Question

1A Explain whether the statements are true or false.

a.Personal financial planning is a process that should be carried out on a regular five-yearly basis.

b.It is far more important for older people to engage with personal financial planning, than younger people.

c.If inflation is measured at 3% per annum and a savings account is paying interest at 3% per annum, the purchasing power of the savings made will remain unchanged.

d.Career planning is not a part of financial planning.

e.Once you have set your financial goals, you should try to achieve them by all means.

1BCase study

Peter, aged forty, and his wife Ming have three young children and together they are buying their own home. Peter works in the public sector and has joined the Mandatory Pension Fund for the last fifteen years. Ming runs a small business from home that generates an income for her of HK$5000 each month.

They have a large mortgage and owe significant sums on their credit cards. Peter has never considered undertaking any kind of personal financial planning. His view is as follows:

“Given my current financial predicament, I have absolutely no choices to make as I have no spare cash to consider investing. Personal financial planning is for people with cash to save.”

a.Do you agree with Peter’s view on personal financial planning?

b.Suggest a SMART financial goal to them.

c.Describe some of the benefits that personal financial planning could offer to them?

C Calculation

Your friend is now working in an insurance company. He is prompting an investment project of his company to you:

“Our company is now offering a plan, which is a very good project. You just need to pay $3000 at the end of each month from January 2017 for ten years. Then you can get back HK$1million on 31st December 2046.”

Assume that the market interest rate is 6%p.a. and is stable during the period, will you consider the project?

Answer 1

A. False. Personal Finance Planning should be done whenever it is required, it should be checked at a regular interval and should be amended if need be. Because the business enviornment is dynamic. It keeps on changing. So this planning is a subjective and depends on person to person.

B. False. It is not just elders that need financial planing. Every individual should be able to finance his/her stream of income or cash. However, elders should invest in risk free or low risk investments such as bonds, FDs etc. because they cannot afford huge risk at that age. But a young person should try investing in risky deals such as equity and earn more profit.

C. True. Suppose you want to a purchase something for $100 today. But you think that you dont need to now. So you defer this to next year and deposit this amount in the savings account that has 3$ interest rate effective annually. Now the inflation is also 3%. So, the item you wanted to buy after 1 year would cost 103$ and the amount you will have in the bank account will also be 103$. So, the purchasing power remains unchanged.

D. False. Financial Planning and Career Planing are interlinked. You cannot lead a healthy career in any filed without managing or planning your finances. So you should plan them both as interlinked planning.

E. True. You should be able to achieve your financial goals. However, sometimes we plan with wrong data, or with wrong concepts. Sometimes our future need changes. Therefore, financial goals may change. However, they should be achieved for your success.

(If you have any doubt regarding by point of view in these true, false, you can ask me in the comment section)

1B Case Study.

a. No, I don't agree with the Peter's point of view. Instead, I would suggest to opt for financial planning to get out from his current situation.

b. SMART goals are goals that embody five distinct traits - specific, measurable, achievable, realistic, and time-limited.

The Peter Family should set some specific targets of finance that they should achieve at the end of each month, quarter, semi annual and year. They should also consider some long term investments in equity based investments, bond investment.

In short period, that is a month or a quarter, they should save some amount from their monthly or quarterly expenditure. They should invest in large cap, mid cap equity that gives around 18% effective return annually, i.e the average from the equity. They should be invest some amount in the bonds that are undervalued, giving nice coupon rates and redemption price. If they invest little amount every month, they will be able to achieve their goals in forthcoming years. The magic of compounding will overcome the desire of not plan financially. For eg : Invest in equity a sum of 100$ each month at 18 percent effective annual rate for 10 years will pay you 2352$ in 10 years.

c. Benefits of Personal Financial Planning

1. Cash Management - You will be able to manage your cash effectively. You will be able to generate cash with the help of cash.

2. Future Needs - Everyone have futures needs. Suppose education of children, their marriage or buying a car, a house etc. You can invest today and earn the lump sum amount at the end of the investment and complete your needs.

3.It will help you get out of debt - It helps you find an investment that is ideal for you and for your current situation. You can also reduce the debt by looking at various options in the market.

4. Reduces Risk - The enviornment is uncertain. It is dynamic. It keeps on changing. Therefore, if you plan your finances, you will be able to reduce the risk of changing markets. Such as inflation, rate changes etc.

5. Helps you in retirement - You do not have to worry about the cash after retirement if you plan your finances. You will be able to generate enough cash to live a happy life after retirement.

C. Calculation

Present Value of the payments for 10 years

Monthly Payment(P) = $3000

Time Period = 10*12(T) = 120

Interest Rate/Discount Rate(i) = 0.06/12 = 0.005

PV = P(1-(1+i)^-t)/i = 3000(1-(1+0.005)^-120)/0.005 = $270,220.36

Present Value of the amount receivable at 31st December 2046. Time period between 1st jan 2017 to 31st December 2046 = 349 months.

PV = Amount/(1+i)^t = 1,000,000/(1+0.005)³⁴⁹ = 175,406.00

Clearly the present value of amount you are receiving at 31st dec 2046 is way lesser that the present value that of all the monthly payments of $3000 that you are making for 10 years. So you should not opt this scheme as this is not profitable. You should not consider this project.