Lecture Notes: Financial Planning and Financial Products
Introduction to Financial Planning and Financial Products
Importance of Financial Planning: Helps individuals achieve long-term financial goals such as buying a house, starting a business, or retiring comfortably.
Introduction to Saving
What is Saving?: Refers to setting aside a portion of income/resources for future use rather than spending it immediately.
Benefits of Saving: Helps achieve financial goals like buying a house, starting a business, or retiring comfortably.
Ways to Save Money:
Setting up saving accounts
Creating a budget
Automating saving transfers
Cutting back on unnecessary expenses
Uses of Savings:
Building an emergency fund
Investment for future
Achieving financial stability
Developing regular saving habits and mindful spending
Benefits of Savings
Financial Security: Provides a safety net for unexpected expenses like medical emergencies, car repairs, or job loss without going into debt.
Achieving Financial Goals: Helps in buying a home, starting a business, or funding children's education.
Emergency Fund: Provides peace of mind and financial stability during crises (e.g., job loss, natural disasters).
Retirement Planning: Saves for retirement, ensuring financial security in later years.
Opportunity to Invest: Saves money to invest in assets like stocks, bonds, real estate, and retirement accounts for additional income and long-term growth.
Reduced Financial Stress: Knowing that there is money set aside for emergencies reduces stress and anxiety.
Time Value of Money (TVM)
Definition: The idea that a dollar today is worth more than a dollar in the future because of its potential earning capacity.
Factors Influencing TVM: Inflation, interest rates, and potential earning capacity of invested funds.
Components of TVM:
Future Value (FV): Value of an investment at a specific future date considering interest/return on investment.
Present Value (PV): Current value of a future sum of money, discounted back to the present at a specific rate of return.
Formulae:
FV: FV = PV (1 + r)^t
PV: PV = FV / (1 + r)^t
Managing Spending
Steps for Managing Spending:
Create a budget outlining income, expenses, and financial goals
Track expenses meticulously
Differentiate between needs and wants
Use cash or debit cards instead of credit cards
Comparison shopping for best deals
Avoid lifestyle inflation
Set saving goals
Regularly review and adjust budget
Financial Discipline
Achieving Financial Discipline:
Create a budget and stick to it
Avoid impulse purchases
Limit credit card use
Build an emergency fund
Set clear financial goals
Automate savings
Monitor progress and adjust
Educate yourself on financial literacy
Stay motivated
Types of Banks
Key Types of Banks:
Reserve Bank of India (RBI)
Commercial Banks
Scheduled Banks
Non-Scheduled Banks
Regional Rural Banks (RRBs)
Public Sector Banks
Private Sector Banks
Cooperative Banks
Foreign Banks
Development Banks
Banking Products and Services
Main Services Provided by Banks:
Loan facilities
Overdraft facility
Discounting of bills
Encashing cheques
Collecting and paying instruments of credit
Exchange of foreign currency
Utility bill payments
Types of Bank Deposit Accounts
Main Types:
Savings Bank Account
Term Deposit (Fixed Deposit)
Current Account
Recurring Deposit
Digitalization of Transactions
Net Banking
Features: Account management, fund transfer, bill payment, mobile recharge, online shopping, investment, and insurance
Advantages: Convenience, time-saving, cost-effective, enhanced security, transaction history tracking
Disadvantages: Security risks, technical issues, dependence on technology, lack of personal interaction, limited cash transactions
Definition: Investment vehicles pooling money from multiple investors for diversified portfolio investments
Advantages: Diversification, professional management, variety of options, liquidity, transparency
Disadvantages: Fees and expenses, lack of control, market risk, tax implications, potential for underperformance, redemption restrictions, over-diversification
Insurance
Concept: Provides protection against the risk of uncertain events via risk pooling where individuals and entities facing similar risks contribute premiums to a collective fund
Principles:
Principle of utmost good faith
Principle of insurable interest
Principle of indemnity
Principle of contribution
Principle of subrogation
Principle of proximate cause
Principle of mitigation of loss
Life Insurance
Definition: Contract between an individual and insurance company to pay a designated sum to beneficiaries upon the insured person’s death
Types: Term insurance, endowment policies
Principles: Utmost good faith, insurable interest, indemnity, contribution, subrogation, proximate cause
Benefits: Financial protection, income replacement, tax benefits
Health Insurance
Definition: Provides coverage for medical and surgical expenses incurred by the insured person
Importance: Financial protection, access to healthcare, preventive care, peace of mind
Benefits: Covers medical expenses, access to network of providers, financial stability
Property Insurance
Definition: Provides financial protection against damage or loss of physical property