HUSNIYAH BT. ABD. RAHIM BILIK A2-14 Jabatan Pengurusan Sumber & Pengajian Pengguna

1. FEM 3204 : 3 (2+1)Perancangan Kewangan Dalam Pasaran GlobalFinancial Planning in a Global Market HUSNIYAH BT. ABD. RAHIM BILIK A2-14 Jabatan Pengurusan Sumber & Pengajian Pengguna Fakulti Ekologi Manusia

2. Chapter 3 Financial Planning Process

3. Model of Financial Management • Adopted from Deacon and Firebaugh (1988) • the three components in financial management – input, throughput , output • Input- resources & demand – money from income or gifts, desire to purchase & expenses • Throughput – planning & implementation – financial planning & implementing the financial plan • Output – the satisfaction from the process, the financial well-being , financial status

4. Systems Approach • The systems approach in financial management: • The financial management is a dynamic process that needs individuals, households or institutions to interact with the environment while managing their money. • Deacon & Firebaugh (1988) integrates both system and ecology in their model, hence the approach is named ecosystem approach • This approach helps to understand the process of financial management of a system and the interaction between the system and unit in the environment

5. Systems Approach (cont.) System: • A group of unit or individual that coordinates, interact, mutually dependent, affecting and coorporating with each other to achieve financial goals. Eg. Household, community, financial institutions, financial advisor Ecology: • A study on how the units of living interact with the environment (human ecology – the interaction between human and environment) ; environment – the financial system, financial products)

6. Systems Approach (cont.) Three elements in the family ecosystem: • Organism or units of living– individual, family members • Environment • Organisation – the role as a management system to provide expertise and information for families to make financial decision- financial institutions

7. Financial Records: Income Statement and Balance Sheet

8. Financial Records Principal records most people should maintain Income statement • Summary of income & expenses for selected time period • Show annual changes in savings & investment • Provides 1st important step in financial planning & budgeting • It explains the latest financial history • From the income statement, check whether the expenses on housing is less than 35% & its monthly payment is less than 20% from income

9. Income Statement Developing an income statement, for a period of one year Steps • income: list down amount of income received last year from various sources - salary, allowances, dividend, rental etc • total the income from the various sources for the whole year • tax: include the income tax/taxes • total the taxes • amount for expenses, savings & investment: total income minus total tax. If it is negative, put in a bracket

10. Income Statement (cont.) 6. expenses consists of two: fixed and variable Fixed - housing (tax on land, tax on housing, annual payment), transportation (license, insurances, road-tax, annual payment), life insurance, educational plan/insurance Variable - housing (maintenance or repair cost), clothing and food, transportation (fuel, repair/service), other expenses such as entertainment, holiday tour, gifts, party 7. total the fixed and variable expenses 8. amount for savings & investment: amount number 5 minus amount of expenses (number 7). If negative, put in a bracket

11. Income StatementName: Salleh bin AhmadPeriod: 1 January 2009 to 31 December 2009 1 Income: RM RM Salleh’s salary 33,000 Sarina‘s salary 30,000 Dividend from ASB 1,500 House rental 6,000 Selling of motorbicycle 1,000 2 Total income 71,500 3 Tax: Income tax (Salleh & Sarina) 4,000 4 Total tax 4,000 5 Amount for expenses, Savings & investment 67,500

12. Income Statement (cont.) 6 Housing expenses Fixed Variable Annual payment (loan) 12,000 Housing & related tax 300 Food 10,000 Clothing 2,000 Transportation: Fuel 1,600 Insurance 1,200 License 120 Life insurance 4,000 Annual payment (loan) 8,000 Others 800 Small total 25,620 14,400 7 Total expenses 40,020 8 Amount for savings & investment 27,480

13. Balance Sheet • Consist of asset and liabilities • Asset - items that you owned, use the market value Liabilities - debts • Difference in asset and liabilities is the net-worth Networth= asset - liablities • If asset > liabilities => positive networth • If asset < liabilities => negative networth • Assets : financial asset (cash, savings or current account, receivable, investment, insurance) & fixed asset (house, land, car) • Liabilities: fixed & variable

14. Balance Sheet(cont.) Developing the balance sheet ■ At one point of time eg. Ended 31 st December 2009 Steps • Financial assets: Cash- cash at hands, savings or current accounts • Financial assets: Receivables - money lend to others & might be able to retrieve. Estimate the amount of receivable • Financial assets: Investment - list market value of investment, bond, insurance, retirement fund (amount that are able to withdraw). Total the market values.

15. Balance Sheet(cont.) 4. Total financial asset = 1 + 2 + 3 • Fixed assets: Property - house, land; use the market value • Fixed assets: Investment - retirement fund (cannot withdraw now), long-term investment - current value 7. Fixed assets: Car -market value 8. Fixed assets: Personal belongings - jewellery, antique, electrical items, furniture 9. Total fixed asset=5+6+7+8 • Total the financial and fixed asset =4 + 9

16. Balance Sheet(cont.) 11. Fixed liabilities: Balance of loan - car, hirepurchase, educational loan, housing loan 12. Variable liabilities: Bills to be paid - insurance premium due, credit card bill, purchasement with deferred payment, rental, tax, utility bills 13. Total liabilities = 11 + 12 14. Net-worth = Asset - liabilities =10 - 13; if negative net­worth, put the amount in bracket.

17. Changes to the Balance Sheet 1. The value of assets changes according to market value • Liabilities may increase (took new loan) or reduce (repayment of loan) • Selling off asset will change the fixed asset to financial asset or vice-versa if buy asset

18. The Effect of Changes in Income Statement on the Balance Sheet • Changes in surplus or deficit in income statement will affect the net-worth in balance sheet • If increase in value occur in income statement, eg. Surplus of RM2,000 of income, an increase of RM2,000 will occur in the asset category of balance sheet. The net-worth increase in the same amount (+RM2,000) BeforeAfter the Surplus Assets RM28,000 RM30,000 Liabilities RM10,000RM10,000 Net-worth RM18,000 RM20,000

19. Evaluating the Financial Situation 1. Using balance sheet: Balance sheet shows the use of money – for assets & liabilities i. Referring to the asset & net-worth: • Higher net-worth, better financial situation • Guideline: 30 – 50% of networth should be in the financial asset so that cash money is easily to obtain during emergency • Financial asset has high liquidity • Liquidity- how easy or quick for an asset to be converted to cash without reduce of value

20. Evaluating the Financial Situation(cont.) ii. Referring to the assets & liabilities: • Compare the total cash with total liabilities • Cash> liabilities • Debt less than 50% of financial asset iii. A positive change in net-worth for series of balance sheet for different time shows that liabilities is decreasing or asset is increasing or there are changes in both asset & liabilities but the asset increase > than the liabilities increase

21. Evaluating the Financial Situation(cont.) iv. To increase net-worth, increase the income or spend less than income, so there is surplus of income that could be saved Other evaluation: a. Ratio of asset to liability = total asset > 1 total liability Asset can be used to pay off the debt if ratio is equal to 1 Asset>>>liability to be financially stable

22. Evaluating the Financial Situation(cont.) b. Ratio of liability to asset = total liability < 1 total asset • The opposite of the 1st ratio • Liability can be paid off by the valued of asset if ratio is 1 • Liability <<< asset to be financially stable c. Ratio of net-worth to liability = net-worth total liability • The use of this ratio is better than (a) to determine financial situation • A positive ratio shows good financial situation • A negative ratio shows bad financial situation

23. Financial Goals

24. Budgeting • Budgeting or a spending plan is a process of income allocation for spending need • Prior to that individual should determine their financial goals • Budgeting is based on past expenses of the items • The budget would involved the expected monthly income & expenses and carried out for one year • It is budgeted before the income or expenses occurred • Categories of items are written in the spending plan

25. The Importance of Budgeting • Helps individual to save to purchase for items needed, thus reducing the use of credit • Enable an individual to live within his income • One way to overcome financial tense in family due to financial matters • Helps to keep records for items that are taxable for the purpose of income tax • Enable the individual to control and record expenses • Enable specific financial goals to be achieved • Helps individual to be prepared for financial emergencies • Assist the individual in directing the income to important expenses

26. Objectives of Budgeting • To implement a proper & disciplined spending – individuals must follow the amount allocated • To reduce amount of money wasted through unnecessary spending by • Reducing interest for credit • Buying items that involved large sum of money at different period of time (eg. Different months) • Discussing with family members the items that should be bought at certain time

27. Budgeting (cont.) There are 3 steps in budgeting • Planning the spending plan • Estimating available income • Defining major expense categories & setting budget levels 2. Implementing the spending plan 3. Evaluating the spending plan

28. Steps in Budgeting Planning the spending plan i. Estimating available income Income are identified, make a list or table of income that might be received the following year Income may be based to the past income with a little adjustment Income include: Salary (later minus the income-tax) Dividend from investment Bonus from investment or salary, profit from business Borrowed money Money from working children Rental from tenant Debt repayment by others to you

29. Steps in Budgeting (cont.) Table of Income (for next year)

30. Steps in Budgeting (cont.) ii. Defining major expense categories & setting budget levels Consider the spending habit of family members & discussed Review the suitability of financial goals Allocate amount of money for expenses: Identify the expenses & the amount that will be spend the following year by referring to expenses made in the previous year (Worksheet for Recording Expenses) For annual expenses (once a year), calculate the average monthly expenses

31. Worksheet for Recording Expenses (reference for next year)

32. Budgeting (cont.) Table of Past Expenses (used the amount for next year)

33. Steps in Budgeting (cont.) • Implementing the spending plan • Use a summary of the budget (table) to monitor and control expenses • When spending, keep all records related to expenses. Eg. Receipts for payment of utility bills, purchasing items receipts, receipts of payment of fees, statement on depositing money for payments of car loan, home loan • Write down all expenses for a certain category of expenses & get the monthly total amount. Eg. Clothes, food • Some items may not be categorised eg. Car installment, electricity bills • For annual expenses, write down the actual amount spent in the specific month

34. Table of Budget Summary

35. Steps in Budgeting(cont.) • Evaluating & reviewing the spending plan • Evaluate the spending plan to identify any major differences in expenses or whether the actual spending conform to the budget for that year • Review the spending plan in periodical. For eg. Review every 3 months • The review is to ensure that the spending plan or budget is suitable with current changes • Eg. Changes in family life-cycle, changes in wants, inflation • If there is any changes in the price or wants of family members, then the spending plan will also be altered

36. Budgeting (cont.) The income for each month may not be the same due to • Increase in income starting at certain month (annual increment for permanent job) • Increase in income due to job promotion • Bonus or dividend obtained from investment at certain month, usually at the end of the year • Profit from business incurred once in 2 or 3 months • House rental may differs as tenant move out or new tenant moves in

37. Budgeting (cont.) The expenses for each month may also differs due to • School fees are paid at the beginning of the year • Other fees may be paid once in 6 months or so on • Fees for higher education are paid at the beginning of the semester eg. June and November • Car insurance, road-tax and driving license are paid once a year • Expenses for festive seasons or schools - transportation, clothing & food for the specific festival or new school uniforms, books & other equipments • expenses during school holiday may increase with holiday tour

38. Budget (cont.) • Expenses that exceeded the spending plan will result in either the savings reduced or the use of credit increased • Expenses that exceeded income resulted in the use of credit, the use of cash advance from credit card or borrowing from friends • Together with the spending plan or budget, need a list for sources of income, a list of expenses for each item & for each transaction occurred and also a table for achievement of short-term & long-term financial goals

39. Budgeting Problems Past mistakes • Mistakes such as large department store bills or high payments for non-essentials eg. car accessories would jeopardise the budget • Rectifying the errors from previous expenses can help to ensure the success of the new budget • When the budget is finally started, it will be a spending pattern that is more consistent with spending plans not as a spending pattern like before

40. Budgeting Problems (cont.) Car payments • When car payments were completed somewhere in the middle of the year, you should make provisions before the year started to save an amount equal to the payments • Some people might simply increased the spending in other areas • The saved amount from the supposed car repayment can help to increase usage of cash in the next car purchasing & lessen the car loan, thus reducing extra expense from loan interest

41. Budgeting Problems (cont.) Two incomes • The danger of two incomes is in getting used to living on two salaries • Do not become dependent on the second income • Budget only the primary income for routine living expenses • The second income should be used for non-regular expenses such as for vacation or eating out frequently and also for savings & building wealth • If the second income is used for normal expenses, if it stops, the normal expenses has to be reduced & this will be difficult

42. Budgeting Problems (cont.) Joint effort • Budget should be a family effort • In younger family, it involve both husband & wife • If it is not a joint effort, there is little chance that it will succeed • In older families, other than the husband & wife, children should involved in the budgeting process as they are also spending part of the family income • The budget is only a visible evidence that shows a family wants to control the way it spends money • Full cooperation of family members are needed to make the budget work