The literature discusses the relationship between current and perceived knowledge, with an emphasis on two scenarios. First, limited observed knowledge and extensive perceived expertise contribute to overconfidence. Second, broad observed knowledge and restricted perceived expertise result in underconfidence (Ramalho and Forte 2019), so under- and overconfidence are behavioral biases that can influence financial behavior. Pak and Chatterjee (2016) focused on both observed and perceived knowledge and measured financial literacy’s impact on savings (i.e., emergency and retirement) for the study’s entire sample and overconfidence group. The literature has also discussed financial literacy’s multidimensional role and analyzed the relationships between the three dimensions mentioned previously. For instance, the model proposed by Potrich, Vieira and Mendes-Da- -Silva (2016) and Ramalho and Forte (2019) incorporates current financial knowledge, perceived financial knowledge and financial attitude as antecedents of financial behavior. Potrich, Vieira and Mendes-Da-Silva (2016) compared three models with different relationships between the components of financial literacy, behavior, knowledge, and attitude and concluded that financial knowledge and attitude are correlated with and mutually predict financial behavior. Murendo and Mutsonziwa (2017) applied a multivariate approach to measuring financial literacy, including financial attitude, confidence, and knowledge.
The above literature review states the different kinds of relationship in individuals activities or behavior of investments in their perspective. Married and single male respondents were more subjectively risk tolerant than otherwise similar female-headed households. This helps us to identify the risk level with comparison of individuals from age and Financial status.
Problem Statement
People are confused about what to do with money and how to manage or achieve their financial goals. They lack knowledge on proper saving schemes. While people miss out on proper planning they tend to suffer if any unexpected loss of income occurs and this puts them into debt and unwanted financial pressure. They spend a lot of money on expenses and between the half of the month their debit card balance will be low. All this comes in because there is no concentration on money flow and lack of taking risks. A financial advisory software will get finance in order, support tax issues, plan for retirement, provide reviews on financial patterns, save time that is spent on organizing finance, it can also provide knowledge on investments and insurance planning. Through a proper financial planning people tend to achieve financial freedom, a better quality of life and peace of mind post retirement stage of life.
Objectives :
Financial planning involves collection of financial data and strategies to assist people on an integrated approach towards handling funds. The main objective of personal financial planner tools is to help people manage their finances even without any proper knowledge and strain. The tool provides a user-friendly platform where the user can learn about investments and choose plans and investment strategies which will help them in later stages of their life and provide them financial freedom. Our financial planning software provides the following services which include, budgeting, insurance planning, risk & asset allocation, retirement Planning, wealth management, child future planning, and loan/debt advisory services.
Required Tools :
We aim at building a dashboard for wealth management, and models that will study the current tax payment and risk taking ability based on the age, income, and other independent factors and suggest users the risk that they can take and also suggest them plans based on their earning ability. For implementing the above we use the following tools,
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Python
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PostgreSql
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Streamlit
Tools And Techniques Employed
PYTHON :
Python is commonly used for developing websites and software, task automation, data analysis, and data visualization. Python has been adopted by many non-programmers such as accountants and scientists, for a variety of everyday tasks, like organizing finances.
Postgresql :
PostgreSQL is a relational database. It stores data points in rows, with columns as different data attributes. A table stores multiple related rows. The relational database is the most common type of database in use. It differentiates itself with a focus on integrations and extensibility. It works with a lot of other technologies and conforms to various database standards, which ensures it is extensible.
Streamlit :
Streamlit's architecture allows you to write apps the same way you write plain Python scripts. To unlock this, Streamlit apps have a unique data flow: any time something must be updated on the screen, Streamlit reruns your entire Python script from top to bottom.
Modules :
Modules include user and admin modules, the user module can look into the following sub modules, whereas admin will be able to add changes to plans that are viewed by the end users. The user modules include,
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Summary of Cash Flow and budgeting
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Cash flow projection
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Insurance Planning
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Risk and Asset Allocation
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Investment Recommendation
Modules Description :
• Cash Flow and budgeting :
The user gives the basic information about him and his financial status. Cash Inflow describes all of the income that is brought through your activities– any strategy to bring profits. Cash Outflow includes any debts, liabilities, and operating costs– like expenses and funds you spend.
• Cash flow projection :
A cash flow projection is an estimate of income and expenditure over a set period, usually a month but up to a year. It helps understand what their cash position is now and into the future by analyzing upcoming income and expenses.
• Insurance Planning:
Insurance is a contract in which each participant ensures another for losses caused by specific safeguards or risks. It assists in protecting the insured person or their family from financial loss. This plan includes some recommendations such as Health Insurance, Life Insurance, Personal Insurance, and Property Insurance.
• Risk and Asset Allocation :
Asset allocation provides an investment option in which a stockholder or portfolio manager attempts to balance risk versus reward by adjusting the percentage of money invested in a portfolio asset based on the investor's risk tolerance, goals, and investment time frame. Overall, a budget puts a person on better financial footing in the short and long term.
• Investment Recommendation :
Information recommending or suggesting an investment strategy, explicitly or implicitly, concerning one or more financial instruments or issuers, including any opinion on the current or future value or price of such instrument.
Cashflow Budgeting :
In this phase, User can see the complete savings and expenses using above module gathered information.
Cashflow Assets and Liabilities :
The above Fig. 3.1 shows a cash flow summary which fetches the information from user input and displays a small summary. Helps us to understand the current state of the user.
This Fig. 3.2 presents the monthly expenses from daily needs and annual needs.
The previously mentioned Fig. 3.3 implies the ongoing non-regular needs with calculating the monthly cash flow surplus says the difference between the cash inflow(income) and outflow(expenses)
Here in Fig. 3.4 conveys the property or land asset and any structure that is permanently attached to it. Personal property—boats, collectibles, household furnishings, jewelry, vehicles.
3.1.2 Goal Planning and Asset Allocation :
This module gathers the user id and inflation rate in percent to calculate the long term goals needs in upcoming year.
Formula, for calculating inflation rate = investment *(1+(rate)^no.of years)
Monthly needs caluation for achieveing Goals = (rate/12)*(Goal – investment
(1-(rate/12))^year^12.
This Fig. 3.5 calculates the Children marriage fund needed after 5 years with tax and inflation rate calculations from users point.
Here in Fig. 3.6 replicates the Home renovation fund needed in 2025 with 2% of inflation rate and after tax and then monthly saving amount is calculated.
This Fig. 3.7 presents the calculated future value of buying a car in the upcoming year with inflation rate and monthly you need to save for buying a new car.
The Fig. 3.8 gives a summary of all fund needs in upcoming years and how much monthly the user should save from salary or other inflows.
3.1.3 Cashflow Projection :
A cash flow projection is a breakdown of the money that is expected to come in and out. This includes calculating your income and all of your expenses, which will provide a clear picture of how much cash it will have at the end of a specific time period.
Expenses Projections :
Based on the User Id and appropriate inflation rate from the user. It calculates the total expenses like ongoing needs, core lifestyle expenses and non-core lifestyle expenses.
Formula : Future value = investment(1+(inflation rate)**No.of years)
This Fig. 3.9 projection shows Future daily needs and annual needs in upcoming years with calculation of inflation rate.
The Fig. 3.10 graph shows the small visualization between the Core life Expenses is increases for each year when comparing to the Annual Non- core expenses
Similarly, as expenses projections, intimidated in other ongoing needs and long term needs for upcoming years and predicts the future value using inflation rate.
As far the income projection chart, done for monthly necessary which depends on yearly expenses to live daily life as so far.
This Fig. 3.11 chart visualizes the approx corpus balance by calculating current hand-in cash and annual expense shows the upcoming year's future value.
3.1.4 Risk Measurement
Risk of individual user is calculated based on their response to various financial questions like their risk-taking ability from very low risk taker to very high-risk taker, and the respondents are assigned with scores in range of 0 to 4 based on their answer. More detailed risk analysis is mentioned below in table.
Average score is calculated on the scores for different question, this helps in determining their risk-taking group and later helps in suggesting stocks and personalized financial planning.
Based on their risk average score users can have a conservative portfolio if their average score is below 1, can have a moderately conservative portfolio if their average score is 1 or less than 2, can have a moderately aggressive portfolio if their average score is 2 or less than 3, can have an aggressive portfolio if their average score is 3 or less than 4, or can have a very aggressive portfolio if their average score is 4. Based on the customer’s portfolio their investments can be divided into various investment options like fixed income securities, equities, and into cash and equivalents. Investment splits for various portfolios are mentioned in the below Table 2. Customers can split their amount available for financial investment into various investment options according to their portfolio share split.
Table 2
Investment split on different options for all portfolios
Portfolio | Fixed Income Securities | Equities | Cash and Equivalent |
A Conservative Portfolio | 60% | 30% | 10% |
A Moderately Conservative Portfolio | 55% | 35% | 10% |
A Moderately Aggressive Portfolio | 40% | 50% | 10% |
An Aggressive Portfolio | 30% | 60% | 10% |
A Very Aggressive Portfolio | 10% | 80% | 10% |
This Fig. 3.12 pie chart shows the Portfolio based on the risk-scale measurement with percentage range.
Investment Recommendation :
Recommendation is a subclass of information filtering system that provide suggestions for items that are most pertinent to a particular user. The suggestions refer to various decision-making processes. Firstly, gave recommend for stock market. instantly it calculates the level of risk in stock and displays the appropriate company name and risk-taking tendence in those stock by using value at risk (VaR) of a stock. The VaR quantifies the risk of potential losses for a firm or an investment over a time period, using statistical methods to calculate a confidence level. If a stock has a VaR of -5% with a confidence level of 90%, it means its losses will not exceed − 5% with a 90% probability in a given day based on historical values. Confidence level is 90%, 95% or 99%
Figure 4.1 shows the value at risk of each stock ticker based on the risk tolerance measurement.
For each recommendation like equity, debt it follows the same risk-taking measure as mentioned below. Every investment interrupts the relate investment factors.