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Personal Financial Planning
Foundation Course on Insurance & Takaful Based Personal Financial Planning
• Break the problem into one of four types orinto variations of them
• Figure out what information you have
• Determine what you are solving for
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Personal Financial Planning
Rule of 72
• Can be used to determine the length oftime it will take for an investment todouble
– Given the rate of return
– An approximation
• Formula
Years to double = 72 / interest rate
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Personal Financial Planning
Rule of 69• Can be used to determine the length of
time it will take for an investment todouble
– Given the rate of return
– An approximation
• Formula
Years to double = 0.35+69/r
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Personal Financial Planning
Example
• If Sufyan can earn 6.5% annually, how longwould it take for his Rs.10,000 investmentto double?
Could do10000 +/- PVN= 11
6.5 I/Yr 20000 FV
OR72/6.5 = 11
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Personal Financial Planning
Ratios of financial stability
1. Basic Liquidity RatioIndicates the ability to cover monthly expenses in an emergency. Eg. Job LossCash & Near Cash/Monthly ExpensesRecommended Value – 3 - 6
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Personal Financial Planning
Ratios of financial stability
2. Liquid Assets to Net Worth RatioIndicates the ability to cover emergency funding like hospitalization.Cash & Near Cash/Net WorthRecommended Value – 15%
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Personal Financial Planning
Ratios of financial stability
3. Savings RatioIndicates the ability to fund for future capital and retirement goals.Savings/Gross Income (annual)Recommended Value – 15% - 20%
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Personal Financial Planning
Ratios of financial stability
4. Debt to Asset RatioIndicates the ability to meet the liabilities.Total Liabilities/Total AssetsRecommended Value – 50% (Max)
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Personal Financial Planning
Ratios of financial stability
5. Solvency RatioIndicates the ability to meet the liabilities and indicates whether the person has borrowed excessively.Total Net worth/Total AssetsRecommended Value – 50% (Min)
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Personal Financial Planning
Ratios of financial stability
6. Debt Service RatioIndicates the ability to service debt repayments.Total Annual Debt Repayment/Annual Take Home IncomeRecommended Value – 35% (Max)
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Personal Financial Planning
Ratios of financial stability
7. Debt Service Ratio - 2Indicates the ability to service lifestyle related debt repayments.Total Annual Non Mortgage Debt Repayment/Annual Take Home IncomeRecommended Value – 15% (Max)
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Personal Financial Planning
Ratios of financial stability
8. Net Investment to Net Worth RatioIndicates how well investment assets have been accumulated for retirement and other needs.Total Invested Assets/Net WorthRecommended Value – 50% (Min)
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Personal Financial Planning
Ratios of financial stability
9. Net Worth RatioStarting point to set up a financial plan and help determine how much insurance coverage is required to protect ones assets.Total Assets-Total LiabilitiesThe Net Worth Thumb Rule = Age X Gross Annual Income/10
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Personal Financial Planning
Retirement Planning – Case StudyClient : Mr.MubarakAge : 47Requirement : 70% of the salary as pensionExpected Salary Growth : 5%Current Monthly Salary : Rs.65,000/-
How much does he need as pension for a year at the age of 60?How much he has to invest from now onwards?
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Personal Financial Planning
Retirement Planning – Case Study CalculationFuture Value = Present Value (1+r)nX70%
Future Value = Present Value (1+r)nX70%Future Value = (65,000X12)(1+0.05)13X0.7Future Value = (65,000X12)(1+0.05)13X0.7Future Value = (780,000)(1.05)13X0.7Future Value = (780,000)X(1.885)X0.7Future Value = 1,029,564.43 (Pension Per Annum)
What is the monthly pension ?1,029,564.43 / 12 = 85,797.00
How much he has to invest from now onwards?
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Personal Financial Planning
Insurance Needs Assessment – Human Life Value
Client : Mr.FaizerAge : 40Planning to retire at the age : 60Expected Salary Growth : 5%Earning Per Annum : Rs.2,000,000/-Expected Return from Investment : 8%Existing Life Cover : Rs. 500,000/-