Form 4 Mathematics Bab 10: Consumer Mathematics: Financial Management
10.1 Financial Management Process
Financial management is the process of managing money from sources of income into savings, expenses, protection and investment. (p.272)
Five steps: setting financial goals; evaluating financial status; creating a financial plan; carrying out the financial plan; reviewing and revising the progress. (p.272)
Financial goals must be prioritised and specific. (p.272)
Short-term goals can be achieved in less than a year and involve a small amount of money (e.g. laptop, furniture, phone). (p.272)
Long-term goals usually take more than five years and involve a large amount of money (e.g. retirement, children’s education, medical expenses). (p.272)
Prioritise needs (food, accommodation, clothing) over wants; spending on wants leads to spending more than we earn. (p.273)
As a general guide, keep savings for basic needs for at least six months. (p.274)
10.2 Evaluating Status and Creating a Plan
Assets and liabilities are the benchmarks for evaluating financial status. Assets: cash, savings, real estate, fixed deposits, unit trusts, shares. Liabilities: bank loans, credit card debts, other obligations. (p.274)
Active income: salaries, allowances, commissions. Passive income: rent, interest, dividends and other investments. Both are cash inflows. (p.274)
Fixed expenses: must be paid (rent, insurance, housing and car instalments, credit cards). Variable expenses change monthly (petrol, groceries, utility bills). Both are cash outflows. (p.274)
Total income = Active income + Passive income. (p.274)
Total expenses = Fixed expenses + Variable expenses. (p.274)
Income balance = Total monthly income − Monthly savings. (p.274)
Cash flow = Income balance − Total expenses; positive cash flow if income balance > total expenses; negative cash flow if income balance < total expenses. (p.274)
Before creating a plan: define short- and long-term goals; make an initial budget; calculate the monthly savings needed; analyse spending behaviour; set a time frame; determine income strategies. (p.275)
Example: a positive cash flow of RM1 500 gives a surplus for investment or emergencies; a negative cash flow may push a person to use credit cards. (p.276)
10.3 Carrying Out and Reviewing the Plan
Compare planned and actual expenses to identify wastage, then reduce actual expenses to meet the plan. (p.277)
Prioritise payment of fixed expenses (housing loan, credit card, car instalments); late payment leads to additional interest and penalties. (p.277)
Ensure the monthly cash flow is always positive; if negative, change spending behaviour promptly or the goals will not be achieved on time. (p.277)
Surplus of income = Income balance − Total fixed expenses − Total variable expenses; keep at least 10% of income as savings before spending. (p.278)
Reviewing and revising: review progress from time to time, keep cash flow positive, and change goals that are not realistic for the income. (p.280)
A salary increase raises income and savings, which can help reach a goal sooner if other expenses are fixed. (p.280)
Financial plans must be reviewed from time to time; otherwise it is difficult to achieve the goals. (p.281)
10.4 Feasibility of Short-Term and Long-Term Plans
An effective financial plan sets aside at least 10% of total income for savings before fixed and variable expenses (AKPK guideline). (p.282)
If cash flow is negative, reduce variable expenses and/or add a source of income, keeping fixed expenses unaffected. (p.282)
Monthly savings needed = Target amount / Number of months. (p.283)
Evaluate feasibility against inflation (rising costs); savings and investments (e.g. unit trusts, dividends) can offset additional expenses. (p.284)
Long-term plans (over five years: education, retirement, buying a house) should consider inflation rate, interest rate and personal health. (p.285)
Inflation: a situation of continuing increase in the general price level. (p.285)
Start saving early to reach financial goals faster; a joint income of husband and wife allows sufficient savings in a shorter time. (p.285)
Annual savings = Target / Years; Monthly savings = Annual savings / 12; any shortfall is met by reducing expenses or adding income. (p.287)
The feasibility of a long-term plan depends on: inflation not exceeding pay rise, fixed rental income, good health, expenses offset by income growth, and no unexpected high costs. (p.288)