Personal Finance for Accountants (U13763)

Lecture 1 Introduction

Personal Finance for Accountants• Studying Personal Finance

Scheme of workAssessment

• Introduction to Personal Finance

Why study Personal Finance?Topical issues

• Principles of Financial Planning

Studying Personal Finance

Recommended Core Text:Personal Finance and Planning Theory and Practice by Debbie Harrison. Published by FT Prentice Hall (2005). ISBN13:9780273681014 ISBN10: 027368101X

Assessment

• Group Presentation on a Personal Finance Topic 40%

• Seminar Preparation 10%

• In-Class Test week 11 (Multi-choice questions) 50%

Topical Issues- Banks in Trouble

Credit Crunch

• Credit crunch – a period of restricted lending

• Nationalisation of banks: Northern Rock;Bradford and Bingley.

• Other Banks in trouble e.g. HBOS

• Recession looming (?)

Why study Personal Finance?

• Throughout our lives there are major financial milestones such as buying a house and preparing for retirement. These types of decisions are long term and involve large sums of money so they need to be carefully planned.

Why study Personal Finance?

• There are also changing trends in the economy which require us all to be more financially astute. An example is the level of unsecured personal debt that we are all living with. Most students are graduating with considerable amounts of debt (see creditaction article). We are also bombarded on a daily basis with tempting offers of credit, these need to be treated with some caution.

Why study Personal Finance?

• So this course aims to increase your awareness of such issues and to arm you with the tools to help you to make sound life long financial decisions.

• We will cover such topics as Banking and Debt, Savings and Personal Taxation. We will examine opportunities to keep our precious savings out of the Tax man’s net!

Why study Personal Finance?

• Provision for retirement may seem a long way away but the simple rule is the earlier that you start the better so we will investigate different ways of providing for retirement. This will include the traditional pension and alternatives such as buy to let property

Why study Personal Finance?

• As background to Personal Finance it is necessary to have an understanding of the regulatory environment in which it operates and also to have an appreciation of financial planning.

Principles of Financial Planning

• The first step in achieving Personal Finance goals is to prepare a plan.

• Financial Planning has be described as:

• A service that helps individuals and families to achieve their personal objectives through the construction of an appropriate financial plan. The plan represents a journey..to the desired goal. Harrison (2005)

• Some typical personal finance goals are:

Reducing or eliminating debtBuying a houseAchieving a comfortable retirement

Principles of Financial Planning• The planning process will go through several

activities including:

• Data gathering;• Goal/objective setting;• Identification of financial issues;• Preparation of alternatives and

recommendations;• Implementation of the alternative selected, and• Revision of plan

Principles of Financial Planning

• Any good planning system will involve periodic reviews where the actual outcome is compared to the plan.

• As a result of this the either action must be taken to get us back on track to achieve our plan or possibly the plan will be revised in the light of new information..

Principles of Financial Planning

• As part of the data gathering activity we will be required to:

• Prepare a statement of the individuals financial circumstances, issues and objectives.

• Prepare an assessment of the individuals risk profile.

• Prepare a financial statement for the individual

Principles of Financial Planning

• Use appropriate financial data to make realistic assumptions regarding, inflation, interest rates, investment growth etc.

• Produce a written plan. This will identify the individuals objectives including time frames and set out how to make the most of existing resources

Risk

• From a mathematical point of view risk is defined as the standard deviation of the average return.

• However individuals perception of risk is very subjective. The measurement of risk is an attempt to measure uncertainty.

Risk

• With certain types of investment we have the potential to lose our capital (the amount we invested) such as when investing in a company’s shares. Compare this to investing in premium bonds (a government scheme) where the capital is returned on demand.

• We will see later that risk and return have a direct relationship. Generally speaking low risk equals low return and high risk equals high return.

Balance Sheet of an Individuals Assets and Liabilities.

Assets Liabilities

After tax Earnings Living expenses

Savings and Investments Mortgage and other loans

Equity in Property - main residence and buy to let.

Credit card debt

Company share schemes Education fees

Occupational and private pensions Charitable giving

Tangible assets e.g. works of art, antiques and classic cars.

Insurance and maintenance

Example: eliminating all my personal debt

• Data gathering

• How much debt do I have?• With who?• How much interest am I paying?• Are there any penalties to get out early?

• Goal/objective setting

• To eliminate all my personal debt (excluding the mortgage) by the end of 2010 (make the objective measurable so that you know if you have achieved it)

Example: eliminating all my personal debt

• Identification of financial issues

• How do I continue to pay essential bills during this time.

• Preparation of alternatives and recommendations;

• Getting rid of most expensive debt first.• Setting a weekly spending budget.• Getting additional income E.g. Extra job, take in a lodger• Review all spending to look for savings e.g. uswitch.

• Implementation of the alternative selected and• Revision of plan.

Seminar Work

• Review Qs pp 17 & MCQs as given.

• Required Reading

• Core Text - Personal Finance and Planning Theory and Practice by Debbie Harrison.

• Chapter 1 The Principals of Modern Financial Planning