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NCERT Class 11 Home Science Chapter 10 Financial Management and Planning
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Financial Management and Planning
Chapter – 10
| PART – ⅠⅠ HUMAN ECOLOGY AND FAMILY SCIENCES |
| Unit – IV Adulthood |
| Review Questions: |
1. Indicate if the following statements are ‘True’ or ‘False’.
(i) Budget is the first step in money management. (True/False) ___________.
Ans: True.
(ii) Money serves as a medium of exchange of commodities. (True/False) ___________.
Ans: True.
(iii) Profits from business and gifts are a form of income (True/False) ____________.
Ans: True.
(iv) One should first estimate the cost and then list the commodities and services needed while making the budget (True/False) ____________.
Ans: False.
(v) Savings in physical assets are productive in economic terms (True/False) ____________.
Ans: False.
(vi) The trend in business cycle is an important consideration under the principal of safety (True/False) ___________.
Ans: True.
(vii) The time period may be ignored while considering and deciding on an investment (True/False) ____________.
Ans: True.
(viii) The 4 C’s of credit are character, capacity, capital and collateral (True/False) ____________.
Ans: True.
(ix) Nature of enterprise is not an important safety consideration (True/False) _____________.
Ans: False.
Review Questions:
1. What do you understand by ‘management of finances’?
Ans: Financial management in the context of a family simply means management of finances. Finances are all types of income available to a family which include salary, wages, rent, interest, dividends, bonus, retirement benefits and all other forms of monetary receipts. Planning, controlling and evaluating the use of all these types of incomes is called financial management. Its purpose is to give the family greatest satisfaction from the resources at hand.
The quality of living that can be exchanged for financial resources is dependent not only on how much income is available, but more importantly on the regularity and stability of income. Therefore, it is important to learn the skill of managing money as a resource.
2. Discuss the different types of income.
Ans: The different types of income are mentioned below:
(i) Money Income is the purchasing power in rupees and paisa that goes into the family treasury in a given period of time. It comes to the family in the form of wages, salary, bonus, commission, rent, dividends, interest, retirement income, royalties and any other allowances to any member of the family. Money income is converted into goods and services required for daily living, and often a part is diverted into savings for delayed use or for investment purposes.
The frequency and pattern of flow of money income varies from family to family. For example in rural areas agriculture is the main occupation. The income of a farmer is not regular but she/he earns money when she/he sells the crop which may be twice in a year–the rabi and the kharif crops. In contrast, a person having a job will have regular income every month.
Real Income is defined by economists as a flow of commodities and services available for satisfaction of human wants and needs over a given period of time.
This definition has three important points, namely:
(i) Real income is a flow of goods and services, it is not stagnant.
(ii) It consists of goods and services which might or might not be available with money, e.g., produce from your own land, services of a household.
(iii) There is a time period involved – it may be a month or a year.
Real income is of two types- direct income and indirect income:
(a) Direct Income consists of those goods and services available to the family members without the use of money. For example, services rendered by family members, like cooking, laundering, stitching, maintaining kitchen garden, etc. A house which is fully paid for and community facilities like parks, roads, libraries also come under direct income.
(b) Indirect Income those material goods and services which are available to the family only after some means of exchange (ordinarily money) has been obtained, e.g., use of money to buy good quality vegetables because it involves one’s skill and ability to select.
(iii) Psychic Income is the satisfaction that results from the ownership and utilisation of goods and services. It can also be defined as the satisfaction derived from real income. It is difficult to quantify psychic income in terms of rupees. It is a form of hidden income. It is intangible and subjective and the most important in terms of quality of living.
3. Discuss the steps in making a budget.
Ans: The steps in making a budget are mentioned below:
(i) List the commodities and services needed by the family members throughout the proposed budget plan. Group the related goods and services together.
The following grouping may be helpful:
(a) Food and related costs.
(b) Housing.
(c) Household operations fuel, utilities.
(d) Education.
(e) Transportation.
(f) Clothing.
(g) Income tax.
(h) Medical.
(i) Personal allowances.
(j) Miscellaneous – recreation, house furnishings
(k) Provision for future – saving, retirement.
(ii) Estimate the cost of the desired items totaling each classification and the budget as a whole. General market trends must be considered while making these estimates. For example, if prices are showing an upward trend, sufficient margin should be allowed to cover such increases.
(iii) Estimate total expected income. It is helpful to list income under two headings – assured and possible income. The budget should ensure that necessities are taken care from the assured income and the ‘nice but not necessary’ items can be obtained from possible income.
(iv) Bring expected income and expenditure into balance. Sometimes expenses are more than income. There are two ways to bring them into balance. One can either increase the income (for example by, taking up an extra job/work) or cut expenditures (less frequent outings or less expenditure on festivals).
(v) Check plans to see that they have a reasonable chance of success.
The plans are checked in light of the following factors:
(a) The needs of the family have been met.
(b) The budget allows for emergencies. A joint fund may be kept aside for emergency period.
(c) Solvency is assured. Solvency is the ability to pay bills or debts as they fall due.
(d) The national and world-wide conditions have been considered (e.g., global economic recession).
(e) The long term goals of the family are recognised.
4. What are the controls that can be exercised in money management?
Ans: After planning, controlling is the next step in money management. Control in financial management is usually of two types: checking to see how well the plan is progressing and adjusting wherever necessary. Checking is important as it tells how one’s plans are progressing and where adjustments are needed.
There can be two kinds of checks:
(i) Mental and mechanical checks: Mental checks are usually established by breaking the allocations into units which can be related to actual expenditures. For example, Rs. 1,000 may appear to be a large amount to a student, but when one realises that one must purchase a pair of shoes, a new dress for a festival and a few books all at one time, it is obvious that one must take extreme care in the selection and the price in light of the total money available. Thus, in mental checking one visualises clearly the items a specific amount must cover.
A mechanical check is one in which you set aside a certain amount of money in cash to be used for a particular item. For example, many homemakers have a food purse in which monthly allocation for food is kept. All food expenses are carried out from the money in this envelope. Quick disappearance of the money shows how rapidly the money is being spent.
(ii) Records and accounts: Records and accounts show the distribution of money after expenditures have been made. Such records can quite casual, such as keeping everyday written account or receipted bills, or they can consist of formal and detailed accounts.
5. Discuss the principles underlying sound investments.
Ans: The principles underlying sound investments are mentioned below:
(i) Safety of the principal amount: The principal itself has to be safe if it is to earn interest or dividends. This principle is the most important factor for sound investing.
Safety can be ensured:
(a) Owning securities in both government and private sectors like National Savings Certificate (NSCs), Public Provident Fund (PPF), Kisan Vikas Patra (KVPs), fixed deposits in banks.
(b) Investing in companies in different geographical zones.
(c) Owning shares and bonds in different companies.
(d) Studying the market reputation of the issues of the securities
(e) Varying the kind of securities purchased – agricultural land, real estate, stocks, bonds, fixed deposits, etc.
(f) Understanding prevailing phase of business cycle.
(ii) Reasonable rate of return: In general, the higher the rate of return on an investment, the greater the risk, i.e., safety of principal and rate of return are inversely related. To some people, particularly those depending upon investments as their major source of income, regularity of income is more important than a higher but fluctuating return. This is determined by the selection of securities. Therefore, before investing money one should compare the rate of interest and the associated risk under various schemes and options.
(iii) Liquidity: It is the ability to convert the securities into cash without sacrificing value. The more liquid an investment is, the higher is its price, or in other words, the lower the return to the investor. Hence income and liquidity must be balanced.
(iv) Recognition of effect of world conditions: Changes in business trends will affect both the amount of protection needed, the ease of providing it and the methods chosen to provide it. Considering the long time business trends, a family must recognise the effect of their savings on the entire economy. Their willingness or unwillingness to invest in business enterprises at various stages in the cycle may well have an effect in reducing the extremeness of the cycle.
(v) Easy accessibility and convenience: While choosing an investment option for family funds, one must consider the knowledge required for its success. A family may choose an investment which might result in loss simply because they did not foresee the problems involved in the management of security or property acquired.
(vi) Investing in needed commodities: The date on which an investment is to mature is important for a family that plans to have funds available for a known future need. Therefore, while investing money, families should purchase securities of lengths and durations so that they mature close to the time of the envisaged need or needs, e.g., for the child’s higher education.
(vii) Tax efficiency: Investments should be made in those instruments which lead to tax saving. A number of provisions in the Income Tax Act can be used to save taxes. Investment in insurance policies, Employees Provident Fund, PPF, etc., have built-in tax rebates with a specific ceiling limit.
(viii) After investment service: While selecting an investment instrument, customer care or customer service must be a critical decision-making factor. Good customer care includes easy encashability of securities, good communication network, timely dispatch of interest or dividend warrants, timely disbursal of the due amount after completion of investment period, keeping the customer posted about changes in the policies, interest rate, etc. A customer-friendly company provides the needed support and protection to the investor as and when required.
(ix) Time period: The “lock in” period is a critical aspect to be considered before deciding on an investment. The longer the period of investment the higher is the rate of return. For example in most fixed schemes the rate of interest is higher for long-term deposits compared to short-term deposits. Thus the investor must choose between a higher return with a longer waiting period or a comparatively lower return for a short lockin-period, based on the needs and requirements of his/her family.
(x) Capacity: One should not invest beyond one’s capacity so that the investments can be free of undue hardships. It is important to balance present needs with future needs and security.
