Chapter13-Personal Financial Management

1
Personal Financial
Management
13
Synopsis
Personal finance or personal financial management

is the financial management which an individual or a
family unit performs to budget, save, spend and
invest monetary resources over time, taking into
account various financial risks and future life events.
Students will be introduced to personal financial
planning, budgeting, investment, borrowing tips, and
common personal financial mistakes and pitfalls.
Introduction to Entrepreneurship All Rights Reserved

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Objectives
The objectives of this chapter are:

To introduce personal financial management to
students so that they will able to manage their
personal finance more effectively to achieve their
financial goals.
To realize the various common mistakes and
pitfalls of personal financial management and
enable students to avoid them.

Learning Outcomes
At the end of this chapter, students should be able

to:
 Realize and understand the importance of
personal financial management.
 Prepare important personal financial
management tasks: outlining financial goals,
preparing budgets and avoiding financial
mistakes and pitfalls.

List of Topics
 Cash Flow Management

 Balancing Incomes and Expenses
 Guide to Managing Your Budget
 Borrowing Basics
 Borrowing Tips
 Common Mistakes and Pitfalls in Personal
Financial Management

Introduction
 Recent global developments have made

financial education, awareness and well-being
increasingly important.
 Financially-educated individuals will be able to
plan and choose the best financial strategy that
suits and enables them to achieve their financial
objectives.

Introduction (cont.)

Cash Flow Management
 How you manage, spend, and invest your

money can have a profound impact on your life,
yet very few books teach these important skills.
 Many focus on making money, which is
important, but what is more important is
managing what you earn in order to ensure
financial success.
 Cash flow management is the process of
monitoring, analyzing and adjusting your
personal cash flow.
Cash Flow Management (cont.)
 Your personal cash flow is made up of two main

components: income and expenses.
 Proper cash flow management ensures that you always
have sufficient funds to pay expenses which will put you in
a good cash position. A budget is a plan for managing
cash flow, used to estimate future income and expenses.
 A budget also helps you develop a saving habit. Without a
savings plan, it will be harder to achieve your financial
goals such as buying a house or car, pursuing further
education or even building a retirement fund.

Cash Flow Management (cont.)

Balancing Incomes and
Expenses

Guide to Managing Your Budget
 List all basic necessary expenditures (i.e. food, rental,

children’s education, etc.). These items are
necessary, but always find ways to spend wisely and
economically by choosing good value-for-money
products.
 List important and urgent items and look for cheaper
but quality alternatives.
 List items that are important but not urgent and must
be included (i.e. insurance, savings for children’s
education, savings for emergencies, retirement fund,
etc.).
(cont.)
 List items that are nice to have but not needed and
can be postponed (i.e. car accessories, house
decorations, etc.). Think of delayed gratification
where money can be saved and used for greater
gratification in the future.
 Major purchases always have recurrent expenses
that must be considered (i.e. for a car, there are petrol
costs, maintenance, depreciation, breakdown repair,
etc.). Sometimes, a good secondhand car is a better
option than buying a brand new car.

(cont.)
 Always consider the alternatives available for all

purchases so you get the best value for your money. A
dollar saved is a dollar extra income for you.
 Try to allocate about 10% to 15% of you income for
savings and investment.
 Impulse purchases should be avoided. Spend more time
to look for additional information on a product before
making a decision. You may delay or postpone buying a
product or service. You must remember that a trickster
always pushes you to decide quickly, to close the deal.

(cont.)
 Plan for income growth: In the short-term, you may

want to do overtime, part-time work or give weekend
tuition. In the long-term, you may want to further
studies or acquire skills to improve work
performance, so you can improve chances of getting
a promotion.
 Be creative and keep looking for opportunities to get
an additional income. A good marketing skill can be
helpful to exploit your marketable strengths.

(cont.)
 Is your problem more about income or expenditure?

Generally, it is easier to manage and control
expenditure than to find an additional income.
Therefore, look for ways to reduce expenses and
always buy good value-for-money products and
services.

Budget and Cash
Flow Statement

Borrowing Basics

Borrowing Tips
 Ideally, it would be good if you do not have any debt.

However, debt is almost a necessity in modern living.
People incur debt through credit cards, house purchase,
car purchase or loans for business. Debts are acceptable
so long as you can afford to regularly pay back,
according to the fixed schedule.
 There are good debts that will help you to increase your
wealth, such as a debt to pay for an asset which can
generate income to pay itself. There are bad debts that
can ruin you financially, such as debt to pay for a luxury
car that you do not need and cannot afford.
Borrowing Tips (cont.)
 The ratio of your borrowing divided by your asset is

called gearing ratio. It is fairly safe if you have
enough assets to cover the amount you borrow and
your monthly income is enough to cover your monthly
instalment. Safe gearing is acceptable but over
gearing is dangerous.

 Suppose your monthly income is reduced and you

cannot afford to pay the required sum any more. You
can ask the lending institution to reschedule the loan
so that payment period is extended over a longer
period and the amount of monthly payment is
reduced. Seek help from the Credit Counsel and
Management Agency (Agensi Kaunseling dan
Pengurusan Kredit or AKPK) to help you.

 Many debt problems occur because of impulse or

uncontrollable purchases through credit cards which
lead to debts piling beyond the capability of the
borrower. Failure to pay can lead to you being
blacklisted and prevented from further loans. The
worst scenario is that legal action could be taken
against you by the lender and you can be declared
bankrupt.

 The debt that you borrow comes with a specified

interest rate. Borrow from those that offer the lowest
rates. A term loan of 7% per annum is definitely
cheaper than a credit card rate of 18% per annum, or
a loan shark rate of 10% per month (120% per
annum). You must be a good borrower by paying
your debt. Failure to pay your debt is going to ruin
your credit rating and reputation.

Common Mistakes and Pitfalls in
Personal Financial Management
 The following are the common mistakes and pitfalls
in personal financial management that must be
avoided:
(a) Failure to plan
(i) No financial planning, no objectives, no
strategies to increase income, no budget, no
savings and no investment.

(cont.)
(ii) Planning is a must in financial management if
one wants to achieve the most with the least
amount of resources. Otherwise, the best
opportunities will be overlooked. Strengths,
energies and resources will not be effectively
utilized.

(cont.)
(b) No financial discipline
(i) You are inclined to make impulsive purchases,
have uncontrollable credit card spending and live
beyond your financial capacity.
(ii) Good character and financial habits are the
foundation of successful financial achievement.
One must learn to be thrifty and only spend on
affordable necessities. Being disciplined with
spending is crucial to achieve financial
objectives.

(cont.)
(c) Poor savings and investment strategies
A good savings and investment plan will augur well
for the future financial well-being of a person. The
savings and investment can provide for children’s
education or for emergency medical needs. He may
need to buy medical and accident insurance
coverage. An investment may enable one to get good
returns, and at the same time, it is also hedging
against inflation.

(cont.)
(d) Poor borrowing decisions
(i) A person has ample opportunity for borrowings
when he has good financial income. Such
opportunities to borrow should be used wisely
and prudently. It is an opportunity for one to
leverage through borrowing to buy valuable,
profitable or useful assets, such as cars, houses
or land. These are also a form of investment that
enables one to build his assets.

(cont.)
(ii) Poor borrowing decisions to buy something that
costs a lot of money with minimum or no financial
return can drain financial resources, and in the
long term, may make a person bankrupt.

Summary
 A good personal financial plan is necessary as it will

enable an individual achieve his financial objectives
and avoid financial failures (i.e. insolvency and
bankruptcy). Students must acquire skills for
personal financial planning, budgeting, investing,
borrowing and learn about the common personal
financial mistakes and pitfalls in order to be
successful in managing their own personal finances.


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1

Personal finance or personal financial management

Introduction to Entrepreneurship All Rights Reserved

The objectives of this chapter are:

Introduction to Entrepreneurship All Rights Reserved

At the end of this chapter, students should be able

Introduction to Entrepreneurship All Rights Reserved

 Cash Flow Management

Introduction to Entrepreneurship All Rights Reserved

 Recent global developments have made

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

 How you manage, spend, and invest your

 Your personal cash flow is made up of two main

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

 List all basic necessary expenditures (i.e. food, rental,

Introduction to Entrepreneurship All Rights Reserved

 Always consider the alternatives available for all

Introduction to Entrepreneurship All Rights Reserved

 Plan for income growth: In the short-term, you may

Introduction to Entrepreneurship All Rights Reserved

 Is your problem more about income or expenditure?

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

 Ideally, it would be good if you do not have any debt.

 The ratio of your borrowing divided by your asset is

Introduction to Entrepreneurship All Rights Reserved

 Suppose your monthly income is reduced and you

Introduction to Entrepreneurship All Rights Reserved

 Many debt problems occur because of impulse or

Introduction to Entrepreneurship All Rights Reserved

 The debt that you borrow comes with a specified

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

Introduction to Entrepreneurship All Rights Reserved

 A good personal financial plan is necessary as it will

Introduction to Entrepreneurship All Rights Reserved

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