Personal Financial Planning: The Case of Mr. X

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Table of Contents

Introduction
Personal Financial Planning- Meaning and Significance
Personal Financial Plan of Mr. X
Calculation of Ratios
Works Cited

Introduction

Everybody prefers to have financial security in his/her life so as to be free from financial troubles and distress. Indebtedness is the worst thing that everyone dislikes in life. Financial security can contribute personal wellness and peace of mind. Financial planning is a necessary step towards securing one’s financial future. Having a financial plan and adhering to it will help one better manage his/her finances and retire rich. When one starts earning, he/she also needs to plan his/her expenditure and savings. Though, not in the form of a perfectly written document, one should definitely have a rough idea about his/her expenditure every month. When one is single, there is a lot of disposable income available with him/her. If married, he/she will have a larger expenditure and different priorities for savings. Whatever be the case, one should have a plan of where his/her hard earned money is going either as expenditure or savings.

Personal Financial Planning- Meaning and Significance

Personal financial planning entails planning for one’s financial needs, present as well as future, keeping in mind his income. He should also have a rough idea of how much he spends on essentials like groceries, rent, travel, and phone and electricity bills. Money for shopping/eating out/entertainment should also be budgeted for. These needs vary significantly according to one’s standard of living. Two people earning the same amount of money may have different spending needs, according to their habits, tastes and preferences. Apart from these, one must set aside a part of his earnings for some unforeseen events and emergencies and the remaining money he has every month, should be invested instead of letting it sit idle. (Harry and Smith).

Most of the people need formal personal financial planning so as to achieve their basic financial goals. To achieve their goals, there are different avenues of investments, insurance coverage, savings plan, tax savings devices, retirement plans, etc. Personal financial planning mainly includes the development and implementation of the total plans in order to achieve the over all financial objective. Each person’s financial objective differs depending on their individual goals and their attitudes. There are different steps involved in the preparation of the personal financial plan. The first and foremost step is to collect the useful information regarding the personal situation of the person. It includes the information regarding the person’s family investment that means investment in the health, life, property, liability, tax, employee benefits etc. Using this information, the personal financial statement of the person and a balance sheet is also prepared. The main purpose of the preparation of the personal balance sheet is to determine how much amount the person has now, and how much amount he needs to achieve his long term and short term financial goals. The short term goals will be related and will be based on the current financial situation of the person. Also the preparation of the personal financial plan will enable the person to identify his assets and liabilities. Listing of the assets will help the person to get an idea regarding the liquidity and liabilities give an idea regarding his personal claims and both are listed according to the order of liquidity and claims. The difference between the assets and the liabilities gives the net worth of the person, which indicates the financial position of the person at that particular point of time. Some of the other items listed in the personal balance sheet include fixed assets, which are characterized by reduction in the value over the entire life time, then comes the appreciating assets which characterized by an increase in their value over the life time, another item is diversification in which the money is allocated among different assets than concentrating on a single asset. Another item called the portfolio of assets consists of all the assets the person posses. Return on portfolio is another item listed in the balance sheet which consists of the cash generated from the assets and the annual increase in the market value of the asset instrument. By calculating the net worth, the person will get an idea regarding his present financial condition and from there he can plan for his future. If the net worth is showing a negative amount then in the financial plan, top priority should be given to pay off some of those debts. If the net worth is positive, then more importance should be given to increasing the net worth by either decreasing the liabilities or by increasing the investments in the assets.

The second step involved in the preparation of the personal financial plan is the fixing of the objectives. But the problem is that the objective may not remain static since the priority of the objectives change along with the circumstances of the person. A person can fix many objectives according to his situation.

Personal Financial Plan of Mr. X

To draw the roadmap of a strategy to implement, the first thing needed is to define the destination. Therefore, it is vital to set the financial goals one wants to achieve. The personal financial plan of Mr. X cannot be separated from his life objectives. It includes both monetary and non-monetary objectives. The ultimate aim of a financial plan, as stated earlier is to have financial security and personal wellness. Mr. X has also the same objectives in life. His long-term objectives in life include:

Maximizing earnings and wealth
Practicing efficient consumption /Efficient Spending
Finding life satisfaction through enough savings, owning home, being free of debt and having a good job that pays handsome package
Financial Security

However, the specific goals through which his long-term objectives are attained can be put as below:

Finish BCCC 2 years college in 2010 with AA degree
Attain a Bachelor Degree in Accounting from the University in the next 2 years
Acquire a good job that pays in the range of $ 50,000-$70,000 per annum
Pay off all debts including that o$530 f three credit cards worth $1,200 with Best Buy MC, $670 with Sears MC and $530 with Discover Card
Loose weight of 10 pound in three months
Save $1000 for a pleasure trip in June 2009

Mr. X’s financial goals are not arranged sequentially. The above list is the various financial goals to be attained at different tome points. The first thing that he would like to have in life is an academic qualification with a very good grade. This takes two years for completion. However, he will have many short term financial objectives during this period. After that, he likes to attain a University Bachelor Degree in another two years. Though, this seems to be somewhat non-monetary, the purpose of academic qualification includes acquiring wealth also for better living. Acquiring a job that pays a handsome salary is of course an objective that is most important to Mr. X. Because, financial security is basically depends upon how regular one’s income is and its volume. But volume does not matter when one is not able to spend economically and logically. Thus, knowing one’s sources well before spending is very important for financial wellness and prosperity. Mr. X has to first practice budgetary discipline so that he will be able to spend the money efficiently. Savings can be made only if the monthly income exceeds the monthly expenses. But, if the monthly expenses exceed the monthly income, savings become impossible. He wants to pay off his debts taken from three credit cards during his studies. Similarly, he wants to go for a leisure trip in the middle of his studies by incurring an amount of $1000. Mr. X also likes to loose his weight by 10 pounds in the next three months.

Question No. 2

Tabl 1. List of Monetary and Non-monetary Goals with target date and amount of money

Sl. No.	Monetary Goals	Target Date	Target Amount of Money	Sl. No.	Non-monetary Goals	Target Date	Target Amount of Money
1	Gaining a good job	After 2012	$ 50000 – $ 70000	1	Completion of BCCC	2010
2	Debt Pay off			2	Bachelor Degree in Accounting	2012
a	Best Buy MC		$1,200	3	Reducing weight	in the next 3 months
b	Sears MC		$670
c	Discover card		$530
3	Pleasure Trip	Jun-09	$1,000

Question No. 3 (a)

Table 2. Mr. X’s Income Statement for the month of September, 2008 (Amount in $)

Income	Sep-08
Salary	1150
Total Income	1150

Expense
BGE	150
Car Insurance	67
Apartment Payment	200
Food, shopping	190
Credit Card Payment	150
Personal spending	150
Gas	100
Total Expense	1007
Net Income	143

(Flexo).

Question No. 3 (b)

Table 3. Balance Sheet of Mr. X for the month ending September, 2008 (Amount in $)

Assets	Amount	Amount	Liabilities	Amount	Amount
Cash	143		Credit Cards
			a. Best Buy MC	1,200
Investments	200		b. Sears MC	670
			c. Discover card	530
			Total Liabilities	2,400
Real Estate	Nil		Less payment during the month	150
					2,250
Other Assets	Nil		Other Liabilities		Nil
Automobiles	Nil
Negative Net worth	1907

Total Assets	2,2,50		Total Liabilities		2,2,50

Question No. 3 ©

Table 4. Mr. X’s Monthly Budget commencing from September, 2008 to August, 2009

Category	Sept	Oct	Nove	Dece	Jan	Feb	Mar	April	May	June	July	Aug
Income
Salary	1150	1150	1150	1150	1150	1150	1150	1150	1150	1150	1150	1150
Other Income
Income Sub total	1150	1150	1150	1150	1150	1150	1150	1150	1150	1150	1150	1150
Expense
Apartment payment	200	200	200	200	200	200	200	200	200	200	200	200
BGE	150	150	150	150	150	150	150	150	150	150	150	150
Personal Spending	150	150	150	150	150	150	150	150	150	150	150	150
Utility
Gas	100	100	100	100	100	100	100	100	100	100	100	100
Food
Food and Shopping	190	190	190	190	190	190	190	190	190	190	190	190
Debt Payments
Credit Card Payment	150	150	150	150	150	150	150	150	150	150	150	150
Pleasure trip										1000
Car Insurance	67	67	67	67	67	67	67	67	67	67	67	67
Investment and Savings	200
Total Investment and Expenses	1207	1007	1007	1007	1007	1007	1007	1007	1007	2007	1007	1007
Surplus or Shortage	-57	143	143	143	143	143	143	143	143	-1053	143	143

(Budget Worksheet).

Calculation of Ratios

Question No. 3.1

Table 5. Liquidity/ Expense Ratio

Month	Liquid Assets	Total Monthly Expenses	Ratio
September	343	1007	34.
October	343	1007	34
November	343	1007	34
December	343	1007	34
January	343	1007	34
February	343	1007	34
March	343	1007	34
April	343	1007	34
May	343	1007	34
June	343	2007	17
July	343	1007	34
August	343	1007	34

Question No 3.2.

Table 6. Debt Payments to Disposable Income

Month	Debt Payment	Disposable Income	Ratio
September	150	143	104.89
October	150	143	104.89
November	150	143	104.89
December	150	143	104.89
January	150	143	104.89
February	150	143	104.89
March	150	143	104.89
April	150	143	104.89
May	150	143	104.89
June	150	Nil ( Pleasure trip)	Nil
July	150	143	104.89
August	150	143	104.89

Question No. 5

Table 7. List of Outstanding Debts

Nature of Debt	Name of Lender	Amount	Monthly Payment	Target date
Credit Card	Best Buy MC	1,200		at the end of each month
	Sears MC	670
	Discover card	530	150

Question No. 6

Month	Surplus	Deficit	Net Surplus	Average Surplus
September	nil	57
October	143
November	143
December	143
January	143
February	143
March	143
April	143
May	143
June	nil	857
July	143
August	143
Surplus/Deficit	1430	914	516	43

Mr. X has an average Surplus of $ 43 per month and he can avail debt for another $688, which can be calculated as below.

Monthly payment made by Mr. X for a total debt of $ 2400 is $ 150.

Therefore, rate of interest is 150/ 2400 = 6.25 %

Average surplus available with Mr. X is $ 43

Assuming the same interest rate, the maximum debt amount is 43/ 6.5 X 100 = 688

Question No. 7

No information on price range of house

Question No. 8

The only insurance policy with Mr. is auto insurance

Question No. 9.

The investment of $ 200 with a bank is the only investment

Question No. 10

No relevant data such as retirement age, percentage increase in the income and expenses etc are given, the calculation is impossible

Works Cited

Budget Worksheet. About.com: Financial Planing. 2008. Web.
Flexo. Personal Income Statement 2006. Consumerism Commentary. 2006. Web.
Harry., and Smith, Francis. Sample Statement of Net Worth. Finplan.com. 2007.

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