Fundamentals of Financial Planning: Process, Statements, TVM and Ratios
What this domain tests
This domain supplies the vocabulary and mechanics the other six domains assume: the planning process, personal financial statements, time value of money, ratio diagnostics, and the professional framework (MFPC Code of Ethics, CMSA 2007, SIDC licensing, BNM for insurance/takaful). Questions are usually applied, not definitional.
Core rules
- Six-step process: establish and define the relationship; gather quantitative and qualitative data; analyse and assess; develop and present the plan; implement; monitor and review. Each step has a deliverable - skipping straight to a product is a scoring error.
- Net worth = assets at fair value minus liabilities. Cash-flow surplus = income minus expenses minus debt servicing.
- Diagnostic ratios: basic liquidity (liquid assets / monthly expenses) 3–6 months; debt-to-asset below 50%; savings ratio at least 10% of gross income; debt service ratio no more than one-third of gross income.
- TVM: match the rate to the compounding period, set payments per year correctly, use END mode for ordinary annuities and BEGIN for annuities due, and separate nominal from real (inflation-adjusted) figures.
Worked example
A client saves RM1,200 at the end of each month for 10 years at 5% p.a. compounded monthly. Monthly rate = 0.05/12 = 0.4167%; n = 120. Future value factor = ((1.004167^120 − 1) / 0.004167) ≈ 155.28. FV ≈ RM186,340. If the deposits are made at the start of each month, multiply by 1.004167 → factor 155.93 → RM187,120. Only the timing changed; the rate and term did not.
Traps that cost marks
- Using an annual n with a monthly rate, or leaving the calculator in BEGIN mode by accident.
- Presenting total assets as net worth, ignoring the mortgage.
- Mixing a nominal return with inflation-adjusted spending, which overstates the funding gap.
- Treating the emergency fund as an investment portfolio and applying equity risk to it.