have claim on asset before common stock but after creditors and debt.
Equity Shares cannot be converted to preference share. Also, they are irredeemable	Preference share can be converted to equity shares. They are both redeemable and irredeemable.

2.

Importance of Financial Planning

1. Efficient income management: Through proper financial planning, one can generate income over the period of time efficiently and consistently.
2. Expenditure and Saving: Financial Planning guides you on how to spend and save money. It limits your expenditure and multiplies your saving over a period of time.
3. Helps you meet your financial goal: Dream to buy a car or a house? Financial management helps you achieve your goal in time and also helps you to achieve more than what you desire.
4. Reduces Tax Liability: It also helps in reducing tax liability by claiming deductions from various investments provided by the government.

3.

A budget helps you in achieving your financial goal by reducing your unnecessary expenditure and increasing your savings. A efficient budget will provide a roadmap to your financial. It will tell your where your money is wasted and what you can do to channelize that money so that it can grow. It helps you to achieve your dreams and financial goals.

For example: There are two people A and B. Both earn $10,000 per month. However, A has no budget planned for him. He spends all his money on buying clothes every month or buying unnecessary products to fulfil short term desires. However B is smart and has a budget. He saves just $2000 every month. If he saves this much amount and invest it at risk free rate of say 5%. He will have $308,887.90 by the end of 10 year while A will have nothing. Therefore, budgeting is very important.

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