Unit 1: Financial planning fundamentals
Personal Financial Planning notes · PTU syllabus (BCOP 511-18)
On this page
Unit summary
Personal financial planning helps individuals turn income into security and wealth. This unit covers the time value of money, the need and principles of financial planning, the planning process, personal financial statements — income and expenditure statement and balance sheet — budgeting, ratio analysis, the investor life cycle and risk profiling.
After this unit you can
- Apply time value of money to personal decisions
- Explain the need, principles and process of personal financial planning
- Prepare personal financial statements and a budget, and compute personal ratios
- Explain the investor life cycle and risk profiling
PTU syllabus topics
- Time value of money
- need and principles of personal financial planning
- the financial planning process
- personal financial statements
- income and expenditure statement
- balance sheet
- budgeting
- ratio analysis
- investor life cycle and risk profiling
- 1Set goals
Short and long term
- 2Gather data
Income, expenses, assets, debts
- 3Analyse
Net worth and cash flow
- 4Make the plan
Saving, investing, insurance
- 5Implement and review
Revisit every year
Topic 1
Time value of money
Time value of money (TVM) means a sum of money received today is worth more than the same sum in future, because it can be invested to earn a return. Reasons: earning opportunity, inflation, risk and uncertainty, and preference for present consumption.
Future value (lump sum)
FV = PV × (1 + r)^n
Present value (lump sum)
PV = FV ÷ (1 + r)^n
FV with m compounding periods
FV = PV × (1 + r/m)^(m × n)
FV of an annuity
FVA = A × [((1 + r)^n − 1) ÷ r]
PV of an annuity
PVA = A × [(1 − (1 + r)^−n) ÷ r]
Rule of 72
Years to double ≈ 72 ÷ interest rate %
Example
₹1,00,000 invested at 8% for 5 years: FV = 1,00,000 × (1.08)^5 = 1,00,000 × 1.4693 = ₹1,46,933.
Example
PV of ₹5,00,000 needed after 10 years at 10%: PV = 5,00,000 ÷ (1.10)^10 = 5,00,000 ÷ 2.5937 = ₹1,92,772.
Example
SIP of ₹1,000 at year-end for 3 years at 10%: FVA = 1,000 × [(1.331 − 1) ÷ 0.10] = 1,000 × 3.31 = ₹3,310.
Exam tip
Show the formula, substitution and final answer with units — most marks in TVM numericals are for method.
Topic 2
Need and principles of personal financial planning
Personal financial planning is the process of setting financial goals, assessing resources and creating a plan for saving, investing, protecting and transferring wealth.
Need
- Rising cost of living and inflation; longer life expectancy.
- Nuclear families and fewer pension schemes — individuals must self-fund retirement.
- Growing range of financial products and mis-selling risks.
- Emergencies — illness, job loss — need a safety net.
- Achieving goals: education, home, marriage, retirement.
Pay yourself first
Save before spending
Emergency fund first
3–6 months of expenses
Protect before investing
Adequate term and health cover
Diversify
Spread across asset classes
Start early
Power of compounding
Match investments to goals and time horizon
Avoid high-cost debt
Credit-card revolving, personal loans
Review regularly
Topic 3
The financial planning process
- 1
Establish the client relationship
Scope and responsibilities
- 2
Gather data and goals
Income, expenses, assets, liabilities, risk profile
- 3
Analyse and evaluate
Net worth, cash flow, gaps
- 4
Develop and present the plan
Recommendations and alternatives
- 5
Implement
Buy policies, start SIPs, write a will
- 6
Monitor and review
Annually or after life events
Example
Riya, 25, earns ₹60,000 a month. Her plan: emergency fund of ₹1.5 lakh, term cover of ₹1 crore, health cover of ₹5 lakh, SIP of ₹10,000 in equity funds for a house down payment in 7 years, and ₹1.5 lakh a year in PPF/ELSS.
Topic 4
Personal financial statements and budgeting
Shows
Inflows and outflows over a period (month/year)
Assets and liabilities at a point in time
Result
Surplus (savings) or deficit
Net worth = Assets − Liabilities
Items
Salary, rent received, interest; household expenses, EMIs, insurance, fees
House, car, deposits, mutual funds, gold; home loan, car loan, card dues
Example
Monthly: take-home salary ₹80,000, rent received ₹10,000. Expenses ₹45,000, EMIs ₹20,000, insurance ₹3,000. Surplus = 90,000 − 68,000 = ₹22,000 (savings rate 24%).
Budgeting
- A budget is a plan for spending and saving.
- 50/30/20 rule: 50% needs, 30% wants, 20% savings and debt repayment.
- Zero-based budget: every rupee assigned a purpose.
- Envelope method: fixed cash for each category.
- Steps: list income → track expenses → classify (fixed, variable, discretionary) → set limits → review monthly.
Personal ratio analysis
Basic liquidity ratio
Liquid assets ÷ Monthly expenses (3–6 months)
Savings ratio
Savings ÷ Gross income (20%+)
Debt-to-income ratio
Monthly EMIs ÷ Gross monthly income (below 35–40%)
Solvency ratio
Net worth ÷ Total assets
Debt-to-asset ratio
Total liabilities ÷ Total assets
Investment assets to net worth
Invested assets ÷ Net worth
Topic 5
Investor life cycle and risk profiling
- 1Accumulation (20s–30s)
Low assets, long horizon — high equity
- 2Consolidation (40s–50s)
Peak income, goals near — balanced
- 3Spending/retirement (60+)
Need regular income — mostly debt and annuities
- 4Gifting/estate
Passing wealth to heirs
Risk profiling assesses an investor's risk capacity (ability to bear loss — income, age, dependants, wealth) and risk tolerance (willingness — attitude, experience).
| Risk profile | Typical allocation | Suitable products |
|---|---|---|
| Conservative | 20% equity, 80% debt | FDs, PPF, debt funds, SCSS |
| Moderate | 50% equity, 50% debt | Hybrid funds, large-cap funds, bonds |
| Aggressive | 80% equity, 20% debt | Equity funds, mid/small-cap, direct stocks |
- Tools: questionnaires (SEBI requires risk profiling by investment advisers), psychometric tests.
Exam tip
Suitability is the core ethical duty of a planner — products must match the client's risk profile.
Key terms
- Time value of money
- A rupee today is worth more than a rupee in future
- Net worth
- Total assets minus total liabilities
- Budget
- Plan for income, spending and saving
- Risk capacity
- Financial ability to bear losses
- Risk tolerance
- Psychological willingness to bear losses
Quick revision
- FV = PV(1 + r)^n; Rule of 72.
- Principles: emergency fund, protection, diversification, early start.
- I&E statement → savings; balance sheet → net worth.
- 50/30/20 budgeting; ratios — liquidity, savings, debt-to-income.
- Life cycle: accumulation → consolidation → spending → gifting; risk profile guides allocation.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is time value of money?
- Q2.State four principles of personal financial planning.
- Q3.What is the 50/30/20 rule?
- Q4.Define net worth.
- Q5.What is the debt-to-income ratio?
- Q6.Distinguish risk capacity and risk tolerance.
Long-answer questions
- Q1.Explain the need and principles of personal financial planning.
- Q2.Explain the financial planning process.
- Q3.Prepare a personal balance sheet and income and expenditure statement with ratios.
- Q4.Explain the investor life cycle and risk profiling.
Stuck on this unit?
Message SBS on WhatsApp for help with Personal Financial Planning, or to ask about studying B.Com at Synetic.