Mathematics of Financial Planning

By | January 19, 2015

Financial Planning involves the following calculations:

  • A sum of the assets as well as liabilities of the client. The difference is the net worth of the client.
  • A sum of the income less expenses of the client on an annual basis. This figure gives us the potential savings the client can make.
  • Time value of money calculations to find out the retirement funding requirements of the client in the future, factoring in inflation.
  • Compound interest calculations to ascertain a conservative future value of the client’s investments.
  • Ratio analysis that compares key numbers of the clients:
    1. Cash / Expenses i.e. Liquidity ratio
    2. Assets / Debts
    3. Cash / Short-term Liabilities i.e. Current ratio
    4. Short-term Liabilities / Total Income i.e. Debt service ratio
    5. Monthly surplus / Monthly income i.e Saving ratio
    6. Net worth / Total Assets i.e Solvency ratio
    7. Liquid Assets / Total Assets
    8. Investments / Total Assets

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