I.

OVERVIEW OF FINANCIAL PLAN Budget planning enables you to build your net worth by
setting aside part of your income to either invest in
PERSONAL FINANCE is the process of planning your additional assets or reduce your liabilities.
spending, financing, and investing to optimize your
financial situation. MANAGING LIQUIDITY
Liquidity - access to funds to cover any short-
defined as all financial decisions and activities of term cash needs
an individual or household, including budgeting, 1. Money management involves decisions regarding
insurance, mortgage planning, savings and retirement how much money to retain in a liquid form (to avoid
planning. cash shortages because of unanticipated expenses) and
how to allocate the funds among short-term
A personal financial plan specifies your financial goals
investments.
and describes the spending, financing, and investing
2. Credit management involves decisions about how
plans that are intended to achieve those goals.
much credit you need to support your spending and
- does not require a genius mind, but does
which sources of credit to use. Credit is commonly used
require the use of common sense and discipline
to cover both large and small expenses when you are
- result increases your wealth, and allows you to
short on cash, so it enhances your liquidity.
more easily afford purchases
- Conversely, poor personal finance decisions can
FINANCING LARGE PURCHASES
cause you to borrow excessively
Managing loans includes determining how much you
can afford to borrow, deciding on the maturity (length
As you build your financial plan, you are developing
of time) of the loan, and selecting a loan that charges a
skills that enhance your employability. When you make
competitive interest rate.
personal finance decisions, you are managing yourself.

PROTECTING ASSETS AND HOME

Self-management
To protect your assets, you can conduct insurance
- can take the initiative to make decisions.
planning, which determines the types and amount of
In addition, personal finance decisions require weighing
insurance that you need.
tradeoffs of alternative options and problem solving
- Automobile insurance
(qualitative and quantitative)
- Homeowner’s insurance
COMPONENTS OF A FINANCIAL PLAN - Health insurance
1. Budgeting and tax planning - Disability and life insurance (income)
2. Managing your liquidity
3. Financing your large purchases INVESTING MONEY
4. Protecting your assets and income (insurance) Any funds that you have beyond what you need to
5. Investing your money maintain liquidity should be invested with the primary
6. Planning your retirement and estate objective of earning a high return.

BUDGETING AND TAX PLANNING Potential investments include stocks, bonds, mutual
- Process of forecasting future expenses funds, and real estate. You must determine how much
and savings. Evaluate your current financial position by of your funds you wish to allocate toward investments
assessing your income, your expenses, your assets and what types of investments you wish to consider.
(what you own), and your liabilities (debt, or what you
owe). Your wealth is measured by your Net Worth. Most investments are subject to risk (uncertainty
surrounding their potential return), however, so you
Net Worth = Assets (what you own) – Liabilities (what need to manage them so that your risk is limited to a
you owe) As you save money, you increase your assets tolerable level.
and therefore increase your net worth.
 Financial plans are the road maps that show you the
RETIREMENT & ESTATE PLANNING way, whereas personal financial statements let you
Retirement planning involves determining how much know where you stand.
money you should set aside each year for retirement Budgets, detailed short-term financial forecasts that
and how you should invest those funds. compare estimated income with estimated expenses
Estate planning is the act of planning how your wealth - allow you to monitor and control expenses and
will be distributed before or upon your death. purchases in a manner that is consistent with
PSYCHOLOGY OF PERSONAL FINANCE your financial plans.

Instant Gratification & Peer Pressure PERSONAL FINANCIAL STATEMENTS

- This causes them to spend excessively, meaning - planning tools that provide an up-to-date
that they make purchases that are not evaluation of your financial well-being, help you
necessary. identify potential financial problems, and help
- tend to make many impulse purchases you make better-informed financial decisions.
Discipline & Focus on the Future - a document, or set of documents, that outlines
- strong desire to avoid debt because they would an individual’s financial position at a given point
feel stress from the obligation of making large in time
debt payments - helpful for tracking wealth and goals, as well as
- by spending conservatively today, they will have applying for credit
additional money available that they can use for Balance Sheet
financial planning functions to improve their - describes your financial position—the assets
financial future you hold, less the debts you owe, equal your
Assess Your Own Spending Behavior net worth (general level of wealth)—at a given
- If you spend excessively now to achieve point in time
immediate satisfaction, you have no money left - helps you track the progress you’re making in
to direct toward financial planning functions building up your assets and reducing your debt
such as managing liquidity, insurance, investing, Income Statement
or retirement planning. - measures financial performance over time
- tracks income earned, as well as expenses
DEVELOPING FINANCIAL PLAN made, during a given period
1. Establish financial goals - helps you control your future expenses and
2. Consider your current financial position purchases so you’ll have the funds needed to
3. Identify and evaluate alternatives carry out your financial plans
4. Select and implement the best plan Budgets
5. Evaluate your financial plan - allow you to monitor and control spending
6. Revise your financial plan because they are based on expected income
and expenses
II. PERSONAL FINANCIAL STATEMENTS Cash Budget
Financial Roadmap - deals with estimated cash receipts and cash
1. Financial Organization expenses, including savings and investments,
2. Saving that are expected to occur in the coming year or
3. Career/Work Income months
4. Spending
5. Investing Cash budget preparation has three stages:
6. Tax  estimating income,
7. Insurance/Protection  estimating expenses, and
8. Retirement Planning  finalizing the cash budget
 Liabilities represent an individual’s or family’s debts. A
liability, regardless of its source, is something that you
owe and must repay in the future.
THE INTERLOCKING NETWORK OF FINANCIAL PLANS
AND STATEMENTS Current, or short-term, liability: Any debt currently
owed and due within 1 year of the date of the balance
sheet.
Examples include charges for consumable goods, utility
bills, rent, insurance premiums, taxes, medical bills,
repair bills, and total open account credit obligations —
the outstanding balances against established credit lines
(usually through credit card purchases).

Long-term liability: Debt due 1 year or more from the

date of the balance sheet. These liabilities typically
include real estate mortgages, most consumer
ASSETS: The things you own
installment loans, education loans, and margin loans
used to purchase securities.
Liquid assets: Low-risk financial assets held in the form
of cash or instruments that can readily be converted to
NET WORTH: A measure of financial worth
cash with little or no loss in value. They help us meet
the everyday needs of life and provide for emergencies
Net Worth, the amount of actual wealth or equity that
and unexpected assets.
an individual or family has in owned assets.
- amount of money you’d have left after selling
Household assets include items normally owned by a
all your owned assets at their estimated fair
household, such as a home, car, and furniture.
market values and paying off all your liabilities

Investments: Assets acquired to earn a return rather

FACTORS AFFECTING CASH INFLOWS
than provide a service. These assets are mostly
intangible financial assets (stocks, bonds, mutual funds,
1. Stage in Career Path (Closely related to your
and other types of securities), typically acquired to
stage in the life cycle – college, career,
achieve long-term personal financial goals.
retirement
2. Type of Job (Based on skill level and demand for
Real and personal property: Tangible assets that we use
those skills)
in our everyday lives.
3. Number of Income Earners in the Household

Real property refers to immovable property: land and

FACTORS AFFECTING CASH OUTFLOWS
anything fixed to it, such as a house. Real property
generally has a relatively long life and high cost, and it
1. Size of Family
may appreciate, or increase in value.
2. Age
3. Health
Personal property is movable property, such as
4. Personal Consumption Behavior
automobiles, recreational equipment, household
furnishings and appliances, clothing, jewelry, home
INCOME STATEMENT: What we earn and where it goes
electronics, and similar items.
The income and expense statement captures the
various financial transactions that have occurred over
LIABILITIES: The money you owe
time—normally over the course of a year, although it
technically can cover any time period (month, quarter,
and so on).
  Keep good recordkeeping system (organized
3 Major Parts: and up-to-date)
 Income  Track down Financial Progress: Ratio Analysis
 Expenses
 Cash Surplus (Deficit) III. MONEY MANAGEMENT
INCOME: Cash In Money management describes the decisions you make
Common sources of income: over a short-term period regarding your cash inflows
 wages, salaries, self-employment income, and outflows
bonuses, and commissions; - separate from decisions about investing funds
 interest and dividends received from savings for a long-term period (such as several years) or
and investments; borrowing funds for a long-term period
 proceeds from the sale of assets such as stocks - focuses on maintaining short-term investments
and bonds or an auto. to achieve both liquidity and an adequate
 other income items include pension, annuity, return on your investments
and Social Security income; Liquidity refers to your ability to cover any short-term
 rent received from leased assets; cash deficiencies
 alimony and child support; - company's ability to convert assets to cash or
 scholarships or grants; acquire cash—through a loan or money in the
 tax refunds; and bank—to pay its short-term obligations or
 miscellaneous types of income. liabilities
Cash is the most liquid of assets, while tangible items
EXPENSES: Cash Out are less liquid.
Expenses represent money used for outlays. Tangible assets, such as real estate, fine art, and
(1) living expenses (such as housing, utilities, collectibles, are all relatively illiquid. Other financial
food, transportation, medical, clothing, and assets, ranging from equities to partnership units, fall at
insurance), various places on the liquidity spectrum.
(2) tax payments, Current ratio, quick ratio, and cash ratio are most
(3) asset purchases (such as autos, stereos, commonly used to measure liquidity.
furniture, appliances, and loan payments on
them), MONEY MARKET INSTRUMENTS
(4) Payments for personal care, recreation & 1. Checking account
entertainment 2. NOW account
3. Savings deposit
EXPENSES: Cash Out 4. Certificate of deposit
Fixed expenses—usually contractual, predetermined, 5. Money Market deposit account (MMDA)
and involving equal payments each period (typically 6. Treasury bills
each month). Examples include mortgage and 7. Money market fund
installment loan payments, insurance premiums, 8. Asset management account
professional or union dues, club dues, monthly savings
or investment programs, and cable TV fees. CHECKING ACCOUNT
- deposit account with a bank or other financial
Variable Expenses—amounts change from one time firm that allows the holder to make deposits
period to the next such as food, clothing, utilities, and withdrawals
entertainment, and medical expenses - very liquid, allowing for numerous deposits and
withdrawals, as opposed to less liquid savings
USING PERSONAL FINANCIAL STATEMENTS or investment accounts
- tradeoff for increased liquidity is that checking
accounts don’t offer interest
 - important to keep track of checking account a minimum balance to be maintained, has no maturity
fees, which are assessed for overdrafts. date, pays interest, and allows a limited number of
withdrawals per month.

NOW Account
NOW (negotiable order of withdrawal) account - a type
of deposit offered by depository institutions that
provides checking services and pays interest.
- combines the payable demand feature of
checks and investment feature of savings
account
SAVINGS ACCOUNT
A savings account is a deposit account held at a financial Treasury Bills or popularly known as T-Bills are peso-
institution that provides principal security and a modest denominated short-term fixed income securities issued
interest rate by the Republic of the Philippines through its Bureau of
 Because savings accounts pay interest while Treasury.
keeping your funds easily accessible, they’re a - get the interest in advance
good option for emergency or short-term cash. - practically risk free since it is ssued by the
 In exchange for the ease and liquidity that Republic of the Philippines
savings accounts offer, you’ll earn a lower rate - carries its obligation to pay investors on
than that paid by more restrictive savings maturity dates
instruments and investments. - Original tenors are 91, 182 and 364 days
 The amount you can withdraw from a savings - can sell the Tbills in the Fixed Income Market
account is generally unlimited. through prevailing market rate before the
 The interest you earn on a savings account is security matures
considered taxable income MONEY MARKET FUNDS
CERTIFICATE OF DEPOSITS A money market fund (also called money market mutual
A certificate of deposit (CD) is a savings product that funds) is a kind of mutual fund that invests in highly
earns interest on a lump sum for a fixed period of time. liquid, near-term instruments. These instruments
CD’s must remain untouched for the entirety of their include cash, cash equivalent securities, and high-credit-
term or risk penalty fees or lost interest. CDs usually rating, debt-based securities with a short-term maturity,
have higher interest rates than savings accounts as an typically less than 90 days.
incentive for lost liquidity An asset management account combines deposit
 CDs are a safer and more conservative accounts with a brokerage account that is used to buy
investment than stocks and bonds, offering or sell stocks.
lower opportunity for growth, but with a non-
volatile, guaranteed rate of return. RISK OF MONEY MARKET INVESTMENTS
 The top nationally available CD rates are
typically three to five times higher than the Credit Risk, also referred to as default risk, is the risk
industry average for every term, so shopping that the borrower will not repay on a timely basis. The
around delivers significant gains. borrower may make late payments or even default on
 Although you lock into a term of duration when the credit. In that event, you will receive only a portion
you open a CD, there are options for exiting (or none) of the money you invested.
early should you encounter an emergency or
change of plans Interest Rate Risk, is the risk that the value of an
investment could decline as a result of a change in
MONEY MARKET DEPOSIT ACCOUNT (MMDA) interest rates.
A money market deposit account (MMDA) is a deposit
account offered by a depository institution that requires
Liquidity Risk, is the risk that the value of an investment
could decline as a result of a change in interest rates.