FOUNDATIONS OF PERSONAL

FINANCIAL PLANNING

Outline
Overview of the personal financial planning
Personal financial planning: conventional vs
Islamic perspectives
Key components of a financial plan

How Financial Planning Affects Your Cash Flow

1. Financial
Planning
6.Retirement and
Estate Planning
Your
Cash

2. Managing Liquidity
(Cash and Credit Management)

5. Investing

4. Income and Asset

Protection

Products
and
Service

3. Managing expenditures
for major purchases

Steps in Successful Management of

Personal Finance
Lifetime Financial Objectives
Retirement and estate planning
Wealth

Investment planning
Income and asset protection
Managing expenditures
Cash and credit management

Accumulate wealth for retirement

Reach financial security
Find life satisfaction
Practice efficient consumption
Maximize earnings and wealth

Financial planning

What You Will Gain From The Study Of

Personal Finance
Financial literacy -- the vocabulary necessary to
manage ones personal finances
Personal finance -- the study of personal and family
resources considered important in achieving financial
success.
Personal financial planning the process of planning
your spending, financing, and investing to optimize your
financial situation.
Financial success -- the achievement of financial
aspirations that are desired, planned, or attempted. It is
defined by the individual or family that seeks it.
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The Financial Planning Process

Six-step procedure for Financial Planning
Determine your current financial situation.
Develop your financial goals.
Identify alternative courses of action.
Evaluate your alternatives.
Create and implement your financial action
plan.
Review and revise your plan.

The Financial Planning Process

Step 1: DETERMINE YOUR CURRENT
FINANCIAL SITUATION

Determine current financial situation regarding

income, savings, living expenses, and debts

Prepare a list of current asset and debt

balances and amount spent for various items

Match financial goals to current income and

potential earning power
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The Financial Planning Process

Step 2: DEVELOP YOUR FINANCIAL GOALS
Identify feelings about money and the reasons for
those feelings
Determine the source of your feelings about money
Determine the effects of economy on your goals and
priorities
Make sure that your goals are your own and are
specific to your situation
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The Financial Planning Process

Step 3: IDENTIFY ALTERNATIVE COURSES
OF ACTION
Possible courses of action can be:
Continue the same course of action
Expand the current situation
Change the current situation
Take a new course of action
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The Financial Planning Process

Step 4: EVALUATE YOUR ALTERNATIVES
CONSEQUENCES OF CHOICES
Opportunity cost - What you give up
when you make a choice
The cost or trade-off of a decision cannot always be
measured in dollars. Sometimes the cost is your time

EVALUATING RISK
Uncertainty is a part of every decision.
Best way to analyze and minimize risk is to gather
information from financial planning sources.
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The Financial Planning Process

Step 5: CREATE AND IMPLEMENT YOUR
FINANCIAL ACTION PLAN
Develop an action plan that identifies ways to
achieve financial goals
Possible action plans can be increasing savings,
reducing spending, or making provisions for taxes
To implement action plans you may need
assistance from others
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The Financial Planning Process

Step 5: CREATE AND IMPLEMENT YOUR
FINANCIAL ACTION PLAN
Develop an action plan that identifies ways to
achieve financial goals
Possible action plans can be increasing savings,
reducing spending, or making provisions for taxes
To implement action plans you may need
assistance from others
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The Financial Planning Process

Step 6: REVIEW AND REVISE YOUR PLAN
Financial planning decisions need to be assessed
regularly
Complete review should be done at least once a
year
Regular reviews of decision-making process can
help in making priority adjustments to achieve
financial goals
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What Islamic Financial Planning

Is About
The financial needs of a Muslim are similar to
those of a non-Muslim except that they should
not go against the dictates of Islam.
Islamic financial planning is basically a financial
planning that conforms to Shariah (Islamic Law)
or Shariah compliant.
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Primary Sources of Shariah

The main sources of Shariah are:

1. Quran (holy book for the mankind)

2. Sunnah (Practices & Saying of the Prophet
Muhammad s.a.w./pbuh)
3. Ijma (consensus of Muslims community)
4. Qiyas (analogy/ analytical comparison)
5. Ijtehad (reasoning applied by scholars)
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Shariah vs
Conventional Financial Planning
In offering shariah based financial planning
services to a Muslim client, the practitioner
should take care the statements do not embody
any prohibited (haram) element, and the assets,
liabilities etc are properly reflected in line with
shariah guidelines.

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Shariah vs
Conventional Financial Planning
Haram (illegitimate) sources of income are
prohibited, which include income from:
Riba (Usury) interest income received from money
lending, savings, investments or any trades.
Gambling
Gharar (uncertainty in contracts)
Conventional insurance
Sale of alcohol/pork
Bribery

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The Scope of Financial Planning

From Islamic Perspectives
Cash flow and Liability Management (Shariah
compliant):
Practice Shariah principles and use Islamic financial
instruments in managing your income vs. expenditures,
assessing personal balance sheet, budgeting, controlling
and eliminating debts, and buildings savings.

Tax and Zakat Planning

Tax planning is a necessity, especially if one is in the
higher income bracket. Muslims are provided tax rebates
on the full amount of zakat paid to authorized zakat
collection bodies.
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The Scope of Financial Planning

From Islamic Perspectives
Risk Management and Takaful Planning
(Shariah compliant)
Managing cash flow risks and mitigating financial loss
exposure through effective Islamic financial management
and Takaful techniques.

Investment Planning (Shariah compliant)

Accumulating wealth based on Islamic financial
instruments

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The Scope of Financial Planning

From Islamic Perspectives
.

Retirement Planning (Shariah compliant)

Planning for financial independence and comfortable
living during your retirement.

Estate Planning (Shariah compliant)

Planning for protection, conservation and distribution of
your assets or estates.

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Money Management
Money management refers to the process of knowing
where you are spending your money today, and having a
well thought-out plan in the future.
Money management activities comprise of:
Get organized: Storing and maintaining personal
financial records and documents
Creating personal financial statements (personal balance
sheet and cash flow statements)
Creating and implementing a budget
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Money Management
There exist opportunity costs in money
management
Spending money on current living expenses
reduces the amount you can use for saving and
investing for long-term financial security
Saving and investing for the future reduce the
amount you can spend now
Buying on credit results in payments later and a
reduction in the amount of future income
available for spending
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Personal Financial Statements

Measure Financial Progress
Develop a personal balance sheet and cash flow
statement
Purpose of Personal Financial Statements
Report your current financial position in relation to
the value of the items you own and the amounts
you owe
Measure your progress toward your financial
goals
Maintain information on your financial activities
Provide data you can use when preparing tax
forms or applying for credit
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BALANCE SHEET
A balance sheet, also called a net worth statement or
statement of financial position, indicates what you own and
what you owe.
ASSETS
LIABILITIES
NET WORTH
Item of value __ Amount owed = Net worth
(what you own) (what you owe) (your wealth)

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BALANCE SHEET
CATEGORIES OF ASSETS:
Liquid Assets: e.g. Cash, Money in Savings and current
accounts, Fixed Deposits
Real Estate: e.g. House, condominium, land
Personal Possessions: e.g. Automobiles, jewelry,
collectibles
Investment Assets: e.g. Stocks, bonds, unit trusts
CATEGORIES OF LIABILITIES:
Current Liabilities: e.g. Credit card balances, medical
bills, insurance premiums
Long-term Liabilities: e.g. Mortgage loans, automobile
hire-purchase, education loans
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BALANCE SHEET
Net worth is the amount you would have if all assets were
sold for the market values and all debts are paid in full. Net
worth can be increased by:
Increasing your savings
Reducing spending
Increasing the value of investments and other
possessions
Reducing borrowings and debts

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BALANCE SHEET
BALANCE SHEET: WHERE ARE YOU NOW?
Also called the Net Worth Statement or Statement of
Financial Planning
Preparation of Balance Sheet requires using the
following Steps
STEP 1: LIST ITEMS OF VALUE
Assets - what you own

Liquid assets
Real estate
Personal possessions
Investment assets

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BALANCE SHEET
STEP 2: DETERMINE THE AMOUNTS OWED
Liabilities - what you owe
Current liabilities (< 1 year)
Long term liabilities
STEP 3: COMPUTE NET WORTH
Assets Liabilities = Net Worth
Assets = Net Worth + Liabilities
Insolvency is the inability to pay debts when they
are due
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BALANCE SHEET
Net Worth is an indication of the financial position at
any given date

Ways to increase Net Worth

Increasing your savings
Reducing spending
Increasing the value of investments and other
possessions
Reducing the amounts you owe

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CASH FLOW STATEMENT

Cash Flow is the actual inflow, outflow for a

given time period

The Cash Flow statement is also called

personal income and expenditure

statement

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CASH FLOW STATEMENT

Cash flow is the actual inflow and outflow of cash during a
given time period.
INCOME
EXPENSES
NET CASH FLOW
Cash Inflow Cash Outflows = Cash Surplus
or Deficit

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CASH FLOW STATEMENT

EXPENSES:
Cash outflows comprise of fixed expenses and variable
Expenses
Fixed expenses:
Payments that do not vary from month to month, e.g. rent,
loan payments
Variable expenses:
Flexible payments that change from month to month, e.g.
food, clothing, utilities
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CASH FLOW STATEMENT

INCOME:
Income is the inflows of cash for an individual or household.
Wages, salaries, and commissions
Self-employment business income
Savings and investment income
Disposable income (take-home pay):
Earnings after deductions for taxes and other items (e.g. zakat)
Amount a person/household has available to spend
Discretionary income:
Money left over after paying for housing, food and other
necessities.

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CASH FLOW STATEMENT

NET CASH FLOW:
Cash Inflow > Cash Outflow = Surplus
Cash Inflow < Cash Outflow = Deficit

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CASH FLOW STATEMENT

THE CASH FLOW STATEMENT
The process of preparing cash flows statement follows
these steps
STEP 1: RECORD INCOME
Wages, salaries, and commissions
Self-employment business income
Savings and investment income
Gifts, grants, scholarships and educational loans
Government payments, such as Social Security, public
assistance, and unemployment benefits
Amounts received from pension and retirement
programs
Alimony and child support payments

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CASH FLOW STATEMENT

STEP 2: RECORD CASH OUTFLOWS
Fixed Expenses
Variable expenses
STEP 3: DETERMINE NET CASH FLOWS
The difference between income and outflows can
either be positive or negative
Cash flow statement provides the foundation for
preparing and implementing a spending, saving,
and investment plan
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BUDGETING
A budget is a specific plan for spending income
(spending plan).
The main purposes of a budget include:
Ease the financial stress
Live within your income/means
Spend your money wisely
Reach your financial goals
Prepare for financial emergencies
Develop wise financial management habits
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Control Phase of Budgeting

REASONS FOR BUDGET CONTROLS:
Stay on target
Check progress
Be alert to problems or errors

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Six Phases of Budgeting

Achieve
success
in
financial
goals

Evaluate
Control
Implement
Decide

Monitor,
review, revise
after each
period.

Organize
Set Goals

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BUDGETING
***Steps in the budgeting process
1. Set financial goals
2. Estimate income from all sources
3. Budget amount for an emergency fund,
periodic expenses and financial goals
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BUDGETING

4. Budget Fixed Expenses that you are

obligated to pay
5. Budget Variable Expensesthe amounts
that are to be spent for household and
living expenses

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BUDGETING
6. Record Spending Amountsthe actual
amounts for inflows and outflows,
comparing actual amounts with budgeted
amounts to determine variances
Budget Variance: The difference between the
amount budgeted and the actual amount received
or spent
Surplus: Actual spending is less than planned
spending
Deficit: Actual spending exceeds planned
spending
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BUDGETING
7.

Review Spending and Saving Patterns

8. Evaluate whether revisions are needed in

your savings and spending plans

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BUDGETING
CHARACTERISTICS OF SUCCESSFUL BUDGETING

Well-planned
Realistic
Flexible
Clearly communicated to house members

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Comparison of Statements
Balance Sheet reports current financial position
Cash Flow Statement shows cash you have
received and spent in the past
Budgets help you to spend and save to achieve
financial goals

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Comparison of Statements
PAST

Income and
Expense
Statement

PRESENT

FUTURE

Balance
Sheet

Budget

(Cash Flow
Statement)

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The Impact of Inflation

Inflation-- a steady rise in the general level of prices.
Deflation -- falling prices.
When prices are rising, an individuals income also
must rise to maintain its purchasing power, which is
a measure of the goods and services that ones
income will buy.
Your real income reflects the actual buying power of
your nominal income (also called money income.)
Interest is the price of money. Savers make no
money when the inflation rate is equal to or higher
than their interest rate.
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