AU734783B2 - Method of personal financial planning - Google Patents

Description

WO 98/14902 PCTIUS97/15358 -1- METHOD OF PERSONAL FINANCIAL PLANNING BACKGROUND OF THE INVENTION THIS invention relates to a method of personal financial planning.

Current methods of financial and retirement planning commonly take into account a subject's assets, liabilities, income and expenditure in order to establish the subject's current financial position. An attempt is then made to project the subject's future financial requirements, and if sufficient capital is not available to accommodate these requirements, suggestions are made as to how the necessary capital can be provided.

There are, however, a multiplicity of variables which influence such projections, including variations in the inflation rate, applicable tax rates, and variations in income and expenditure, inter alia, as well as the great number of possible choices which the subject can make in terms of his or her lifestyle and likely future expenses (for example, the purchase of a holiday home or a new vehicle). If an attempt is made to take all of these variables into account, the projection quickly becomes unwieldy, and conventional approaches therefore tend to rely on a simplified, broad-based approach.

It is an object of the invention to provide a method of financial planning which can give a subject a relatively detailed and in-depth assessment of his or her financial future, and which allows the effect of various alternatives to be considered.

1" WO 98/14902 PCT/US97/15358 2 SUMMARY OF THE INVENTION According to the invention there is provided a method of financial planning, the method comprising: creating a financial model from data relating to income, expenses, assets and liabilities of a subject; creating a planning rules database from data relating to a preferred financial strategy of the subject; projecting an unplanned future financial situation of the subject by applying predicted future circumstances to the data of the financial model; applying a plurality of planning rules derived from the planning rules database to data representing the subject's unplanned future financial situation, thereby to calculate a planned future financial situation; and generating displays of data representing the planned and unplanned future financial situations for comparison.

For purposes of projecting the subject's future financial situation, the financial model may further be compiled from data relating to applicable tax rates, estate duty rates, annual inflation rates, rates of appreciation or depreciation/increase or decrease of assets, liabilities, income and expenditure, and predicted future values thereof.

WO 98/14902 PCT/US97/15358 3 The financial model may additionally include data relating to costs associated with the management of assets and liabilities, such as commissions, finance charges, administration fees, transfer costs and the like.

The financial model may further include the subject's actual or anticipated retirement date, and estimated date of death.

In addition, the financial model may include similar information for the subject's spouse, family trusts or any other person or entity who should be considered when planning the subject's finances.

The planning rules database may be compiled by recording data corresponding to the subject's preferences relating to the investment of cash surpluses and the funding of cash deficits.

The planning rules database may further include data relating to predicted future income and expenses of the subject.

Preferably, the data relates to priorities set by the subject for allocating cash surpluses to liquidate debts or fund investments, and liquidating assets or increasing liabilities to fund cash deficits.

The planning rules derived from the planning rules database are preferably applied automatically to the data representing the client's unplanned future financial situation by an allocation and funding routine, thereby to generate a suggested future financial situation usable in calculating the subject's planned future financial situation.

'i 'e 4 The method may include, on an iterative basis, selectively altering data representing the subject's planned future financial situation and recalculating the planned future financial situation by applying the planning rules to the altered data.

The method is preferably carried out using a computer which generates the financial model and the planning rules database and applies the planning rules automatically to the relevant data after entry of the data.

BRIEF DESCRIPTION OF THE DRAWINGS Figure 1 is a simplified overall flow diagram illustrating the 10 method of the invention; Figure 2 is a simplified block diagram illustrating the operation "of an automatic funding and allocation program used to implement the method, and the subsequent calculation of a suggested financial model; .o.

15 Figure 3 is a simplified flowchart illustrating the method of calculating a financial model utilising the method of the invention; Figure 4 is a more detailed flowchart of the block "Process one year through model" in Figure 3; and Figure 5 is a simplified flowchart of an automatic allocation and funding program utilized in the method of the invention.

DESCRIPTION OF AN EMBODIMENT The present invention revolves around a software program designed to facilitate the entry of detailed financial data relating to a subject's current and future financial situation, to generate a detailed financial model from the data, using data corresponding to predicted future circumstances and assumptions, and especially to allow the model to be altered and developed using rules and preferences set by the subject, thus allowing a detailed projection of the subject's future financial situation which takes both external factors and the subject's own personal choices into account. In particular, the method allows probable future annual cash flow surpluses and shortfalls to be identified, and automatically applies the rules and preferences set by the subject to invest the surpluses and to fund the deficits. The result is a suggested model representing a planned future financial situation of the subject, which can be analyzed and adjusted as required until a satisfactory financial plan results. The software generates displays allowing the calculated data to be viewed in oo a user friendly manner, and generates printouts as a record of its operation.

The overall operation of the method of the invention, as implemented using a purpose-written software program, typically running on a personal computer is S shown in Figure 1A and B. Operation of the automatic allocation and funding program for calculation of a suggested financial model is shown in Figure 2.

5 The method will typically be carried out by a financial advisor who interviews and advises the subject whose financial situation is under analysis, although it will be appreciated that the subject could operate the software directly.

Assuming the first mentioned scenario, the first step in the method is for the financial advisor to interview the subject and to obtain two types of information; firstly, actual financial information in respect of the subject's personal details, assets, A' iabilities, income and expenses and so on; and secondly, the subject's overall

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Al, 6 financial objectives and strategy, from which the subject's preferences and rules for the allocation of cash flow surpluses and the funding of cash flow deficits can be determined.

The first category of information is utilised to create a basic financial model (22) which contains sufficient information to project the subject's net assets and net cash flow year-by-year into the future, using conventional assumptions, and applying known tax and estate duty rules and rates thereby to project an unplanned future financial situation (18) of the subject.

The basic financial model (22) with database (24) is copied to provide the starting point for a planned model (26) with database which is altered and updated interactively by the user, utilising data generated by an automatic allocation and funding routine (32) of the software, until the planned future financial situation of the subject is considered satisfactory. Thus, the planned model (26, 28) starts out as a copy of the basic model (22, 24), and the suggested model and database (34) is i initially a copy of the planned model. The difference is that the basic or unplanned model (24) is left unaltered, while the suggested model (34) is acted on by the automatic allocation and funding program with a projected suggested future financial situation and the planned model (28) is updated and altered in the light of the results thereof, as well as further choices of the subject. Calculation results may be viewed (36) by printing or on-screen display.

The following description relates to all three models, since their structure is :25 essentially the same. The model comprises the following: one entry for each of the subject's current and anticipated future assets; one entry for each of the subject's current and anticipated future liabilities; one entry for each of the subject's current and anticipated future sources of income; and one entry for each of the subject's current and anticipated future expenses.

These entries are grouped into various sections and each section has a section heading. There are also totalled entries within the model. Some of these are section totals, while others are calculated by applying formulae to the figures on other entries or combinations of entries. Appendix 1 gives an example of sections and the types of entries that may appear in those sections, under the main heading "Known Cash Inflows". The studying and auditing of the model is facilitated by the grouping of similar items together.

rr r WO 98/14902 PCTUS97/15358 8 The extent and level at which information is fed into the model depends upon the degree of detail required by the subject for whom the model is being built, but will typically include the following: current and future income and expenses; current and future assets and liabilities; current and future assumptions relating interest rates, dividend rates, etc.; known or anticipated retirement date; and to growth rates, estimated date of death.

It can be seen that the model is custom-built for each subject as the database of the model is being compiled, and a formula is associated with each entry as it is loaded. The particular formula applied to any entry is dependent on the type of entry.

The programs to calculate the three different types of models all function in exactly the same way.

The calculation program reads through the model database and on each entry, performs calculations according to the formula associated with the item.

The following are brief descriptions of the information carried in the model 9 database for each type of entry and the types of processing performed on each. The processes are shown graphically in the flow charts of Figures 3 and 4. The process in Figure 3 for processing one year through the model (40) is shown in greater detail in Figure 4.

Asset Database information Line number.

Type of asset eg. shares, fixed property, personal asset like a car, etc.

Description of asset.

Value in base (starting) year.

Anticipated annual growth or depreciation percentage.

This is negative in the case of a depreciating asset.

One entry per year being planned.

i Date of purchase. This is the date on which the subject intends to purchase the asset if he does not already own it in the base year.

"RET" Retirement date.

0 "DEA" Estimated date of death.

Liquidation percentage. This shows the percentage of the asset value to be liquidated in the year of sale.

Date of sale. This is the date on which the subject intends to sell or ~liquidate the asset. In the case of an item such as an insurance policy that is .25 paid out in cash in its year of maturity this would be that year.

"RET" Retirement date.

"DEA" Estimated date of death.

WO 98/14902 PCT/US97/15358 10 Link pointers to related liability, if any.

Link pointers to related income sources, if any.

Link pointers to related expenses, if any.

Price escalation rate percent until date of purchase. One entry per year being planned.

This would be used, for example, if the intention were to purchase a motor car in the future. The value is entered as the price of the car in the base year. The model escalates the price by this percentage each year until the year of purchase is reached. In that year the investment is made at the escalated price and depreciation starts immediately using the Growth/Depreciation percentage.

Escalated purchase price. When it is planned to purchase the item in the future this is the value in the base year escalated by the price escalation rate percent for each year up to the year of purchase.

Opening asset value. One entry per year being planned.

Amount invested. One entry per year being planned.

Amount liquidated. One entry per year being planned.

Growth or depreciation amount. One entry per year being planned.

Closing asset value. One entry per year being planned.

Other types of assets may require more or less information than is shown above. For example, a retirement annuity policy needs the percentage of its value to be taken as a lump sum on maturity and the percentage to be taken annually as a pension to be indicated.

Some assets such as motor vehicles require both a market value for cash flow projection and a cost value for tax calculations.

WO 98/14902 PCTIUS97/15358 ll There are various other essential pieces of modelling information relating to an asset. Again, the actual items of information required depend on the type of asset.

Some examples of these are income items from the asset such as rental, dividends, interest; others are expenses such as maintenance costs, and others are liabilities such as loans (bonded or otherwise).

These may be carried in their respective sections of the model (Normal taxable income, Dividend income, etc), and linked to the asset because the purchase or sale of the asset can control their applicability or else they may be carried together with the asset to facilitate checking and auditing. In this case, the entries and totals requiring these figures will fetch them as needed.

Method of Processing If the asset has not yet been purchased in the Base year, its expected purchase price is escalated each year at the price escalation rate until the purchase year is reached. In that year the escalated purchase price is added to the amount invested in the asset.

For each year that the asset is owned, its closing balance is brought forward from the previous year. The new closing balance for the year being processed is calculated as Brought forward balance plus amount invested during year minus amount liquidated during year plus growth amount.

Growth amount is calculated at the growth rate percent for the year. In the case of a depreciating asset the growth percentages are negative numbers.

When calculating growth amount, amounts invested or liquidated during the WO 98/14902 PCT/US97/15358 12year are normally treated as though.they occurred half way through the year unless they are specifically dated.

In the year in which the asset is to be sold or liquidated, the liquidation percentage is applied to the asset value and that amount is put into the amount liquidated for the year.

In addition to the above, actual amounts to be invested or liquidated may be entered on the asset for any year.

For cashflow calculations, amounts invested during a year are treated as cash outflow while amounts liquidated are cash inflow.

Liability Database information Line Number.

Type of liability. eg. Bond on property, Bank overdraft, etc.

Description of liability.

Value in base (Starting) year.

Interest payable (rate One entry per year being planned.

Start date. Date on which liability will begin if not already there in base year and if not linked to an asset or if not same as date of purchase of linked asset.

"ASS" Date of purchase of linked asset.

"RET" Retirement date.

"DEA" Estimated date of death.

WO 98/14902 PCT/US97/15358 13 End date. Date on which liability must be settled.

"ASS" Date of sale of linked asset.

"RET" Retirement date.

"DEA" Estimated date of death.

Annual repayment amount. This may be calculated by the model or entered by the user depending on the details of the liability.

Link pointer to related asset, if any.

Link pointers to related income items, if any.

Link pointers to related expenses, if any.

Value escalation rate percent until date of incurrence. One entry per year being planned.

Opening liability amount. One entry per year being planned.

Amount increased. One entry per year being planned.

Amount decreased. One entry per year being planned.

Interest amount. One entry per year being planned.

Repayment amount. One entry per year being planned.

Closing liability amount. One entry per year being planned.

Method of Drocessing If the liability has not yet been incurred in the Base year, its value in the Base year and its repayment amount are escalated at the value escalation rate for each year until the date of incurrence. That date may be the start date shown on the liability or it could be the date of purchase of a linked asset.

For the year in which the liability is incurred, the escalated value is put into amount increased on the liability and the escalated repayment amount becomes the annual repayment.

WO 98/14902 PCT/US97/15358 14 As each year is processed, the closing liability amount is brought forward from the previous year to become the opening liability amount. The repayment amount is also copied from the previous year unless a different figure has been specified or calculated for the year being processed. Interest is calculated at the rate for the year. The closing liability amount for the year is calculated as opening liability amount, plus amount increased and interest amount, minus amount decreased and repayment amount.

In the year in which the liability has to be settled, the liability amount is put into the repayment amount after raising half a year's interest. The date of settlement may be the date of sale of the corresponding asset where the liability is linked to an asset.

Apart from the above automatic calculations, any amount may be entered into amount increased or amount decreased in any year. For the purpose of calculating cashflow for the year, amount increased is part of cash inflow while amount decreased and repayment amount form part of cash outflow.

On certain types of liabilities (eg. loans, bonds and hire purchase agreements) the rates, data requirements and processing may vary greatly from one to the next as there are numerous variations in the conditions pertaining to loans of different types.

Expense or cash outflow item Database information Line number.

Type of expense, eg. medical, entertainment, holiday, insurance, WO 98/14902 PCT/US97/15358 15 etc.

Description of expense.

Amount in base year.

Anticipated annual growth rate. (Negative for a reducing amount).

One entry per year being planned.

Expense percentage. If the expense amount is calculated as a percentage of the value of the linked asset or liability or income item then this is that percentage.

Start date. Date on which expense will begin if not already there in base year and if not linked to an asset or liability or an income item or if not same as date of purchase of linked asset or date of incurring of linked liability or start date of linked income item.

"ASS" Date of purchase of linked asset.

"RET" Retirement date.

"LIA" Date of incurring of liability.

"INC" Start date of linked income item.

"DEA" Estimated date of death.

End Date. Date on which expense will end if not linked to an asset or a liability or an income item or if not same as disposal date of linked asset or date of settlement of linked liability or end date of linked income item.

"ASS" Date of disposal of linked asset.

"RET" Retirement date.

"LIA" Date of settlement of linked liability.

"INC" End date of linked income item.

"DEA" Estimated date of death.

Link pointer to related asset or liability, if any.

WO 98/14902 PCT/US97/15358 16 Link pointer to related income item, if any.

Amount of expense. One entry per year being planned.

Method of Processing The amount of the expense may be carried as an actual amount in the Base year or as a percentage of the value of a linked asset, liability or income item. In addition, certain types of expense may require formulae and/or tables of figures for their calculation. If it is an amount and it has not yet been incurred in the Base year it is escalated at the growth rate for each year until its first date of incurrence. If the expense is linked to an asset then that date may be the date of purchase of the asset. If it is linked to a liability it may be the date of incurring of the liability. Otherwise, if it is linked to an income item it may be the start date of the income item. In the first year of incurrence the escalated amount is reflected as an expense (cash outflow) for the first time. Each year henceforth the amount is escalated by the growth factor for the year. Of course, if the amount is calculated by applying a formula or a percentage to another figure or combination of figures in the model then the growth factor may not apply.

The expense continues until its end date which again may be dependent on a linked asset, liability or income item.

The expense amount may also just be specified as an amount for each year with or without a growth rate. In that case start and end dates override these amounts.

WO 98/14902 PCT/US97/15358 17- Income source Database information Line number.

Type of income source eg. Salary, Dividends, etc.

Description of income source Amount in base year Anticipated Annual growth rate. (Negative for a reducing amount.) One entry per year being planned.

Income percentage. If the income amount is a percentage of the value of the linked asset or liability then this is that percentage.

Start date. Date on which income will begin if not already there in base year and if not linked to an asset or a liability or if not same as date of purchase of linked asset or date of incurring of linked liability.

"ASS" Date of purchase of linked asset.

"RET" Retirement date.

"LIA" Date of incurring of linked liability.

"DEA" Estimated date of death.

End date. Date on which income will end if not linked to an asset or a liability or if not same as disposal date of linked asset or settlement date of linked liability.

"ASS" Date of disposal of linked asset.

"RET" Retirement date.

"LIA" Date of settlement of linked liability.

"DEA" Estimated date of death.

Link pointer to related asset or liability, if any.

WO 98/14902 PCT/US97/15358 18 Income amount. One entry per year being planned.

Method of processing The income amount may be carried as an actual amount in the base year or as a percentage of the value of a linked asset or liability. In addition, certain types of income may require formulae and/or tables of figures for their calculation. If it is an amount and it has not yet started to flow in the Base Year it is escalated at the growth rate for each year until the start date. If the income is linked to an asset then that date may be the date of purchase of the asset otherwise if it is linked to a liability it may be the date of incurrence of the liability. In the start year the escalated amount is reflected as income for the first time. Each year henceforth the amount is escalated by the annual growth rate for the year. If the amount is calculated by applying a formula or a percentage to another figure or combination of figures in the model then the growth factor may not apply.

The income continues until its end date which again may be dependent on a linked asset or liability.

The income amount may also just be specified as an amount for each year with or without a growth rate. In this case start and end dates override these amounts. For cashflow calculations, income is, of course, treated as cash inflow.

WO 98/14902 PCT/US97/15358 19 Total or Sub-Total Database information Line number Total type Total description Total amount. One entry per year being planned.

Method of Processing Each total in the model has a unique method to find and process the figures it needs. This is best explained by examples.

a) To calculate total income tax for the year, the total entry formula locates the information it needs in the various parts of the model. It knows the entry types required and the areas in the model in which they reside. It then does whatever calculations are necessary to calculate tax according to the tax laws prevailing in the year being processed.

b) To calculate nett cashflow for the year, the formula for that entry locates every cash inflow and cash outflow item and sums them.

c) Total nett assets for the year is arrived at by summing the carried forward balances for the year being processed on all assets and liabilities.

WO 98/14902 PCTIUS97/15358 20 Section heading Database information Line number.

Type of entry. ie. Section heading.

Section heading in words.

Method of Processina No processing is performed on Section headings by the Model calculation programs.

Cash Float Database information Line number.

Type of entry. ie. Cash Float.

Description, "CASH FLOAT".

Surplus interest rate percent. This is the annual rate of interest earned on a positive amount. One entry per year being planned.

Deficit interest rate percent. This is the annual rate of interest charged on a negative amount. One entry per year being planned.

Brought forward balance. One entry per year being planned.

WO 98/14902 PCTIUS97/15358 21 Surplus for year. One entry per year being planned.

Interest on surplus for year. One entry per year being planned.

Deficit for year. One entry per year being planned.

Interest on deficit for year. One entry per year being planned.

Carried forward balance. One entry per year being planned.

Method of Processing For the year being processed the following methods are applied: The balance is brought forward from the previous year.

Interest is calculated in two parts: Half a year's interest is calculated on the brought forward balance using either the surplus or deficit interest percentage for the year depending on whether the balance is positive or negative.

The balance and either the surplus or deficit for the year (depending on which one is present) are then summed together and a further half year's interest is calculated on their total.

Again, the interest percentage used depends on whether the total is positive or negative. The two calculated interest amounts are totalled. If the total is positive it is put into interest on surplus for the year, otherwise into interest on deficit. The carried forward balance for the year is then 23 projected financial situation to be accessed. The user can make changes to the entries in the planned model and recalculate the model to see the effect thereof. The user can access any entry in the planned model. A multi-level index is provided to enable any item to be accessed via main section headings, section headings and sub-sections.

The financial summary screen can be presented in a "merged" or "non-merged" format, depending on which is easier to interpret.

In addition to the making of manual changes to the planned model, the subject can run the automatic allocation and funding program (32) whenever the need is felt for a suggested future projection (30) based on the data in the planning rules database A number of different planned future projections can be created for comparison.

The automatic allocation and funding program (32) utilises data entered by the subject relating to the allocation of surpluses, and the funding of deficits. A format for setting surplus allocation parameters is shown in Table I. For each item to which future surpluses may be allocated an entry reflecting the subject's preferences is filled in on the screen for surplus allocation parameters of Table I which is used to build a surplus allocation table (see Appendix This surplus allocation table forms part of the planning rules database (16).

TABLE I Surplus Allocation Parameters Sequence Y N Minimum Maximum Fnal Type Une No. numbe Maxium Mmum Minium f year in DesriionofAssetor (Alet Number amount to amount tc n cr i (A)sset (Pnonty) Use Use if years:o su invest inves to to Llablity (L)iability in model 1 =Highest balance balance invest invest invest negative positive Similarly, a format for deficit funding preferences is shown in Tables II and III.

Deficit funding parameters for liabilities and assets are entered into the screens of Tables II and III, respectively, according to the parameters set out in Appendices 3 and 4, respectively, and utilised as a deficit funding table in the planning rules _-database.

24 TABLE II Deficit Funding Parameters Liabilities TABLE III Sequence L ne •ooeshptio of i. biy No. Line Maximum Description of Lability Number in iNu er Unk Funding Funaing amount to Minimum (Pr**hty) model of linked lype value Controller raise on amount to tr A= If linked asset is A= Never fund deficits liquidated then from this item item.

A deficit funding routine is utilised to build up a deficit funding array (Appendix from the data in the deficit funding table prior to the calculation of each year's data in the automatic allocation and funding program.ally.

The program reads through the entries in the Deficit funding table in the planning rules database. For each table entry whose parameterents allow it to be used to fund avalue of linked asset that 000 *can be raised on this item.

deficit au ndtomatically in the al year (the year being worked on), it sets up an entry from the data in the deficit funding table prior to the calculation of each year's data in the automatic allocation and funding program.

The program reads through the entries in the Deficit funding table in the planning rules database. For each table entry whose parameters allow it to be used to fund a deficit automatically in the Calc year (the year being worked on), it sets up an entry i nthe deficit funding array. Each entry in the array shows the amount of money 24 a available for deficit funding in the year being worked on, this being dependent on the subject's rules and perhaps, the value of the asset or liability in that year. (See layout of Deficit funding array entry Appendix The entries are placed in the array in the most useful sequence. Refer to the layouts of the asset and liability entries in the deficit funding table (Appendix 3 and Appendix 4) to see the parameters that limit the use of an item for automatic funding in a year.

On each entry the amount that can be raised in the Calc year is computed in the following way: For a liability the program selects the lesser of the "Maximum amount to be funded from this item" in the table or the "Funding value percentage" of the brought forward value of the linked asset for the Calc year in the suggested model. From the selected amount it subtracts .'15 the "Opening liability amount" for the Calc year on the item in the suggested o e *oa oo o e >o *o ^o °oo* ooo

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WO 98/14902 PCTIUS97/15358 model.

For an asset the lesser amount is selected between the "Maximum amount to be liquidated from this asset" in the table and the "Maximum liquidation value percentage" of the brought forward value of the asset for the Calc year in the suggested model. If there is a liability linked to the asset and it has to be settled when the asset is liquidated then the opening liability amount for the Calc year on the linked item in the suggested model is subtracted from the selected amount.

When the array has been built, its entries are sequenced on Sequence number, type (assets then liabilities) and Amount that can be raised in Calc year.

Apart from the funding rules set by the subject, another factor considered by the program is the future pattern of expected surpluses and deficits. When a deficit is found in a year the future cashflow can follow three basic courses, possibly requiring different funding strategies. These are referred to in the program as patterns 1, 2 and 3.

In pattern 1, the deficit year being worked on may be followed by one or more further deficit years but these are followed by surplus years for the rest of the period being planned. In this case the program tries to fund from liabilities without touching assets but will use assets where necessary.

In future pattern 2 there will be a mixture of deficit and surplus years in the WO 98/14902 PCT/US97/15358 26 future.

In future pattern 3 there are continuous deficits until the last year being planned.

For patterns 2 and 3 the program funds from assets and liabilities in the sequence specified by the user.

The entries in the deficit funding array are accessed in sequence when trying to fund a deficit. Because of the way in which the entries are sequenced the program handles them firstly in the preferred sequence set by the subject and secondly in ascending value so that the assets with the lowest possible values will be liquidated.

A situation can arise where despite one or more smaller assets being liquidated it still becomes necessary to entirely liquidate a large item which in itself is sufficient to cover the deficit for the year. In this case the program does not liquidate the smaller items but just uses the large one.

If an asset is liquidated and it has a linked liability, the liability is settled automatically. If a liquidated asset or a settled liability has income or expense items linked to it those items are ended automatically in the same year. Likewise, where a liability is incurred for the first time, any linked income or expense items are started up automatically.

When the program liquidates an asset partially or completely it adds the liquidated amount to the "Amount liquidated" for Calc year on the item in the suggested model. To raise money on a liability it adds the amount to 27 "Amount increased" for the Calc year on the liability in the suggested model.

The automatic allocation and funding program allocates a cashflow surplus according to the parameters set in the planning rules database. Each entry in the surplus allocation table is examined in turn, in the sequence specified by the subject. On each one, the decision parameters are considered to see whether or not any of the surplus for the Calc year can be allocated to the item. In considering the minimum period of investment, the program looks ahead at the projected cashflow in future years to see the timing and magnitude of any anticipated deficits. Working with the decision 10 parameters, the amount of the surplus and the amount already invested in the item as shown in the suggested model, the program calculates the amount to t*o: be allocated to the item. If the item is an asset, the amount is added to its "Amount invested" for the calc year in the suggested model. On a liability, the allocated amount is added to the "Amount decreased" for the Calc year.

The program carries on processing entries from the surplus allocation table until either the surplus is completely allocated or the table is exhausted.

Event reporting Cashflow The cashflow related to any particular asset, liability, expense item or source of income can be of two types, continuous or intermittent. On-off cashflow items may be considered as intermittent for the purpose of this explanation.

Some examples of the different types of cashflow on a fixed property are: WO 98/14902 PCT/US97/15358 28 Continuous cashflow items: Rates and taxes Repairs and maintenance Domestic staff salaries etc.

Insurance Lights and water Rental income Intermittent cashflow items: Purchase price and other charges on purchase of property Cost of major renovations to property Cost of major improvements to property Income from sale of property Events "Events" related to an asset, liability, expense item or source of income are occurrences or actions that result in a significant change in the continuous cashflow or that result in intermittent cashflow via the item.

The events relating to a fixed property would be: The purchase of the property The sale of the property Major renovations Major improvements The beginning or end of any expense or type of income A significant change to the amount of any expense WO 98/14902 PCT/US97/15358 29 A significant change to the amount of any type of income Different types of items have different events. For example, in the case of a loan the events may be: The raising of the loan The settlement of the loan The borrowing of additional amounts on the loan The payment of significant additional amounts off the loan from time to time ie. amounts in excess of the required instalment.

Event Messages By examining the information contained in the model after performing projection calculations, the Event Reporting programme identifies every significant event occurring on every entry in the model.

The programme generates a "Normal language" event message to report each event that has a meaningful effect on the subject's cashflow, assets or liabilities.

Examples of messages are: Client purchases fixed property "23 Johnson Ave" for R450000 on 23/11/2002 Client raises first mortgage bond of R300000 on fixed property "23 Johnson Ave" on 23/11/2002. Bond to be settled by 30/11/2022.

Client begins to earn rental of R48000 per annum from fixed WO 98/14902 PCT/US97/15358 30 property "23 Johnson Ave" on 1/5/2003.

Client donates R250000 to spouse.

The generated "Event messages" are used in various ways to produce different types of reports. One example of such a report is the "Annual Events and Actions" report. This report may be run on any of the models (unplanned, suggested, planned). It shows, year by year, the events that occur in each year. The report makes it easy for anyone to understand a plan, to compare it to other plans and to decide whether or not a plan is acceptable. For example the plan may indicate that the subject should sell his house and buy a smaller property in a certain year. On this report the subject will clearly see the implications thereof.

It will be appreciated that the described method, implemented with the assistance of a sophisticated software program, allows a highly detailed analysis and projection of a subject's financial situation, with the subject's own rules and preferences being applied automatically in projecting a suggested future financial situation year by year, thereby greatly simplifying what would otherwise be an unwieldy, complex and very laborious task.

The result is that a more thorough, detailed and in-depth assessment of the subject's future financial position can be carried out in a reasonable time, with consequent benefits to the subject. In particular, the method permits the simultaneous examination of various alternative choices and the financial consequences thereof.

WO 98/14902 PCT/US97/15358 31 APPENDIX 1 Examples of sections within the model and the types of items which appear within those sections Section names KNOWN CASH INFLOWS: Income From Employment Retirement Funding (RIF) Income Non-Retirement Funding (Non-RIF) Income Tax-Free Income Fringe Benefits Pensions/Annuities Lump Sums Received From Resignations/Retirement/Redundancy Interest Income Dividend Income Rental Income BusinesslProfessional Income Foreign Income Capital Income Exempt Income Gross Contributions Made Tax Allowable Deductions Less: Tax Paid ANTICIPATED CASH INFLOWS: Expected future income Types of items Salary, Wages, Bonus Leave pay, Commission Transfer allowance Company car Low interest loans From Growth/Income Plans: From Pension/Provident Funds RA's Pension Fund (up to 1/3) Provident Fund Retirement Annuities (up to 1/3) Deferred compensation Gratuity Accumulated leave pay Unit Trusts/Managed Share Portfolio Short Term Deposits Unit Trusts Building Society Residential Timeshare Consulting fees Sales Investments Fixed Assets Sale of Unit Trusts. Equities Interest (max. R2000) Dividends Pension funds, RA's Pension funds,. RA's Car allowance, Entertainment, Medical Tax on: Salary, Growth Income plans Inheritances. Donations SUBSTITUTE SHEET (RULE 26) WO 98/14902 PCT/US97/15358 32 APPENDIX 2 Entry in surDlus allocation table Item code Type A Asset L Liability Description Sequence number (Priority number) Shows the position of this item in the sequence in which surpluses must be applied to the table entries.

Line number of this item in the model.

Decision parameters Only if balance is negative (Y or N) Only if balance is positive (Y or N) Minimum period of investment (Asset only) (If zero then no minimum period) Maximum amount to invest (Asset only. If zero then no limit) Allocation percentage (Percentage of surplus to put into this item. If zero, then no limit) Minimum amount required (Asset only. If zero then no minimum) Maximum year number (Assets only. Do not invest in this item after this year. If zero then no maximum year) SUBSTITUTE SHEET (RULE 26) WO 98/14902 PCT/US97/15358 33 APPENDIX 3 Deficit funding table entry Liability Description of liability Sequence no.

This positions the item in the preferred sequence in which the items may be used for deficit funding. More than one item may have the same sequence number.

Line number of this item in the model Line number of linked asset Link type A If linked asset is liquidated then this item must be settled.

Funding value Percentage of value of linked asset that can be raised Zero Not applicable Funding controller A Never fund from this item automatically Maximum amount to be funded from this item Minimum amount to fund from this item SUBSTITUTE SHEET (RULE 26) WO 98/14902 PCTIUS97/15358 34 APPENDIX 4 Deficit funding table entry Asset Description of asset Sequence no.

This positions the item in the preferred sequence in which the items may be used for deficit funding. More than one item may have the same sequence number.

Line number of this item in the model Line number of linked liability Link type A If this item is liquidated then its linked liability must be settled. This can only apply to assets that cannot be partially liquidated.

Maximum liquidation value Percentage of the value of this asset that can be liquidated Zero Not applicable Liquidation controller A Never liquidate this item automatically eg. Pension, favoured assets, etc.

B If a surplus arises in the future do not liquidate this item automatically.

Maximum amount to be liquidated from this asset Minimum amount of deficit to fund from this item.

Zero Not applicable Minimum liquidation year Zero This item may be liquidated in any year Anynumber First year in which this item may be liquidated Partial liquidation Y or N Y This item can be partially liquidated.

SUBSTITUTE SHEET (RULE 26) WO 98/14902 PCT/US97/15358 APPENDIX Deficit funding array Description of item Amount that can be raised on this item in Calc year.

Sequence number Type (Asset or liability) A Asset L Liability Line number of this item in the model Line number of linked asset or liability Link type A If this item is liquidated then its linked liability must be settled Funding controller A Never fund a deficit from this item automatically B If a surplus arises in the future do not fund a deficit from this item automatically Minimum amount of deficit to fund from this item.

Zero Not applicable .Partial liquidation Y or N Y This item may be partially liquidated Sequence of table entries Ascending sequence number Liabilities and then assets Ascending amount that can be raised SUBSTITUTE SHEET (RULE 26)

Claims (13)

1. A method of financial planning comprising: obtaining from a subject a first data relating to income, expenses, assets and liabilities of the subject and a second data relating to a preferred financial strategy of the subject; creating a financial model based upon the first data; creating a planning rules database based upon the second data, the planning rules database having a plurality of planning rules; projecting an unplanned future financial situation of the subject by applying predicted future circumstances to the first data; projecting a planned future financial situation of the subject by applying the plurality of planning rules of the planning rules database to the projected unplanned future financial situation; and, displaying for comparison the planned future financial situation and the unplanned future financial situation.

2. The method according to claim 1 wherein the first data further relates to applicable tax rates, estate duty rates, annual inflation rates, rates of appreciation or depreciation, increase or decrease of assets, liabilities, income and expenditure, and predicted future values thereof. AMENDED SHEEr F W& W% IPEAIS 0 4 JAN 1999 37

3. The method according to claim 2 wherein the first data further relates to costs associated with the management of assets and liabilities, including commissions, finance charges, administration fees and transfer costs.

4. The method according to claim 3 wherein the first data further includes the subject's actual or anticipated retirement date, and estimated date of death.

The method according to claim 1 wherein the first data further includes similar information for the subject's spouse, family trusts or any other person or entity.

6. The method according to claim 1 wherein the second data further relates to the investment of cash surpluses and the funding of cash deficits.

7. The method according to claim 6 wherein the second data further relates to predicted future income and expenses of the subject.

8. The method according to claim 7 wherein the second data relates to priorities set by the subject for allocating cash surpluses to liquidate debts or fund investments, and liquidating assets or increasing liabilities to fund cash deficits. AMENDED SHEET I %P k i V%#1 K I IPEARIS 04-JAN 1999 39

9. The method according to claim 1 wherein the step of projecting a planned future financial situation comprises automatically applying the plurality of planning rules to the projected unplanned future financial situation by an allocation and funding routine.

The method according to claim 1 which includes, on an interactive basis, selectively altering the first and/or second data and re-projecting the planned future financial situation.

11. The method according to claim 1 including defining at least one event relating to each of a plurality of income items, expense items, assets and liabilities affecting the cash flow of the subject, and generating a user- discemable message relating to any such event corresponding to the first data from which the financial model is compiled.

12. The method according to claim 11 including generating a report containing the user-discemable message or messages.

13. The method according to claim 1 which is carried out using a computer which generates the financial model and the planning rules database and applies the planning rules so as to automatically perform the steps of projecting the unplanned and planned future financial situations after entry of the data. AMENDED SHEET