Financial Management and Planning Chapter Notes | Home Science for Class 11 - Humanities/Arts PDF Download

Introduction

• Financial management in a family context refers to the management of all types of income, including salary, wages, rent, interest, dividends, bonuses, retirement benefits, and other monetary receipts.
• It involves planning, controlling, and evaluating the use of these incomes to maximize satisfaction from available resources.
• The quality of living depends not only on the amount of income but also on its regularity and stability.
• Learning to manage money as a resource is crucial for ensuring financial stability and meeting family needs.
• Financial planning is a key component of financial management, often executed through budgeting.
• Budgeting ensures that family income meets current needs while also addressing long-term goals, minimizing wasteful spending on non-essentials.
• Effective financial planning requires monitoring and periodic evaluation of plans, along with commitment from all family members.
• Management involves using available resources (human, material, and community) to achieve family goals and objectives.
• Family resources include human resources (knowledge, skills, health, time, energy), material resources (housing, money, investments), and community resources (libraries, parks, community centers, hospitals).
• A family, as a consumption and social unit, manages finances to ensure the well-being of its members, with money being a critical resource.
• Effective money management to meet present needs and future goals is a learned skill.

Family Income

• Family income is the total income from all sources and types for all family members over a specific period (annual, monthly, weekly, or daily).
• For official purposes, it is typically considered as the annual income in a financial year (1st April to 31st March of the following year).

Income sources include:

• Wages
• Salary
• Profits from business
• Commissions
• Rent from properties
• Interest on cash loans
• Dividends
• Pensions
• Gifts
• Royalties
• Tips and donations
• Bonuses
• Subsidies and charities

Types of Family Income

• Money is defined by its functions: serving as a medium of exchange and a measurement of value.
• Money is anything generally acceptable for exchanging commodities and determining their value.

Importance of money:

• Acts as a medium of exchange, eliminating time-consuming barter processes.
• Serves as a standard of value, expressing the value of commodities in a common denominator.
• Facilitates deferred payments, supporting savings and investments for capital formation and improved living standards.
• Allows durable storage for long periods, enabling accumulation for investment and production.

Three types of family income:
Money Income: The purchasing power in rupees and paisa received by the family over a period, including wages, salary, bonuses, commissions, rent, dividends, interest, retirement income, royalties, and allowances.

• Money income is converted into goods and services for daily living, with a portion often saved or invested.
• The frequency and pattern of money income vary; for example, farmers earn irregularly (e.g., during rabi and kharif crop sales), while salaried individuals receive regular monthly income.

Real Income: The flow of commodities and services available to satisfy human wants and needs over a period, not necessarily involving money.

• Real income is dynamic, includes goods and services from non-monetary sources (e.g., home-grown produce, household services), and is time-bound (e.g., monthly or yearly).
• Real income is divided into:
  • Direct Income: Goods and services available without money, such as family members’ services (cooking, laundering, stitching, maintaining a kitchen garden), fully paid-for housing, and community facilities (parks, roads, libraries).
  • Indirect Income: Goods and services obtained through money exchange, requiring skills like selecting high-quality vegetables.

Psychic Income: The satisfaction derived from owning and using goods and services, linked to real income.

• Psychic income is intangible, subjective, difficult to quantify in rupees, and critical for quality of living.

Income Management

• Income management involves planning, controlling, and evaluating the use of all types of income to maximize satisfaction from available resources.
• Each family has unique needs and desires, requiring a tailored expenditure plan based on their goals.
• Efficient income management requires recognizing and analyzing all available resources (human, material, community).

Budget

• A budget is a plan for future expenditure, serving as the first step in the financial management process.
• Its success depends on being realistic, flexible, suitable for the family, and supported by effective control and evaluation steps.
• A family budget details income and expenditure for a specific period (e.g., month or year), listing all income sources and expenditure categories (food, clothing, housing, entertainment, travel, education, health, medicine, savings).

Steps in making a budget:

• List commodities and services needed by family members, grouping related items (e.g., food, housing, household operations, education, transportation, clothing, income tax, medical, personal allowances, miscellaneous, provision for future).
• Estimate the cost of desired items, totaling each category and the overall budget, considering market trends (e.g., allowing margins for price increases).
• Estimate total expected income, categorizing it as assured (guaranteed) and possible (variable), ensuring necessities are covered by assured income and non-essential items by possible income.
• Balance expected income and expenditure by increasing income (e.g., taking extra work) or reducing expenditures (e.g., fewer outings or festival expenses).
• Check plans for success by ensuring family needs are met, emergencies are accounted for (e.g., a joint emergency fund), solvency is assured (ability to pay debts), national/world conditions (e.g., economic recession) are considered, and long-term goals are recognized.

Advantages of planning family budgets:

• Provides an overview of income use, allowing analysis of allocations relative to total income.
• Helps prioritize spending on important goals, reducing wasteful expenditure.
• Encourages rational decision-making aligned with long-term family goals, reducing impulsive spending.

Control in Money Management

• Mental and Mechanical Checks: Mental checks involve visualizing how a specific amount covers multiple items (e.g., budgeting Rs. 1,000 for shoes, a dress, and books). Mechanical checks involve setting aside cash for specific purposes (e.g., a food purse for monthly food expenses), with rapid depletion indicating spending pace.
• Records and Accounts: Records show money distribution after expenditures, ranging from casual (e.g., written accounts, receipted bills) to formal detailed accounts. They help compare actual spending with planned allocations.

Advantages of record keeping:

• Allows comparison of monthly expenditure with the spending plan to identify areas needing adjustment.
• Identifies categories with excessive or insufficient spending, improving future budgets.
• Provides proof of payment (bills, receipts) for resolving issues with poor products or services.
• The single sheet method is a simple, flexible record-keeping approach, tracking expenses on one sheet (e.g., categories like food, housing, clothing, education, medical).
• Adjusting the plan is critical to address poor planning, emergencies, unplanned spending, or inadequate checking mechanisms.
• Evaluation, the final step, assesses the satisfaction derived from expenditures, focusing on fair value, timely bill payments, future provisions, and improved economic status.

Savings

• Savings involve setting aside part of money or resources for future use or further production.
• Savings are essential for meeting future family needs and supporting economic growth through capital formation.
• Savings occur when families deposit money in banks or financial institutions, which mobilize these funds for productive use.
• Savings depend on:
  • Ability to Save: Determined by per capita income, with higher-income families having greater saving potential than low-income families, who prioritize basic needs.
  • Willingness to Save: Influenced by long-term goals and readiness to forgo present luxuries for future security.
• Saving requires discipline, planning, cooperation, and hard work from family members.
• Savings are meaningful only when their purpose is well-planned, understood by all family members, and wisely invested for future use.

Investment

• Financial Assets: Include bank accounts, post office schemes, financial credit societies, shares, securities, and insurance policies, providing financial security and economic productivity.
• Physical Assets: Include land, property, houses, gold, and household durables, which are not economically productive but often yield long-term positive returns.

Principles Underlying Sound Investments

• Investing in government and private securities (e.g., National Savings Certificates, Public Provident Fund, Kisan Vikas Patra, bank fixed deposits).
• Investing in companies across different geographical zones.
• Owning shares and bonds in multiple companies.
• Researching the market reputation of security issuers.
• Diversifying securities (e.g., agricultural land, real estate, stocks, bonds, fixed deposits).
• Understanding the current business cycle phase.

Reasonable Rate of Return: Higher returns typically involve greater risk, with safety and return being inversely related. Regularity of income is prioritized by those relying on investments, requiring careful comparison of interest rates and risks across schemes.
Liquidity: The ability to convert securities into cash without loss of value; more liquid investments have higher prices and lower returns, necessitating a balance between income and liquidity.
Recognition of Effect of World Conditions: Business trends impact the protection needed, provision ease, and methods chosen. Families must consider long-term economic trends and their investment’s impact on the economy, as investment decisions can moderate business cycle extremes.
Easy Accessibility and Convenience: Investment choices should account for the knowledge required to manage them successfully, avoiding options that may lead to losses due to mismanagement.
Investing in Needed Commodities: Investments should mature close to anticipated needs (e.g., child’s higher education), ensuring funds are available when required.
Tax Efficiency: Investments should leverage tax-saving provisions in the Income Tax Act, such as insurance policies, to reduce tax liability.

Savings and Investment Avenues 

• Post Office Savings
• Bank Savings
• Unit Trust of India (UTI)
• National Savings Scheme
• National Savings Certificates
• Shares and Debentures
• Bonds
• Mutual Funds
• Provident Fund
• Public Provident Fund
• Chit Fund
• Life Insurance and Medical Insurance
• Pension Schemes
• Gold, House, Land

Credit

• Credit involves obtaining money, goods, or services now and paying for them later, derived from the Latin word “CREDO” (I believe).
• It is a postponed payment process, often carrying high interest costs, increasing purchasing power to acquire more goods or services than cash allows.
• Families must understand credit’s nature and repayment obligations, including interest.

Need for Credit

• Families use credit to meet real or perceived needs or obligations, such as purchasing high-cost items (e.g., land) by spreading costs over time, allowing use during repayment.
• Credit is used for emergencies (e.g., medical expenses) or obligations (e.g., marriage, rituals during a family member’s death).
• Self-supporting families can use credit confidently in emergencies.

4 Cs of Credit
Lenders (e.g., banks, financial institutions) assess creditworthiness based on:

• Character: The borrower’s willingness and determination to repay the loan as agreed, even under challenging circumstances.
• Capacity: The ability to meet repayment obligations, determined by the margin of income over necessary expenses, not just total income.
• Capital: The family’s net worth (assets minus liabilities), providing a safety margin for lenders if income is insufficient for repayment.
• Collateral: Specific assets pledged as security for a loan, which the lender can sell to recover funds if the borrower defaults.
• Credit sources include commercial banks, cooperative banks, agricultural banks, credit unions, and self-help groups (SHGs).
• SHGs pool monthly contributions to create a corpus, offering credit to members based on need and repayment capacity, requiring no collateral and charging nominal interest due to mutual trust.
• Families should weigh the satisfaction of acquiring goods/services against the budget adjustments required for loan repayment.
• Managing credit involves deciding when to use it and avoiding excessive reliance.
• Indiscriminate credit use can be disastrous, so families should aim to avoid credit or secure it at the lowest cost.