Personal Financial Analysis and Budgeting
What CF6 tests
Personal financial analysis and budgeting tests the ability to construct and interpret personal statements, calculate ratios, identify surplus or deficit and recommend realistic budget controls.
Core rules
- Net worth = assets minus liabilities; use market or realisable values and disclose contingent liabilities.
- Cash flow = income minus outgoings; separate fixed, variable, irregular and debt payments.
- Emergency reserve: usually three to six months of essential spending, longer for irregular income.
- Savings ratio = savings divided by gross income; debt service ratio = annual debt payments divided by gross income; liquidity ratio = liquid assets divided by monthly essential expenses.
- Budget variance = actual minus budget; investigate adverse variances.
- Use nominal cash flows but stress-test inflation and income shocks.
Worked example
Monthly net income is 600,000; essential spending 300,000; lifestyle 150,000; debt 90,000. Surplus is 60,000. Debt service ratio is 15% (90,000/600,000). A six-month emergency target is 1.8m; current liquid savings are 500,000, leaving a 1.3m gap. The adviser directs 40,000 monthly to the reserve and 20,000 to debt prepayment, then reviews in six months. Reasoning: liquidity comes first, then costly debt, while preserving basic lifestyle.
Traps
Counting a pension balance as liquid; netting liabilities against the wrong asset; mixing monthly and annual figures; ignoring school fees or rent paid annually; assuming all surplus is available for investment.