Personal Finance and Financial Planning - Study Guide
This domain tests personal budgeting, goal planning, emergency funds, insurance, debt management, savings and investment choices. Expect practical calculations and evaluation of financial decisions.
Core ideas
- Financial planning: set goals, measure current position, estimate needs, choose instruments, monitor and review.
- Emergency fund: keep 3–6 months of essential expenses in liquid, low-risk assets.
- Protect first: health insurance and term life insurance; avoid mixing insurance with investment unless the product is understood.
- Debt: clear high-interest debt such as credit-card balances before low-return investing.
- Asset allocation depends on time horizon and risk tolerance; diversification reduces unsystematic risk.
- Real return is approximately nominal return minus inflation; compounding rewards early and regular saving.
Worked example
A person has essential monthly expenses of ₹30,000 and wants a six-month emergency fund: 30,000 × 6 = ₹1,80,000. She saves ₹10,000 per month in a liquid fund earning 7% per annum compounded monthly. The future value of an ordinary annuity after 12 months is 10,000 × [((1 + 0.07/12)^12 − 1)/(0.07/12)], which is about ₹1,23,900. The reasoning: she reaches the target in about 18 months, not 12, so the plan must adjust the monthly saving or the target date.
Traps
Do not keep emergency funds locked in volatile equity. Do not count speculative returns as guaranteed. Do not use credit-card minimum due as a repayment plan. Ignoring inflation overstates retirement readiness. Term insurance is not an investment.