Managing Your Personal Finances Altaf Noor Ali Chartered Accountant
Session Road Map:Managing Your Personal Finances • Smart Audience> Tough Questions • Divine Words on the Topic • A Simple Self-Quiz • The Greatest Threats to your Finances • Financial Fact: The Most Important One • Financial Fact: The 2nd Most Important • Summary & Conclusion
Smart Audience Q’s • We have been managing our finances since childhood. So what’s new that you are going to tell us? • Every individual have a unique set of financial issues. How do you expect to fix it in a 3-hour session? • We have invested our time and money in attending this session. Is it going to be worth it? Is it going to be practical?
>Smart Audience Q’s • Would you be giving us any tips to improve the way we are going to manage our finances? • Is it the first time that a session on this topic is being organised? Why should we believe you? • Tell us what are the origins of an individual’s financial woes? • What can I do to really benefit from this program?
Answers • Personal Finance focuses on optimising financial management of individuals. It goes beyond generalised principles of earning, spending and savings. • I will present this subject in a practical and interesting manner to you. If I succeed, you will be motivated to learn more on your own. • I have been humbly studying and practicing this subject for many years. The proof of pudding is in eating. Give me a fair hearing and decide at the end of the session! • Listen carefully. Take notes, ask questions, and feel ready to change yourself. Its never too late.
Enlightened Divine WordsOn Personal Finance ‘Give the kinsman his due, and the needy, and the wayfarer, and squander not [your wealth] in wantonness’. [17:26] ‘Lo! the squanderers [of wealth] were ever brothers of the devils, and the devil was ever an ingrate to his Lord’. [17:27]
>>Enlightened Divine WordsOn Personal Finance ‘And let not your hand be chained to your neck nor open it with a complete opening, lest you sit down rebuked, denuded’. [17:29] ‘Lo! Your Lord enlargeth the provision for whom He will, and straiteneth [it for whom He will]. Lo! He was ever Knower, Seer of His slaves’. [17:30].
Interesting Conceptual QuizI believe….. • Those with higher level of income have more personal assets and better spending habits. • Temptation [snap decision] is directly related to poor-quality spending decisions. • A major portion of our high-ticket spending is driven by family and social pressures. • For sensible spending, it is important to have a vesting period before buying a big-ticket item. • Supporting a spending of Rs. 1,000 on buying something is like earning first a net return of 10% per annum on an investment or Rs. 10,000.
>>Interesting Conceptual QuizI believe….. • It is perfectly sensible to earn a return annual return of 10% on Rs. 100,000 and pay 25% on borrowed money of Rs. 25,000 out of it. • I CAN save atleast 10% of my income by spending my money sensibly. • Paying expensive debt [like credit card balance] is a fundamental step towards improving your financial position. • A rupee saved is a rupee earned. Example: if I usually get Rs. 10,000 per month and spend all of it, and lets say in a month I get all my stuff for Rs. 9,000, it is as good as earning an extra Rs. 1,000. • To beat inflation, I should store non-perishable items of daily use [like rice, oil, dry milk, medicines, tissues, washing powder, etc] at my home NOW. I will be paying more for them later anyway.
>>>Interesting Conceptual Q’sI believe….. • You should always have an ‘emergency float’ of atleast Rs. 20,000 cash at all times for unexpected expenses. • Our stock exchange is like a big casino. I have seen more people wrecked by it. • Small amounts consistently saved over a period of years grow into fairly larger amounts. • The longer you hold a share in a company, the higher will be its return. • As you grow in age, the contribution of financial assets in your income should rise.
Financial Threats to Your savings…. • Unsystematic undisciplined shopping and spending. • Rich-by-night mentality, in form of dishonesty, lotteries, stock commodity metal currency speculation, etc. • Unhealthy habits [e.g. drinking, smoking, excess partying, outing etc]. • Show-off or bench-marking, under family or social pressures, maintaining an artificial life-style. Financially illiterate spouse. • Mortgaging unearned income via credit cards + monthly financial commitments at heavy interest rates. • Changing culture. Blind faith trust, mixing relationships. • Ignorance & Greed. Weak instinct in sniffing scams and frauds. [e.g Life Insurance, New Islamabad City, Islamic Investment Bank] + Inadequate Monitoring.
Minimising Financial Threats to Your savings…. • Protect your assets and yourself with insurance. • Minimise claims on your unearned future income. • Have titles of financial assets [bank accounts etc] in joint names for ease of transfer in case of death etc. • Set saving goals and act to sacrifice financially. Persuade your family, spouse and kids. Have a simple lifestyle, think hard before spending. • Monitor your financial position. Invest your time in learning about your own financials. Maintain records. • Kill the Greed. Be Patient. • Learn, read and listen. Use Internet and Media. Have right kind of people around you. Discuss and discount. Enjoy your life. Work hard and honestly. Be financially contended and happy.
Tell Me: What is the Most Important Financial Fact of Life for U?
Financial Facts/Principles • Money does not grow on trees. You have to earn it. • Individuals have life cycles. And financial needs are different for each phase. • Financial events for an individual can be measured.
The Most Important Financial Fact of Life Assets – Liabilities = Equity Assets – Liabilities = Net Worth
The Most Important Financial Fact of Life is the basis of preparation of Net Worth Statement • Why do we call it so? • Why do we need one? • How long will it takes to make one? • What does it tells you? • What you can learn from it?
Mr. ANet Worth Statement at 30 June 2005 Assets – Liabilities = Net Worth 5,300,000 – 300,000 = 5,000,000 Assets = Cash 20,000 + Cash at bank 80,000 + Shares 500,000 + PF Balance 150,000 + Receivables 50,000 + Jewellery 100,000 + Vehicle 400,000 + Real-estate property 4,000,000 Liabilities = Mr. A 50,000 + Credit Card 50,000 + Car Instalments 200,000
Net Worth Statement:How to prepare? • Estimate your assets • Estimate your liabilities • Review and Revise, if required • From your assets, deduct liabilities and you will get net worth figure. • Note that a net worth statement shows your financial position at a particular date and time. It changes with each transaction.
Net Worth Statement:Estimate your Assets • Cash • Bank • Provident Fund Balance • Investments • Jewellery • Receivables from others • Furniture fixtures [PC, TV, Electronics etc] • Real-estate properties
Net Worth Statement:Estimate your Liabilities • Balance on credit cards • Payable to others [Mr. A, Mr. B, etc] • Lease payments • House mortgage • Tax
Net Worth Statement:Assets – Liabilities = Net Worth • Remember that net worth is at a specific date [and time]. It changes. • Analysing changes in Assets, Liabilities and Net Worth over a period of time [month, quarter, or annually] provides important personal financial information.
Mr. ANet Worth Statement at 30 June 2005 & 2006 Assets – Liabilities = Net Worth 2005> 5,300,000 – 300,000 = 5,000,000 2006> 5,800,000 – 900,000 = 4,900,000 Assets = Cash 20,000 + Cash at bank 80,000 + Shares 500,000 + PF Balance 150,000 + Receivables 50,000 + Jewellery 100,000 + Vehicle 400,000 + Property 4,000,000 2006 Change> House renovation 300,000 + Electronics 200,000 Liabilities = Mr. A 50,000+Credit Card 50,000+Car Instalments 200,000 2006 Change> Mr. B 250,000 + Credit Card 250,000 + Instalments 400,000
Mr. ANet Worth Statement at 30 June 2005 & 2006 Assets – Liabilities = Net Worth 2005> 5,300,000 – 300,000 = 5,000,000 2006> 5,800,000 – 900,000 = 4,900,000 Net Worth = Changes in Net Worth = Income 600,000 – Expenses 700,000
Mr. ANet Worth Statement at 30 June 2005 & 2006 Assets – Liabilities = Net Worth 2005> 5,300,000 – 300,000 = 5,000,000 2006> 5,800,000 – 900,000 = 4,900,000 Net Worth = Changes in Net Worth = Income 600,000 – Expenses 700,000 Tell Me>> What is your conclusion from above? What is the nature of ‘expenses’?
Mr. ACashflow Statement for the year ended 30 June 2006 Receipts>> Income = 600,000 Mr. B = 250,000 Credit Card, net = 200,000 Instalments, net = 200,000 Total = 1,250,000 Payments>> Expenses = 700,000 House Renovation = 300,000 Electronics = 200,000 Mr. A = 50,000 Total = 1,250,000
Net Worth Statement:How accurate? • Based on single entry • Revisions may be required • Its contents can be improved with some knowledge of accounting and effort in keeping double-entry accounts. • Aggregate of income and expenses over continuous periods account for changes in net worth. • ‘It is better to be roughly right than precisely wrong’.
Net Worth Statement:The Way Forward • Proper account of receipt and payment made through cash and bank is building block of preparing. • The information can also be presented visually. • And…it is not difficult to do so.
Net Worth Statement:Tell Me>> • How many of us keep an account of payments and receipts? • What keeps most of us from doing so? • Awareness • Knowledge and skills • Time required • Facing the truth
The Second Most Important Financial Facts of Life Income < Expenses….Improve Income = Expenses …......Thank God Income > Expenses …Maintain, and do Good
When income is less than expenses…. Generate additional income by learning new skill, taking a part-time job, starting or partnering a new business or service. Learn about your spending pattern and reign it. Turn-around required!
When income equals expenses…. Do you have what it takes to face unexpected circumstances?
When income is more than expenses…. • Income = Expenses + Savings. • What are you doing with the additional resources? • Is your ‘save and invest’ process in place? • Remember the financial asset you are creating now may be your principal source of income in coming years.
Anatomy of expenses…. • Personal and household [e.g utilities, telephone, mobile, fuel, household groceries, medical, school, insurance, membership fees, asset maintenance etc] • Other than personal [e.g charity, zakat, family contributions, direct taxes, etc]
Tell Me: How to Save On.. • Utilities = gas, electricity, water • Telephone and mobile, • Fuel and car maintenance, • Household groceries, • Personal Grooming = clothing etc • Medical, • Schooling, • Insurance, • Club membership fees • House maintenance [maid, mali, chowkidar salary, property taxes etc.] • Entertainment • Finance charges [on credit card etc]
Anatomy of savings…. • Have right attitude towards money, saving’s possible. • Learn and or relearn investing. Set realistic financial goals. • Know thyself, then invest. • Think long-term, for next generation. • Beat the greed, be disciplined.
Session Summary by Mr. Bawa • Highlight FIVE most important points discussed in the session so far. • FIVE additional points that would be helpful for the audience.
Additional Learning Resources • Local newspapers are devoting more space to this topic. • Television: CNBC Aap ka Paisa. • Internet remains the greatest source of learning about the personal finance. It is latest and mostly free. • www.moneycentral.com • www.yahoo.com • www.smartmoney.com
Conclusion: • Financial liberty is a rightful dream of every individual and or household. It is attainable with right frame of mind and life-long discipline. • Financial liberty is not the unabated appetite to buy and consume anything and everything that fancy it. Lets not join Club of 99. • It is a state of bliss that assures fulfilment of our reasonable material essentials and enables us to help less fortunate ones.
> Conclusion:Divine Words ABUNDANCE ‘Lo! We have given thee Abundance; So pray unto thy Lord, and sacrifice. Lo! It is thy insulter [and not you] who is without posterity’. [108: 1 to 3]
A bank book makes good reading - better than some novels. ~Harry Lauder The safe way to double your money is to fold it over once and put it in your pocket. ~Frank Hubbard My problem lies in reconciling my gross habits with my net income. ~Errol FlynnThank You.