BME 100 Module 1

University of the Cordilleras
College of Business Administration
Module in Personal Finance (BME 100)

Prepared by Jennifer D. Estacio, MBA
Unit I: Overview of Personal Finance
1. Definition and scope of personal finance
Unit II: The Financial Plan
1. Components of a financial plan
Unit III: Financial Decision Making
1. Cash flow and your financial future
Learning Outcomes
1. Define what is personal finance and personal financial planning;
2. Analyze the benefits of good financial decision making;
3. Examine the goals for which people make financial plans;
4. Identify sources of financial planning; and
5. Identify the components of a financial plan.
Personal Finance
 Defined as all financial decisions and activities of an individual or household.
Matters of personal finance include, but not limited to:

1. Personal banking
2. Debt / credit card management
3. Savings and investment
4. Risk management
5. Retirement planning and purchasing retirement products
6. Tax planning
7. Estate planning
Sources and uses of an individual’s financial resources
I. Sources of Funds / Financial Resources

1. Earnings from employment
2. Business income
3. Rent income
4. Interest income
5. Personal loans
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6. Inheritance
7. Lotto / lottery winnings
II. Uses of Funds / Resources

A. Living Expenses
1. Food, grocery items and toiletries
2. Housing
3. Clothing
4. Utilities
5. Gas, oil, repairs
6. Medical expenses
7. Real estate tax and other taxes
8. Insurance premium
9. Household help
10. Transportation
11. Communication expenses
12. Gifts
13. Donations
14. Home association dues
15. Entertainment and parties
16. Others
B. Children’s Education
1. School tuition and miscellaneous fees
2. Books and other materials
3. Uniform
4. Transportation
5. School activities
6. Food allowance
7. Others
C. Payment of Debts
1. Credit card
2. SSS loans
3. Cooperatives
4. Others
D. Retirement
1. Living expenses
2. Medical expenses
3. Others
E. Travel
F. Others
1. Wedding expense
2. Emergency
3. Funeral
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Personal Financial Planning

 The process of identifying lifetime goals and determining the level and proper
management of financial resource needed to accomplish those goals.
Personal Investment Management

 Involves the decision – making process of the individual investor.
 The financial decisions and activities will include among others:
 Identification of personal goals.
 Development of personal objectives to achieve the goals.
 Development of financial plans for each goal.
 Development of investment strategies for each goal.
 Monitoring the performance of the investment portfolio.
 Re-evaluation of the financial plans and revising them when necessary.
INVESTMENT OBJECTIVE
To increase systematically his/her wealth / wealth maximization.
Components of an Investment Portfolio

1. Fixed – income securities that have materials matching the needs for the college
education of children.
2. Investment in equity securities with growth potential, for retirement goal.
3. Safe, liquid assets for annual living expenses, medical needs and travel goals.
Personal Financial Planning – a dynamic process and individuals should carefully

monitor their plans.
Life Cycle Financial Planning
Age: Mid-twenties Individuals

Lifestyle: Fast, aggressive with steady source of earnings, capacity for
risk is high. Need disciplined payroll savings to buried nest
egg.
Investment Portfolio: Mostly in corporate equity shares, some in bonds; quite small
cash or liquid investments.
Age: Early-thirties to Early Forties Individuals

Lifestyle: Middle crisis, tuition for children in school looming children
couples, capacity for risk is still quite high, risk options
diminished.
Investment Portfolio: Lesser investment in equity securities more bonds, same level
of cash and money market fund.
Age: Mid-fifties
Lifestyle: Many still reeling college tuition and started thinking about
retirement and the need for income protection.
Investment Portfolio: Shift from equity securities to bonds; same level of cash and
money market funds.
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Age: Mid-sixties and beyond

Lifestyle: Enjoying retirement through leisure activities but also guarding
against major medical costs. Risk capacity is very small to
zero.
Investment Portfolio: More fixed-income investment lesser equity securities; higher
cash and money market fund.
INVESTING FOR RETIREMENT

Pension Plan – (pension fund) is an investment portfolio that is established to provide
retirement benefits to employees of an organization.
Defined benefit Plan (DBP) - the most common type of pension plan and specifies
the benefits that will be received at retirement.
Defined Contribution Plan (DCP) – a plan that specifies the contribution that
employers (and/or employees) will make to plan, rather than stating pension benefits.
Life Insurance
 A contract between an insurance company and an individual policy holder that
provides the beneficiary of the policy a guarantee against loss by death of the
insured individual.
Financial Planning
 Focuses on what the firm intends to do in the near future.
 It is a system that guides the top management to direct the actions of the
different units of the organization in accomplishing its objectives (Kolb &
Demong, 1988).
Dimensions of Financial Planning

o Short-range Plan – focuses on the goals needed to be achieved in the coming
year, usually covers the next twelve months.
o Long-range Plan – It has a time frame of two to five, or more, years and does not
require a great amount of detail.
Financial plan
 Also known as budget.
 Budgeting – the process of transforming the planned courses of action into
quantitative terms.
Approaches to Financial Planning

1. Zero-based Approach – From the name itself “zero” means the budget’s
baseline is zero.
2. Incremental-based Approach – The traditional approach in budgeting. The
budget starts with the previous year’s budget and then an amount is added or
subtracted according to the anticipated needs.
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Objectives of Financial Planning

1. Planning. Financial planning helps the firm determine its objectives and courses
of action.
2. Coordination. Financial planning creates a harmonious relationship among the
different units of the organization.
3. Control. A financial plan becomes an important tool in enhancing and
measuring the performance of the company.
Master Budget – the combined budgets of the different units of the organization
(Mejorada, 2000).
Classification of Master Budget

1. Operating Budget
2. Financial Budget
Operating Budget – shows the plan of operations where the details of sales, production
and expenses are laid out.
 Sales Budget – This refers to the planned volume of production that the
company is expected to sell based on forecasted sales.
 Production Budget – This identifies the number of units to be produced after
the sales budget has been established and the ending inventory has been
set.
 Ending Inventory Budget – This is a budget that specifies the number of units
that the company desires to have in their balance sheet at the end of the
period.
 Direct materials Budget – This shows the quantity of materials required to meet
the production units and the number of units that must be purchased. It
determines first how many units of materials are needed per unit of
production.
 Direct Labor Budget – This refers to the budget that provides the total cost of
labor to meet the production requirements.
 Factory Overhead Budget – This is a schedule of all manufacturing costs other
than direct materials and direct labor.
 Selling and Administrative Budget – This details the sales and administrative
expenses in selling the products of the company.
 Pro-forma Income Statement – This is one of the major schedules in financial
planning showing the projected income of the company.
Financial Budget – shows the budgeted financial resources of the firm.

 Cash Budget – It is prepared to determine the financial needs of the
company. It shows the detailed lists of all cash receipts and expenses for a
particular period.
 Pro-forma Balance Sheet – This budget presents the forecasted components
of the balance sheet at a future date. The actual balance sheet of the
previous period is the starting point of the pro-forma balance sheet.
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University of the Cordilleras

College of Business Administration

Module in Personal Finance (BME 100)

Unit I: Overview of Personal Finance

1. Definition and scope of personal finance

Unit II: The Financial Plan

1. Components of a financial plan

Unit III: Financial Decision Making

1. Cash flow and your financial future

Matters of personal finance include, but not limited to:

Sources and uses of an individual’s financial resources

I. Sources of Funds / Financial Resources

II. Uses of Funds / Resources

Personal Financial Planning

Personal Investment Management

Components of an Investment Portfolio

Personal Financial Planning – a dynamic process and individuals should carefully

Life Cycle Financial Planning

Age: Mid-twenties Individuals

Age: Early-thirties to Early Forties Individuals

Age: Mid-sixties and beyond

INVESTING FOR RETIREMENT

Dimensions of Financial Planning

Approaches to Financial Planning

Objectives of Financial Planning

Classification of Master Budget

Financial Budget – shows the budgeted financial resources of the firm.

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