REPORT: PERSONAL FINANCIAL

PLANNING
(In partial fulfilment of covering the course on
Behavioural Finance and Wealth Management)

Submitted to:
Prof. Vinay Dutta
FACULTY, FORE SCHOOL OF MANAGEMENT

Submitted By:
Saurabh Agarwal
(FMG-25, 251058)

December, 2017

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 DECLARATION

I, Saurabh Agarwal Roll No. 251058 have completed this report on Personal Financial
Planning in partial fulfilment of covering the course on Behavioural Finance and Wealth
Management (BFWM), under the guidance of Prof. Vinay Dutta at Fore School of
Management, New Delhi.

This Report is the result of my own work, no part of it has earlier comprised any other
report, monograph, dissertation or book.

Signature

(Saurabh Agarwal)

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 TABLE OF CONTENT

Sr. No. Title Page

1 Introduction 4
2 Literature Review 4
3 Client Profile 7
4 Analysis of Current Financial Plans 11
5 Financial Goal Setting 12
6 Development of comprehensive financial plan 13
7 Implementation and Execution 14
8 Periodic Review and Update 15
Appendix 16
References 18

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INTRODUCTION:

Behavioral finance is the study of how psychology phenomena impact financial behaviour
(Shefrin,2005). It is a concept developed with the inputs taken from the field of psychology
and finance.
Personal financial planning is the process of making optimum utilization of available resources
to achieve individual and family goals. Goal-directed personal financial planning helps people
in determining where they are financially, where they want to be, and how they can get there.
Personal financial planning is broadly defined as a process of determining an individuals
financial goals, purposes in life and lifes priorities, and after considering his resources, risk
profile and current life style, to detail a balanced and realistic plan to meet those goals. The
individuals goals are used as guideposts to map a course of action on what needs to be done
to reach those goals.
The practical application of behavioural finance can create a successful advisory relationship.
Behavioral finance helps in formulating financial goals, consistent approach to delivering
wealth management services, meeting client expectations, and ensuring mutual benefits.

LITERATURE REVIEW:

Warschauer (2008) lists six areas in which financial planners make recommendations:
emergency fund management, debt management, insurable risk reduction, investment risk
control, goal assessment, and tax and estate assessment. There are a large number of detailed
areas of knowledge for financial planners (Certified Financial Planner Board, 2006) so
more detailed categories of advice could be identified. Recommendations that could
increase a client's wealth, including reallocating a portfolio to produce a higher return
over the long-run, refinancing high interest loans with lower interest and/or tax deductible
debt, and increasing the after tax return on investments based on income tax
considerations. Recommendations that could reduce risk include purchasing insurance,
decreasing the withdrawal of retirement savings to reduce the chance of outliving funds,
or making an investment portfolio less likely to incur substantial losses. Estate planning
strategies can increase the amount that intended beneficiaries receive after the client's death
and, in some cases such as with charitable remainder trusts, produce benefits to the client
before death. In addition to the types of benefits from specific advice, Stango and Zinman
(2009) note that households with behavioral limitations such as exponential growth bias

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can reduce the damage from their biases if they rely on outside financial advice.
Calculating the monetary benefits of financial planning advice may seem obvious when
applied to wealth increasing advice, but because some potential wealth increases take
place far into the future, discounting the benefit back to the present should be considered
in any estimate of value. Investment advice for long-run goals may likely increase
wealth, but if there are risks of losses, those should also should be considered in
the calculations. Calculating the monetary value of advice requires some assumptions
about the household's utility function. It is difficult to estimate a household's risk aversion
level for standard utility functions, but there is a substantial literature on this topic
(Barsky, Juster, Kimball, and Shapiro, 1997; Hanna and Lindamood, 2004). Advice that
helps a household balance consumption over its life cycle can be quantified by
assumptions about the intertemporal utility function of the household.

Risk management strategy and goal-directed personal financial planning are intimately associated.
In a nutshell, risk management and goal-directed financial planning deals with future events (set in
a context) whose outcome (positive, negative or neutral) is not precisely known and provides
opportunity for financial freedom. Financial freedom that people aim at throughout their lives is
dependent upon achievement of financial goals. Achievement of financial goals thus is logically
driven by integration of risk management framework to goal-directed personal financial planning.
This can be done by striking a careful balance between risk management and goal-directed financial
planning.

Fig: Continuous Risk Management Process

Family Risk Management: A Six-Step Process

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 1. Define long-term family goals and objectives

2. Identify risks associated with family objectives

3. Prioritize risks by likelihood of occurrence and potential impact

4. Create mitigation strategies for Top-Priority risks

5. Commit resources for implementing mitigation strategies

6. Monitoring the risk landscape and results of mitigation efforts

The Continuous risk management process and Family risk management process appear
connected with striking similarities, and provide an integrated view. Both begin with set
strategy/objectives corresponding to define long-term family goals and objectives. Communicate
and monitor is the same as monitoring the risk landscape and results of mitigation efforts. Thus,
aligning risk management process, encompassing set strategy/objectives, identify risks, assess
risks, treat risks, control risks and communicate and monitor, to goal-directed personal financial
planning appears logical.

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CLIENT PROFILE:
Vimal and Saumya Agarwal are married couple. Vimal is a senior engineer with a leading
multinational company, and Saumya is a house-wife. Since there marriage three years ago,
they have been living at Bangalore, Karnataka. Next year (i.e. 2018-2019), the family plans to
buy a 2-bhk flat in a residential apartment in Bangalore. The couple now feels that there is a
pressing need for a more structured and comprehensive financial planning, which will help
them achieve financial freedom and create wealth in the future.

Client Profile
Name Vimal Agarwal
Age 29
Profession Private job (since 2011)
Marital status Married (since 2014)
Children Nil
Dependents 3 (wife, parents)
Place of residence Bangalore
Gross Salary 16,00,000

Client Data Gathering:

The present situation of the client has been analysed by collecting and assessing all relevant
data sources of income and expenses (cash flow during the financial year 2016-2017),
personal wealth statement (assets and investments, liabilities), insurance policies, tax
returns, employee benefits.

Employee benefits provided by the employer include health insurance for self and family (INR
10,00,000), life insurance for self (INR 15,00,000), emergency loan option upto INR 10,00,000.

The client has a primary residence in his native place, the market value for which is estimated
to be INR 30,00,000.

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 Mr. and Mrs. Agarwal
Cash Flow Statement for year month March 31, 2017
Income (Cash Inflows)
Salary (gross) 1600000
Less Deductions
Income tax 270440
Provident fund 115200
Total income 1214360
Total income (per month) 101197
Cash Outflows
Fixed Expenses
Rent 25000
Total fixed outflows 25000
Variable Expenses
Food 15,000
Clothing 5,000
Telephone bills 1,000
Electricity 2,000
Transportation expenses 3,000
Medical Expenses 2,000

Recreation and entertainment 2,000

Miscellaneous 5,000
Total variable outflows 35000
Total outflows 60000

Cash Surplus 41197

Cash Surplus (per annum) 494360
Allocation of surplus
Addition to money market mutual fund
during the year 60000
Savings for short-term/ intermediate
financial goals 240000
Total Surplus 194360

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 Personal wealth statement
Mrs & Mr Agarwal
Personal wealth statement as on 31st March, 2017

Assets
Liquid Assets Rs.
Savings account balance 600000
Money market accounts/Flexi deposit 0
Cash on Hand 25000
Total liquid Assets 625000
Real Estate
Current market value of home 3000000
Personal Possessions
Furniture and appliances 100000
Stereo and video equipment 40000
Jewellery 500000
Total household assets 3640000
Investment Assets
Retirement accounts (PF/Gratuity/Pension Fund) 700000
Mutual Funds 60000
Equity (Market value of shares + New purchase) 0
Total investment assets 760000
Total Assets 5025000

Liabilities
Current Liabilities
Charge account and credit card balances 30000
Balance due on auto loan 0
Travel and entertainment card balance 0
Total current liabilities 30000
Long-Term Liabilities
Home Loan 0
Total long-term liabilities 0
Total liabilities 30000

Net worth (assets minus liabilities) 4995000

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Money Relationship Quiz:
In order to assess the clients relationship with money, the money relationship quiz was
conducted (refer appendix for quiz details). It has been observed that the client values money
for the security it provides.

Ratios for Evaluating Financial Progress:

Financial ratios provide guidelines for measuring the changes in clients financial situation.
These relationships can indicate progress toward an improved financial position.

Ratios for Evaluating Financial Progress

Ratio Calculation Value Interpretation
Liabilities divided
a very low debt ratio is best, which is
Debt ratio by net worth 0.006
the case in observation
(30000/ 4995000)
Liquid assets
divided by current a high current ratio is desirable to
Current ratio 20.833
liabilities have cash available to pay bills
(625000/ 30000)
Liquid assets
10 months of living expenses can be
divided by monthly
Liquidity ratio 10.417 paid if an emergency arises, which is
expenses
good
(625000/ 60000)

Monthly credit
Debt-payments a debt/payments ratio of less than 20
payments divided 0.000
ratio percent is advisable
by take-home pay

Amount saved each

15 percent savings ratio is good as
month divided by
Savings ratio 0.150 financial experts recommend savings
gross income
of atleast 10 percent
(20000/ 133333)

Emergency Fund:

Checking clients preparedness during an emergency has highlighted some positive aspects,
like stable job and high liquidity ratio maintained. However, some of the major risks are not
adequately insured, which include life insurance for self and spouse.

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ANALYSIS OF CURRENT FINANCIAL PLANS

Capturing Risk Exposure across significant life events:

Year Significant life event Risk exposure Possible risk strategy

increased
dependency,
life insurance,
2014 Marriage job loss,
sufficient liquidity
death,
disability
loan outstanding, creditor's indemnity
2018 purchasing a house
project delay policy
damage due to
automobile insurance,
accident,
2020 plan to buy a new car timely maintenance,
third party damage,
emergency fund
incidental losses

Identification of Insurance Needs:

To mitigate risk, adequate life insurance cover for self and the spouse is necessary.

Calculation of Insurance Needs

Know your family Income/Expenses
Monthly Income 101197
Spouse Income NIL
Monthly expenses(discretionary) 35000
Annual Expenses 420000
Number of years family will need replacement income 15
Total family expense needs 6300000
Know your family's one time needs
children's higher education 5000000
home loan pay-off 4500000
Total one time needs 9500000
Total requirement 15800000
Know your current assets
House value 3000000
Bank balance 600000
Investment (MF) 60000
Retirement plans(PF) 700000
Other assets(jewellery) 500000
Total existing assets 4860000
Insurance needs 10940000

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FINANCIAL GOAL SETTING:

Collective approach to setting goals can help in clearly articulating the goal statements and vision,
sub-goals and milestones, action plans and priorities. Meyer (2003) describes the characteristics of
SMART goals in attitude is everything. Use of goal setting worksheet in the SMART format helps
in objectively defining the goals. Objectively defined goals are not only achievable but also help in
reducing aspiration base risk.

Summary of Personal Financial Goals in SMART Format:

GOALS Specific Measurable Achievable Realistic Time Limited
Prepare a I want to prepare 5,000 I will start Same
contingency a fund for saving 5,000
fund contingencies monthly from
my salary
Save money I want to pay the 4,00,000 I will start Same Within 1 year
for down down payment saving 32,277
payment of for a new 2-bhk monthly from
new 2-bhk flat my salary
flat in
Bangalore
Buy a ICICI I want to 1,00,00,000 I will pay a Same After 1 year
Prudential purchase a term monthly
term life life insurance premium of
insurance for 867 from my
self salary.
Buy a ICICI I want to 50,00,000 I will pay a Same After 1 year
Prudential purchase a term monthly
term life life insurance premium of
insurance for 525 from my
spouse salary.
Buy a new car I want to 7,00,000 I will start Same After 3 years
(Volkswagen purchase a car saving 27,257
Polo) after 3 years monthly from
my salary after
1 year.
I want to clear I will clear my 45,00,000 I will take out Same After 20 years
off my home home loan in 39,052 from my
loan from next 20 years monthly salary
HDFC bank
Accumulate I want to save 50,00,000 I will start Same After 21 years
money for enough money saving 6,597
children to finance the monthly from
higher education of my my salary after
education child after 3 years
his/her schooling
Early I want to save 1,00,00,000 I will start Same After 26 years
retirement enough money saving 10,108
corpus for an early monthly from
retirement at an my salary after
age of 55 6 years.

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DEVELOPMENT OF COMPREHENSIVE FINANCIAL PLAN
After scrutinizing all the information provided, and developing financial goals in SMART
format, this section provides specific recommendations to help the client achieve his financial
goals.

Personal Insurance Plan:

The amount of insurance cover needed is INR 1 crore, which will help the family to settle all
the outstanding dues and generate income, in case of any unfortunate happenings. It is advised
for the client to go for Term Insurance plan, which provides death benefits, but no survival
benefits. The policy has a very affordable premium of INR 10,400 (ICICI Prudential) annually
for a policy period of 30 years, covering the client till the time he reaches an age of 60 years.

Personal Investment Plan:

Barne Principle (to find investible surplus)

INR (per
Provision month) INR(annual)

Provision for living expenses to maintain desired lifestyle 35,000 4,20,000

Provision for primary residence 25,000 3,00,000
Provision of emergency fund to meet contingencies 5,000 60,000
Provision of funds for acquisition or replacement of
consumer durables in the next 12 months 30,000
Provision for meeting any major event in the family 1,00,000
Total 9,10,000
Total Income 12,14,360
Investible surplus 3,04,360

To achieve the goals of children higher education and early retirement corpus, client
is advised to invest in Mutual Fund (Type- Balanced Hybrid Fund, i.e., An open ended
balanced scheme investing in equity and debt instruments).
Scheme characteristics:
Equity & Equity related instruments- between 40% and 60% of total assets;
Debt instruments- between 40% and 60% of total assets;
No Arbitrage would be permitted in this scheme

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 IMPLEMENTATION AND EXECUTION
Cost Expected Savings per
Goals Start Date End Date
Estimate Return month
SHORT TERM GOALS
Prepare a contingency fund 7% -5,000.00 April, 2017
Save money for down payment of 4,00,000 7% -32,277.37 April, 2017 April, 2018
new 2-bhk flat in Bangalore
MEDIUM TERM GOALS
Buy a ICICI Prudential term life -867.00 April, 2018
insurance for self
Buy a ICICI Prudential term life -525.00 April, 2018
insurance for spouse
Buy a new car (Volkswagen Polo) 7,00,000 7% -27,257.47 April, 2018 April, 2020
LONG TERM GOALS
I want to clear off my home loan
45,00,000 8.5% -39,052.05 April, 2018 April, 2038
from HDFC bank
Accumulate money for children 50,00,000 12% -6,597.52 April, 2020 April, 2038
higher education

12% -10,108.61 April, 2023 April, 2043
Early retirement corpus at age of 55 1,00,00,000

Assumptions:
1. When expected return is taken as 7%p.a., it is assumed that the money is kept in the
banks savings account where there is least amount of risk as compared to other
investments for other goals.
2. When expected return is taken as 7%p.a. as in the case of preparing a contingency fund,
it is assumed that as a contingency can arrive at any time, so the person will invest the
money in a recurring deposit till perpetuity.
3. For savings for childs education and early retirement, as the period for saving is long,
it is assumed that the money is invested in SIP which will moderately generate a return
of 12%.
4. The period for term insurance policy is 30 years, till the client reaches an age of 60.
5. To be conservative in our approach, we havent taken any increase in the bank savings
interest rate over the years.
6. The compound annual growth rate in the salary is taken as 10%p.a.

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PERIODIC REVIEW & UPDATE

Gatherer: how you acquire income

Accumulator: personal investing
Preserver: personal insurance + emergency planning
Harvestor: retirement planning
Distributor: estate planning

Tracking the progress of our goals is very critical to achieve the financial freedom. The
financial goals should be periodically reviewed, or in case of a major life event like change of
career, marriage, birth of child, significant change in income, etc.
In this case, reviews are scheduled every 2 years to make sure that the clients personal
financial plan is being executed in an expected manner, and to make necessary changes or
upgradation as and when required. Some of the events that can adversely affect the financial
plan are:

Increase in inflation rate (which is assumed to be 4%)

Substantial change in personal income tax rates or slabs
Less than optimal returns on mutual fund required to meet long term financial goals
Any unfortunate incidence occurring in the family

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 APPENDIX

Money relationship quiz:

In order to self-assess your relationship with money, circle the statements that best describe
you:
A. Its a good feeling to have money in my wallet

B. No one can ever really have enough money

C. Clothing should look expensive

B. You cannot live without credit

D. There are a lot of things more important than money.

E. Keeping track of every dollar would drive me crazy

A. It is important to record every dollar you spend

C. Money and prestige go hand in hand

E. A person can get along without a savings account

D. It is easy to have fun with simple things that do not cost much money.

A. Money should only be spent for necessities

C. I want nothing but the very best.

E. If I just wait, money problems will take care of themselves.

D. Money does not buy happiness

B. It would be easy to spend $5,000 in just a couple of days

A. I shop around to find the best price

E. If I need money, it will come from somewhere

A. I will not buy anything unless I have enough money for it.

C. If I am going to buy something, I am going to buy the best option of it.

B. I will never buy something used, always brand new.

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D. A lot of money would be nice, but I do not really need it.

E. I never make plans about money

Scoring:

Count up the number of times you circled A, B, C, D and E statements. I you circled

mostly

A: You value money for the security it provides

B: You want a lot of material items, and you want them now.

C: Money helps you feel important

D: Money is a resource to get the things you need or want

E: You are not concerned with money; there is no reason to worry about it.

Source: Money Relationship Quiz extracted from Money Talks ANR Publication 8272
2007 by Regents of the University of California Division of Agriculture and Natural Resources

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Emergency Fund: Are you prepared?

Checking preparedness during an emergency

I II III

Is your job stable? Not at More or Completely

all less
How dependent are you on interest, Totally Slightly Not at all
dividends and capital gains on your
investments to cover your regular expenses?

Do you have life, health, auto and disability Little/ No Some risks All risk
insurance? cover
Covered Covered

As a multiple of your regular monthly 15 days Two months Three

expenses (including loan repayments and months
insurance premium), how much of your
investments are in liquid options like savings
account, savings cum deposit accounts and
liquid funds?

What is the percentage of regular income 0-5 6-15 Over 15

generating assets to your net worth?
percent Percent Percent

Do you have access to comparatively cheap No access Limited Ample

credit like overdraft facilities against assets access access
like shares and home?

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 REFERENCES

Vinay Dutta, Intersection of Risk Management with Goal-directed Personal Financial

Planning.
Barsky, R. B., Juster, F. T., Kimball, M. S., & Shapiro. M. D. (1997). Preference
parameters and behavioral heterogeneity: An experimental approach in the Health
and Retirement Study. Quarterly Journal of Economics, 112. 537-579.
Calvet, L. E., Campbell. J. Y., & Sodini, P. (2007). Down or out: Assessing
the welfare costs of household investment mistakes. Journal of Political Economy,
115, 707-747.
Coceo, J. F.. Gomes. F. J., & Maenhout. P. J. (2005). Consumption and portfolio
choice over the life cycle.Review of Financial Studies, 18, 491-533.
Hanna, S. D., & Lindamood. S. (2004). An improved measure of risk aversion.
Financial Counseling and Planning, 15, 27-38.
Stango. V., & Zinman, J. (2009). Exponential growth bias and household finance.
Journal of Finance, 64,2807-2849.
Warschauer. T. (2008). The economic benefits of personal financial planning.
Proceedings of the 2008 Academy of Financial Services Annual Conference,
unpaginated. distributed on a CD
http://study.com/academy/lesson/financial-goal-definition-examples-quiz.html
http://www.retire-lan.com/blog/importance-financial-goals

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