MONEY SKILLS FOR LEARNERS Literacy/Documents/Money … · • Buying an affordable house or apartment – it is an asset that can increase your wealth. • Buying a really good bargain

MONEY SKILLS FOR LEARNERSMONEY SKILLS FOR LEARNERSBy: Nico Swart

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طبعة اأوىل

MONEY SKILLS FOR LEARNERSBy: Nico Swart

HOW TO CREATE YOUR OWNPOSITIVE FINANCIAL FUTURE

ISBN: 0620350954

PERSONAL FINANCIAL PLANNING ...................

DEBT .............................................................................

SAVINGS AND INVESTMENTS .............................

FINANCIAL HINTS FOR YOUR FUTURE ...........

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CONTENT

PERSONAL FINANCIAL PLANNING


CHAPTER 1

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Outcome GoalsIn this first chapter of our booklet we will tackle the importance of early personal financial planning, in addition to shedding the light on the basic steps in the personal financial planning process and compiling a personal budget.

1.1 What is personal financial planning?With little effort of financial planning, you can benefit greatly. Personal financial planning primarily means thinking ahead about your personal financial affairs, assuming you are one of those who set themselves financial goals at the beginning of their working lives and are determined to reach them by the end.

The following diagram illustrates the concept of personal financial planning:A (where you are now) PLAN B (where you want to be)

A (you have EGP1,000) PLAN B (what you want to buy)

Many individuals have had unachieved goals in their lives for shortness of money often followed by a decision to use what is available to achieve some of these desires and then postpone others for later.

1.2 When do you start planning?Experts agree that the sooner you start developing your financial plan, the better, and the more ambitious you set your goals. Hence, you should start planning once you get your first salary of your career.


1.3 Plan for objectivesWhatever goals you set for yourself has to be preceded by deep thinking and proper planning of what you want to achieve in your life, and most likely one of your long-term objectives should be leading a financially independent life when you retire. This means that you should have saved enough during your working years to make a comfortable living after retirement at age 60. Worth mentioning, is a recent trend in developed countries to retire early due to personal financial planning becoming more common, leading retirees to be financially independent as they retire even at an earlier age.

Over the last fifty years, the progress of health care in Egypt has led to a rise in the average age of men and women to 68 and 73 years of age respectively, which means men spend an average of 8 years and women an average of 13 years in retirement or pension without work and their income is much less than what they were used to during their work life.

Accordingly, setting your financial plan early enough in your life and having it reviewed each year, is of great importance to help you settle on what you can buy at a certain point of time and what you will need to postpone for a later phase of your life. Thus, assist you in achieving self-sufficiency and saving the amount of money you can spend during retirement without having to resort to others.

This booklet aims to help you to be among those who can enjoy, God willing, this self-sufficiency.

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1.4 What early savings and planning will dofor you

Consider this example: You save 100 pounds per month through a financial institution for periods of 20, 25, 30, 40 years and receive an average annual return of 8% through this financial institution on your savings, as shown in the following table:

Savings period Amount Rate of return Future value

20 years EGP 100 8% EGP 58 902.04

25 years EGP 100 8% EGP 95 102.64

30 years EGP 100 8% EGP 149 035.94

40 years EGP 100 8% EGP 349 100.78

It can be observed from this example that doubling the saving period of one-time from 20 years to 40 years has led to doubling the value of your savings six times from EGP 59,000 to EGP 350,000, which attributes to one scientific funding phenomenon that takes long to explain at this time.


Steps to personal financial planning A- Determine your existing financial situation or position: Here you must carefully consider and determine the value of your monthly income and your monthly expenditures both; primary and secondary, as well as taking into account any debts or periodic installments to be paid, to be able to finally determine the monthly remaining amount that you can set aside to save.

B- Set goals with varying terms: You should consider setting yourself short-term objectives that you can achieve over a period of 3 months to a year, and other medium-term objectives over a period of one year to 3 years, as well as long-term objectives at retirement as we have mentioned earlier. It is necessary to realize from the outset that you won’t be able to buy everything you want, everyone regardless of their potentials or monthly income, needs to set priorities and give up on some desires that cannot be practically achieved.

C- Compiling your financial planning process and the personal budget financial Your starting point here is determining your monthly income, a list of your expenditure items, followed by your short-term goals that you need to achieve that we referred to in the previous paragraph, which enables you to identify any elements of expenditure that you can compress or eliminate monthly. Then comes the difficult step of all; achieving this plan. Now draw up a budget. You must start with your income. Then make a list of your expenses according to your objectives. Remember, savings form part of your expenses. Should your expenses exceed your income, you will have to adjust your objectives and expenses till your income exceeds, or is equal to your expenses. Now you have to implement this plan.

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1.5 How do you calculate these numbers?Very easily

For example: Farida is 25 years old and lives with her parents. She uses public transportation to go to work and gets a salary of EGP 6,000 monthly. She decides to help her family with an amount of EGP 1,000 in cash every month, and spends EGP 500 on food and EGP 250 on maintenance and other expenses monthly. She plans to buy a used car. Let us now look at the monthly budget for Farida as it shows in her January budget column. Income January Action Saving New budgetFarida 6,000 6,0001 Total income 6,000 6,000ExpensesHelp her family 1,000 1,000Food 500 500Clothing 1,000 √ 500 500Transport (car)FurnitureMaintenance 250 250Studies 3,000 √ 500 2,500Entertainment 1,000 √ 500 500Holiday 1,000 √ 500 500Cell phone 700 √ 450 2502 Total expenses 8,450 2,450 6,000Income (1) 6,000 6,000Minus expenses (2)= 8,450 6,000Surplus (+) or = =Deficit (-) (-2,450) 0CumulativeSurplus or (deficit) (-2,450) 2,450 0

A = reduce certain expenses


She needs to reduce her expenses. The Saving action and Savings column show what she did to achieve a new balanced budget.

If Farida wants to buy a used car, she you will have to pay EGP 500 per month for the payment of her car. She therefore will need an additional surplus amount of EGP 750 monthly to cover her car installments expenses, in addition to EGP 250 to cover the cost of gas and maintenance. She can now for example choose not to go on holiday outside the country until she is able to save EGP 500 pounds per month and cut down on another EGP 250 pounds the cost of other entertainment.

What steps can I take if my budget doesn’t balance?First check whether you used the right amounts for income and expenses. Try to increase your income by taking on extra work, or to reduce your expenses by spending less.

Does a budget have limitations, or can it solve all my financial problems?If you live, spend, and invest according to your budget, it will help you to realize your objectives, but the budget is of no use if you don’t want to live by it.

Can you be financially independent when you retire if you never had a budget?You could live and retire much wealthier if you budget from an early age and keep it up until you retire.

DEBT

DEBT

CHAPTER 2

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2.1 What is debt?Debt will have the substantial impact on your life. The impact can be positive or very negative, depending on how you plan and manage it.

Debt is:• The amount of money you have to pay back to the

person or institution (such as banks, retail stores or micro lenders) from which you borrowed.

• This amount consists of two parts: the actual borrowed amount, also known as the capital amount; and interest.

• Interest is the compensation paid to the persons or institutions who lend you the money. It is normally expressed as a percentage of the borrowed amount e.g.15% per year.

• The debt is usually repaid in installments. Installments can be monthly, quarterly, or annually, but are usually monthly. An installment is the amount you have to repay each month.

• The nature of the installment has a huge impact on the amount of debt you repay. For example, if you make monthly installments as opposed to annual installments, the amount you repay will be substantially less.

An example: Assume you borrow (a) EGP 1000 which must be repaid at an interest of 15% per year. If you repay it in one installment at the end of the year, you will have to payborrowed amount (1000) + interest (1000 x 15%) = 150 * The total debt to be repaid is = EGP 1150

However, if you repay it in monthly installments, you will pay 12 equal installments of EGP 90.26. The total debt to be repaid is EGP 1083.12. The reason you pay less if the installments are more regular is because each installment reduces the capital amount borrowed, which then has the

effect of the subsequent interest being calculated on a lower amount.

We should differentiate between two types of return on loans, the simple return and compound return. Simple interest is calculated only on the principal amount, or on that portion of the principal amount which remains unpaid. Compound interest; however, is applied to the balance plus any accumulated interest where unpaid interest is added to the balance due.

The previous example falls under the simple interest calculation

DEPT

CHAPTER 2

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2.2 Advantages of and good reasons for incurring debt

If handled properly, debt can assist you in achieving your objectives. However, due to debt, hundreds of thousands of people every year lose all their possessions.

• This is because they incurred too much debt (they cannot afford it.)

• Their creditors (the persons or institutions that they borrowed from) then sell their belongings in an attempt to recover some of the outstanding debt.

• But why must people recover the outstanding debt even if the lender was forced to sell the borrower’s property?

The simple answer is that the borrowed amount is the savings of other people which are lent out to the borrowers.Situations as such can be avoided if you plan and manage your debt carefully, and if you incur debt for good reasons. Good reasons for incurring debt include:

• Buying an affordable house or apartment – it is an asset that can increase your wealth.

• Buying a really good bargain - if you can afford the debt. This happens when the reduction in the price of a product exceeds the interest you will have to pay if you borrow money to buy the product.

For example: The price of a television is reduced from EGP 1,300 to 1,000 and if you borrow EGP 1,000 at 15% interest rate per year, you will repay EGP 83.12 over 12 months. As the price reduction of EGP 300 is more than the interest, therefore, in this case it is preferred that you borrow the money if you can afford the installments.

DEPT

• Incurring debt to earn an income, such as for studies, a car, machinery to manufacture something, etc.

• Repaying your debt on time will help you to build a good credit record. Creditors will then be more inclined to grant you more credit if and when you need it.

In the end, try not to incur debt for any reason other than these. Otherwise you might be one of the people whose possessions will be sold.

2.3 Credit cards and Debit cards2.3.1 Credit cards

• A convenient way of buying something on credit – as you do not have to obtain a loan or credit from a store every time you want to buy on credit.

• You can get credit cards through banks and different types of retail service providers.

• You will be provided with a credit limit that you can use to buy what you want of goods and services.

• You pay interest and must make installments every month to repay credit purchases.

2.3.2 Debit cards• Debit cards differ from credit cards in that cardholders

can only make cash purchases within the balance of their current account or savings balance.

• It is convenient as you don’t have to withdraw or carry cash from your bank account to pay for your purchases.

• It, at the same time, saves you time as well as bank charges and commission that may be incurred in cash withdrawals from your account.

• No return or interest on these cards is charged.

CHAPTER 2

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2.4 Micro-credit:• People who do not have good credit records tend to

borrow micro- credit and in turn incur high interest rates and fees.

• There are two types of these loans: 1. Long-term: where the repayment period is spread

over six months and one year. 2. Short-term: where the repayment period is between

one month and three months.

2.5 The rate of inflation and debt Inflation is perhaps the most important negative economic phenomenon for a person / household / country. This is because it makes people poorer. This section will explain what it is and how it affects you.

• Inflation can be explained as the continual increase in the prices of goods and services consumers buy.

• Inflation makes people poorer because prices increases mean that people can buy less with the same amount of money.

• Price increases are measured monthly by the government. • Inflation is expressed in percentage terms, for example,

an inflation rate of 5% means that price are on average 5% more expensive than a year ago.

• One way that price increases are contained is by raising interest rates on debt. If a household has to pay more interest, it has less to spend and this limits the amount with which retailers can increase their prices.

• Pamphlets published by the Ministry of Finance and the Central Bank of Egypt, will give you an indication of increases in the inflation rate and interest rates on loans regularly, in addition, such information can be obtained from the websites: www.cbe.org.eg , www.mof.gov.eg

• Therefore if you monitor any significant increase in the rate of inflation, you should expect a corresponding increase in the price of return on loans.

DEPT

2.6 your budget and debt You have to plan and manage your debt in order to:

• Avoid falling into a debt trap. A debt trap arises when you have too much debt then you borrow from bank (A) to repay bank (B)

• Know how much debt you can afford to pay• Achieve your objectives. • Take into account the interest

SAVINGS AND INVESTMENTS


CHAPTER 3

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3.1 What are savings and investments?• Saving are amounts of money that are invested in

particular instruments for later use.• You can save rather than borrow to achieve objectives

such as buying a car or a house, etc. • Some people save to have enough money to retire. • It is important to note that you receive a return on these

savings, meaning that the saved amount will grow into a larger amount.

3.2 Choosing an investment instrument

• Always remember that investment instruments are designed for different purposes.

• Some are risky and provide you with a huge return on your invested money but you can also lose your money.

• Others provide smaller returns but with limited risk. In other words, the greater the risk the higher the return expected and vice versa.

• Choosing the frequency of the return paid depends on the nature and age of the saver, for example, retirees choose the instruments that will provide them with a monthly income.

• Young people, however, invest to grow the capital amounts invested and should therefore choose instruments which are designed to help them to save.


The following instruments are available:(a) DepositsA lump sum is saved for a fixed period in an account at a bank. You receive a fixed pre-determined interest on the invested money.

• Your money is very safe as the investment carries little risk.

• You pay bank charges for the administration of your deposit account.

(b) Money Market Funds• This is a popular investment instrument among older

people.

• Your money is not invested in high-risk return instruments.

• You earn interest on your money; always compare to get the highest return.

(c) Endowment Policy • It is a long term insurance policy, You choose to pay a

lump sum or installments. • You pay commission to the broker who advised you to

invest in the policy. • Try to leave your money in this policy as long as you can

so that it can grow.

(d) Life Insurance Policy• It is another long-term insurance policy; where monthly

premiums are made in exchange for cover of the event of death -an amount will be paid to the loved ones in the event of the policy holder’s death.

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• Monthly premiums normally increase at the rate of inflation every year.

• If you invest in a life cover policy, you should compare the premium and cover amount offered by insurance companies. Choose the highest cover at the lowest monthly premium.

• In some cases, you pay commission to the broker who assisted you.

(e) Insurance policies that provide coverage in the event of death and a return on the amount saved:The higher the coverage the lower the return on the amount saved, and vice versa. Here are some of the most common types of these insurance policies:

e-1) Contract Insurance:• A long-term insurance policy that you can invest by

paying installments or a lump sum. • This instrument is designed to provide you with a monthly

income after contract signing. e-2) Wedding Insurance:

Another form of the long-term insurance, the amount saved and paid monthly, is invested to cover the wedding costs of your children. In the event of death, the insurance company saves premiums on behalf of the insured. On date of maturity, the amount saved and revenue will be paid to the beneficiary (son).

e-3) Education Insurance Policy:This is an insurance policy that you can use to invest to cover your children’s educational costs. In the event of death, the insurance company saves premiums on behalf of the insured. On date of maturity, the amount saved and revenue will be paid to the beneficiary (son).


e-4) Unit Trusts Investment:• Insurance companies provide insurance policies linked

to the performance of several Money Market funds invested in a company, and you choose to link your investment policy to any of them.

• For example, if you wish not to bear the risk of stock market fluctuation, you may choose to link your investment policy with a low- risk Market Fund and vice versa.

(f) Investment in Shares• Purchasing shares of a company from the Stock

Exchange, you, like any other shareholder, own part of this company.

• The company’s share price normally increase or decrease according to changes in the company’s profits.

• If you purchase a share in a reputable company, the chances are very good that the share price will again increase into much higher levels. Although sometimes the share price can fall for reasons that have nothing to do with the company.

• Apart from the increase in the share price, you also receive dividends if the company makes profits.

• Dividends are like the interest you receive on a loan.• When you buy shares, you lend money to the company,

which it uses to make a profit for you as a shareholder, you can in turn entrust the management of the company with the growth of its activities to achieve you profits.

• Shares can be bought through stock brokering companies or via the Internet.

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(g) Investing in Property• Properties can be good investments. You can make a

capital profit by buying a property at a low price, fixing it, and then selling it at a higher price. Or you can simply wait until real estate prices rise and sell it at a profitable price.

• Or you can buy a property and rent it out, thereby receiving a monthly income.

• A good property investment almost always depends on where it is situated.

(h) Health Insurance: • Medical costs have skyrocketed over the last decade to

become accessible only by the financially capable. • One way to resolve this problem, is to participate in

one of the health insurance schemes, whether public, governmental, or private.

• This way, and by paying monthly premiums you can get medical coverage when you need it.

• You have to be careful when you choose a health insurance system suitable for you; providing higher medical cover at the least price.


3.3 How much should you save?Example: Suppose you work as an employee and contribute to a pension or provident for fund for 25 years. It is enough to provide you with a monthly income of 50% of your final salary.

You thus need another 50% income to be able to maintain the same income after retirement.

The following table illustrates the percentage of additional savings of income needed to supplement retirement provision.

CHAPTER 3

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No. of years to

retirement

Percentage of existing income to be invested to maintain yourstandard of living after retirement

8% 9% 10% 11% 12% 13% 14% 15% 16%

10 13.63 15.58 17.45 19.50 21.46 23.41 25.97 27.33 29.29

11 15.41 17.32 19.49 21.67 23.84 25.01 28.19 30.38 32.53

12 16.69 19.08 21.48 23.87 26.26 28.66 31.05 33.44 35.84

13 18.26 20.88 23.50 26.11 28.73 31.35 33.96 36.58 39.20

14 19.86 22.71 25.55 28.40 31.24 34.09 36.93 39.78 42.62

15 21.49 24.57 27.65 30.72 33.80 36.88 39.95 43.03 46.11

16 32.15 26.46 29.78 33.09 36.40 39.72 43.03 46.34 49.65

17 24.84 29.23 31.94 35.50 39.05 42.61 46.16 49.71 53.27

18 26.55 30.35 34.15 37.95 41.75 45.55 49.35 53.14 56.94

19 28.30 32.35 36.40 40.45 44.50 48.54 52.59 58.84 60.69

20 30.08 34.39 38.69 42.99 47.29 51.59 55.89 60.20 64.50

21 31.90 36.46 41.02 45.58 50.14 54.70 59.26 63.82 68.38

22 33.74 38.56 43.39 48.21 53.03 57.86 62.68 67.51 72.33

23 35.62 40.71 45.80 50.89 55.98 61.08 66.17 71.28 76.34

24 37.53 42.89 48.26 53.62 58.99 64.35 69.72 75.08 80.45

25 38.48 45.12 50.76 56.40 62.05 67.69 73.33 78.97 84.61


As shown in the table, if you wish to maintain the same income after retirement, you have to choose the table, the parallel row to the number of years remaining for retirement until you reach the closest percentage that you want to add to your income after retirement. Applying the previous example, we find out that in order to maintain the same level of income while having 20 years time for retirement, you should be saving approximately 13% of your monthly salary.

3.4 Protect Your Possessions and InvestmentsYou can protect your possessions against risks such as theft, damage, or fire. Short-term and long-term insurance are the instruments designed to assist you. You pay a monthly premium in exchange for the replacement of your possessions should they be stolen or destroyed. On the other hand, Life assurance will compulsory pay your debt (for example the bond on your house) lifting the debt burden on heirs in the event of your death.

3.5 Invest in Education Education has never been more important than now to invest in learning new skills.Everybody must be armed with as many skills as possible, particularly personal financial planning skills that include entrepreneurial skills. Use your budget to make provision for this too.

FINANCIAL HINTS FOR YOUR FUTURE

FINANCIAL HINTS FOR YOUR FUTURE

CHAPTER 4

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4.1 IntroductionYou should now be able to:

1. Compile your own personal budget2. Manage your debt according to your budget3. Manage your savings and investments according to

your budget and retirement requirements.Though you are a lot cleverer now, there are a few hints which will enable you to:

1. Repay your debt quicker, thereby releasing money for other purposes

2. Improve your standard of living or reducing financial troubles

3. Retire happily ever after

Below are practical hints which will enable you to achieve these objectives:

4.2 Hints on repaying your debt quicker

4.2.1 Debt on a property such as a house or apartment

The first hint is to pay more than is officially required of you. This will reduce the repayment period substantially and thus the number of installments you need to make. The following example will illustrate how.Suppose you buy a property for EGP 500,000 (the capital borrowed) at an interest rate of 12.5% per year which needs to be repaid over 20 years. Your minimum monthly installment will be EGP 5,681.

• Should you repay about EGP 120 per month more, namely EGP 5 800 per month, you will repay the borrowed amount in 18,5 years. You will save EGP 86,000.

• Thus, the more you repay, the more you save.

The second hint is to make your first payment on the date that the property is registered in your name.

• Now, before taking this advice into consideration it is important to understand that the first bigger portion of repaying the capital amount, which is 92% will flow towards paying the interest, assuming the repayment period is 20 years. The other part flowing towards repaying the capital amount only exceeds the interest portion after the installment No. 175.

• Therefore, by starting to repay before the repayment period, you save in the repayment amount flowing towards the interest, because by the beginning of the period when the interest is calculated you would had already paid a good portion of the capital amount.

• And we have mentioned before, try to continue paying more than is require of you, this way you will keep the advantage of saving in the total amount of capital repayment.


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4.2.2 Reduce your debt on a car loan The same repayment methods can be applied for a car loan but the amount you save will be smaller because the repayment period is much shorter, which is usually 5 years

4.2.3 Ways to improve your standard of livingYou can sell your property and then use the profit to buy a better place. It is normally expected that you repay the loan over 20 years. However, most people sell their homes within 7 years. The profit is then used as to buy a better home by getting a Real Estate loan.For example, you buy an apartment for EGP 500,000 at an interest rate of 12.5%. After 7 years you will owe about EGP 438,000.However, the value of your property would have increased over the years. It should be worth approximately EGP 700,000 after seven years if the value increased by 5% per year. If the property is sold you should receive net profit of EGP 262,000.

Note:Finally you should ensure that you can afford the new loan repayment installments, which is also usually higher installment than the previous one.

The same method can be used to get out of financial trouble.

• For example, suppose you fall behind, or might soon fall behind with your monthly installments. You should consider selling the house and buying a more affordable place. Because once you are behind, your debt will be running up and your house will be sold at an auction. And in most cases it will be sold for less than the property is worth, and after payment go for a smaller home you can afford its premiums.


• A case as such, may result from the sudden change in interest rates, which results in an increase in the premium that you may not be able to afford.

• Worse, you will now have a bad credit record. And then it will be difficult to obtain any credit from anybody else for a long time, or be forced to obtain credit at a higher interest rate than that in the market.

• Thus act early rather than wait till the problem catches up with you

4.3 Retiring happily ever afterThe golden rule to obtain this objective is to start saving at an early age, the amount you will receive at retirement will be huge, much larger than the amount you start saving 10 years before retirement.

• Assuming you were at the age of 20 when you started saving EGP 200 per month in unit trusts of life insurance companies until you are 60 years old, you will receive

• EGP 1,264,815 if the average rate of return is 10% per annum.

• Should you start doing this at the age of 30, you will have to save EGP 559.53 per month to receive the same amount at age 60.

• And if you start when you are 35, you will have to save EGP 953.26 per month to receive the same amount.

CHAPTER 4

4.4 Another hint or two• Two rules which must be followed simultaneously are to

start incurring debt as early as possible (for a property) in your life and to repay this debt as soon as possible.

• For example, if at the age of 22 you purchase a luxury apartment for EGP 400 000 and repay the loan within 10 years, you will own an asset worth EGP1 million while not owing debt at age 32.

• By doing this, you will increase your wealth substantially. It will allow you to purchase a much bigger house. And you will be able to afford it comfortably.

• Another very important hint: include your parents in your financial plans while you are at school. Help them to understand their own money matters as well as you do. You might find that they don’t plan and manage their finances at all.

4.5 Practical assignment• Build and maintain a good relationship and reputation

with your bank.• Make sure that you use the right banking products and

services.• Be fully aware of the structure of prices and banking fees

of the banking products and services you receive.• Keep the interest you pay on debt as low as possible and

try to increase the interest you receive on savings.• When you apply to open any type of bank account you

will have to complete an application form and provide proof of all personal information.

Do you see why it is very important to start investing for retirement when you receive your first salary cheque?

37

Notes

Notes