FIN111 Lecture Notes - Lecture 10: Financial Literacy, Credit Risk, Liquidity Risk
• Future and present values of multiple cash flows
• Valuing level cash flows: annuities and perpetuities
• Comparing rates: the effect of compounding periods
• Loan amortisation (ordinary annuity)
• Financial planning is often claimed to be a new profession
• Preparation of personal financial statements
• Identification of financial goals and relative time frames
• All investors must have an understanding of risk and how this impacts on financial objectives
What is personal financial planning?
• The financial means to satisfy personal objectives.
• Useful to consider objectives in 3 time frames;
• Short: within one year
• Medium: up to 5 years
• Long: up to 40 or even more years
• To be realistic a goal needs 2 components
• Specific or quantifiable
• Referenced to a specified time frame
Why is personal financial planning important?
• It enables people to set in place personal objectives and arrange financial means to satisfy these
objectives.
• Has its roots in life cycle theory of consumption and saving.
• Life cycle theory provides a framework to meet short, medium and long term objectives.
• While consumption is relatively smooth over a persons life cycle, lifetime income is quite
uneven.
Main reasons:
• Increasing numbers in older age groups
This is due to:
• Falling birth rates
• Falling death rates
• Lower rates of immigration
Significant feature of the Australian population is the size of the baby boomers group.
• Increase in longevity
• In the early 1900s, average life expectancy was 55 for men and 59 for women.
• In a recent survey, average life expectancy had risen to 79 for men and 84 for women.
• By 2050 it is expected that life expectancy will increase to 88 for men and 91 for women.
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• Reasons include:
• Vast improvements in medical science
• Changes in dietary habits
• Awareness of health issues and the need for regular exercise.
• Expected restrictions to accessing old age pension
• In recent years, modifications have been made to eligibility for age pension
• Age of entitlement for women rising to match that of men (currently 65)
• Some countries seeking to increase entitlement age beyond 65 in the future
• Pension age to be raised to 67 from 2017
• Government offers incentives to encourage people of pension age to defer taking it up beyond
retirement age.
• Work bonus scheme
• Introduction of compulsory superannuation
• Compulsory employer superannuation contributions first introduced in 1992 at 3% of
employees remuneration.
• From 1 July 2014, superannuation guarantee rate increased to 9.5%
• New laws: SG rate will remain at 9.5% for 7 years, increasing to 10% from 2021, and
eventually to 12% from 2025
• New laws: employer must pay 9.5% of employees salary into a super fund. This is called the
super guarantee. The super guarantee will gradually increase to 12% in coming years.
• Tax deduction offered as encouragement for self-employed people to also contribute towards
their own retirement.
• Recent legislative changes have further increased attractiveness of accumulating a higher
superannuation balance prior to retirement.
• Greater range of superannuation choices
• From 1 July 2005, most employees have been able to choose the fund into which their employer
superannuation contributions are paid.
• This has encouraged funds to offer larger range of portfolio mixes.
• Competition between funds is expected to force underlying member fees to be reduced over
time.
• Anticipated changes to government fiscal policy
Retirement benefits provided by many employers:
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Document Summary
Future and present values of multiple cash flows: valuing level cash flows: annuities and perpetuities, comparing rates: the effect of compounding periods. Loan amortisation (ordinary annuity: financial planning is often claimed to be a new profession, preparation of personal financial statements, all investors must have an understanding of risk and how this impacts on financial objectives. Identification of financial goals and relative time frames. This is due to: falling birth rates, falling death rates, lower rates of immigration. Significant feature of the australian population is the size of the baby boomers group. In the early 1900s, average life expectancy was 55 for men and 59 for women. Retirement benefits provided by many employers: form of superannuation benefits has changes from defined benefits to a defined contribution or accumulation fund, this has meant a transfer of investment risk from employer to employee.
