Budi Frensidy: Advancing to Be Financially Smart
Nino Eka Putra ~ PR of FEB UI
DEPOK – Monday (9/11/2020),
FEB UI Professor of Finance and Capital Market, Budi Frensidy released his article which was published in the Kontan newspaper, the Exchange rubric – Wake Up Call, page 4, which was entitled “Advancing to Be Financially Smart”. Here’s the article.
“Advancing to Be Financially Smart”
Based on a survey by the Financial Services Authority (OJK) last year, the financial literacy index of our Indonesian society has shown improvement. The index increased to 38.0% from 29.7% in 2016. Indeed, the index’s position is still relatively low. Even so, we still have to give our appreciation for the efforts that have been made by the government, OJK, and players in the financial services industry, in increasing financial literacy and inclusion.
With financial literacy, Indonesians can determine which financial products and services suit their needs. The public can also properly understand the benefits and risks, as well as the rights and obligations attached to these products and services.
But it would be better if the public did not just understand financial products and services. More than just being financially literate, undergraduates and high school graduates in Indonesia should be able to become financially savvy. To be able to move up in this class to be financially savvy, one needs to understand financial mathematics.
There are two criteria for someone to be financially savvy. First, the person must be smart as a cash deficit or as a debtor. This includes being smart in dealing with the bank. Second, the person must also be shrewd at the same time as a cash surplus or investor.
To achieve this goal, the person needs three competencies, namely the ability to do their own financial planning, expertise in determining asset valuation and capability in debt affairs with banks.
What these three competencies have in common is that we must understand the variables that affect these three competencies. In general, there are five variables that are commonly used, namely future value, current value, period of accumulated funds, assumption of yield that can be obtained and the amount of deposits that need to be made periodically.
In applying these three competencies, usually four variables will be given and then the fifth variable is calculated. Of the four variables, one variable can be assumed to be zero. In determining asset valuation, there is still a sixth variable, namely g (growth rate).
In addition to looking for unknown variables, people who are financially intelligent will also be able to arrange many schedules, such as financial planning schedules (sinking fund), mortgage or KPA installment schedules, to agio amortization schedules or bond divisions.
Financial planning
A common case in financial planning is that someone plans to have a certain amount of money for a specific purpose in the future by utilizing the money he has in the present. Say the person wants to have IDR 500 million in the future (FV).
He plans to allocate the funds for purposes such as pension money, children’s tuition fees, and traveling around the world. He will prepare the future fund with his current funds (PV). The period of accumulation of these funds, for example 10 years (n). Then, we assume the yield assumption (i) is 5% per annum (p.a).
So there are several possible problems in doing financial planning. The first problem is finding the periodic deposit or annuity (A), given four other variables, namely FV, n, i, and PV. If the person starts financial planning without initial funds, then PV = 0.
The second problem in financial planning is finding the value of the funds in the future or the amount to be owned (FV). To answer that question, you can use four other variables.
Another alternative problem is calculating PV, which is the initial funds that need to be prepared at this time. Another problem can also be finding the amount of yield that must be obtained (i) or finding the number of investment periods required (n), if other variables are known.
With a financial calculator or using an excel program, all of the above problems will be solved in seconds.
Asset Valuation
The main problem in determining the valuation of an asset is that we want to find the value or want to find the fair price of an asset. Apart from using the five variables previously mentioned, in the valuation calculation there is still a variable g (growth rate). Another variation in determining asset valuation is that it is given the price of an asset (PV), then we are asked to calculate the yield that investors can get (i).
For example, which one is more attractive, is receiving a pension of IDR 500 million just once today or receiving a pension worth IDR 5 million every month continuously?
Another problem, what is the fair price of a boarding house that can provide net cash of IDR 10 million per month?
Or, how much are you willing to pay for a stock that has just paid Rp.100 in dividends and is predicted to grow 10% annually? What is the value of a corporate bond with a coupon of 9% p.a. and will be due in eight years? What yield will be obtained if the investor buys the bond at the price of 120%?
In my master’s (S-2) classes at FEB-UI, both classes in Financial Management, Advanced Financial Management, as well as Finance & Managerial Economics Theory, more students were unable to correctly answer the questions above. This includes even when the exam is done from home with an open book system and a computer.
It is unfortunate if it turns out that many prospective masters of accounting and finance are still not financially savvy, because they have not studied or do not understand financial mathematics.
Personal Finance
This finance issue is related to problems related to banking. For debt affairs with banks, the problem variables faced are easier. The reason is, usually FV and g are assumed to be zero.
This is because consumer credit with FV ≠ 0 or bullet payment is almost non-existent here. The application is that we can calculate a person’s debt capacity or the debt balance of a bank debtor in a certain period (PV) and calculate the installment amount (A) for both KPR and KPA.
However, the most important thing is the ability to calculate effective interest (i). For example, a product with a value of Rp. 10 million can be purchased in installments of Rp. 1 million per month for a period of one year (12 times).
In that case, what is the interest rate? What if there is a 20% down payment and the rest is paid in 10 monthly installments of IDR 1 million? If it turns out that for purchases of goods made in cash the buyer gets a cash discount of 10%, while for credit purchases there is no similar facility, then how much is the effective interest?
Another example, what is the effective yield of the offer to pay the annual tuition fee in advance at the same time with a 1 month discount, so that basically students only pay 11 months of tuition at the beginning of the school year? What about the yield of a two-month discount offer for those customers who pay for their cable TV membership a year in advance? You will be surprised if you know the answers.
The capital so that someone is not easily deceived by the bank with all its innovative and creative products is to master financial mathematics. More than that, you can even dismantle the tricks and lies that are in these products.
To help Indonesians move up the class to become financially savvy, I have written several books and a hundred more articles on this subject. In learning it, remember that there is always one goal, two criteria for being financially savvy, and three competencies. (hjtp)
Source: Kontan Newspaper. Edition: Monday, 9 November 2020. Bursa Rubric – Wake Up Call. Page 4.
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