CA2264680A1 - Method of personal financial planning - Google Patents

Abstract

A method of financial planning comprises creating a financial model from data relating to a subject's income, expenses, assets and liabilities. A planning rules database is created from data relating to a preferred financial strategy. First, an unplanned future financial situation of the subject is projected by applying predicted circumstances to the data of the financial model. Then, planning rules selected from the database are applied to the unplanned future financial situation to calculate a planned future financial situation, and the resulting data is displayed for comparison. An allocation and funding routine applies the selected planning rules automatically, but the method also permits iterative alteration of the planned future financial situation, to permit the subject see the effect of particular events on the situation.

Description

W0 98/ 14902101520CA 02264680 1999-02-26METHOD OF PERSONAL FINANCIAL PLANNINGBACKGROUND OF THE INVENTIONTHIS invention relates to a method of personal financial plarming.Current methods of financial and retirement planning commonly take intoaccount a subject’s assets, liabilities, income and expenditure in order toestablish the subject’s current financial position. An attempt is then madeto project the subject’s future financial requirements, and if sufficient capitalis not available to accommodate these requirements, suggestions are madeas 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, andvariations in income and expenditure, inter alia, as well as the great numberof possible choices which the subject can make in terms of his or herlifestyle and likely future expenses (for example, the purchase of a holidayhome or a new vehicle). If an attempt is made to take all of these variablesinto account, the projection quickly becomes unwieldy, and conventionalapproaches therefore tend to rely on a simplified, broad-based approach.It is an object of the invention to provide a method of financial plarmingwhich can give a subject a relatively detailed and in-depth assessment of hisor her financial future, and which allows the effect of various alternatives tobe considered.PCT/US97/1535820W0 98/ 149021015CA 02264680 1999-02-26PCT/US97/15358SUMMARY OF THE INVENTIONAccording 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 preferredfinancial strategy of the subject;projecting an unplanned future financial situation of the subject byapplying predicted future circumstances to the data of the financialmodel;applying a plurality of planning rules derived from the planning rulesdatabase to data representing the subj ect’s unplanned future financialsituation, thereby to calculate a planned future financial situation; andgenerating displays of data representing the plarmed and unplarmedfuture financial situations for comparison.For purposes of projecting the subject’s future financial situation, thefinancial model may further be compiled from data relating to applicable taxrates, estate duty rates, annual inflation rates, rates of appreciation ordepreciation/increase or decrease of assets, liabilities, income andexpenditure, and predicted future values thereof.W0 98/14902101520CA 02264680 1999-02-26The financial model may additionally include data relating to costsassociated with the management of assets and liabilities, such ascommissions, finance charges, administration fees, transfer costs and the like.The financial model may further include the subject’s actual or anticipatedretirement date, and estimated date of death.In addition, the financial model may include similar infonnation for thesubject’s spouse, family trusts or any other person or entity who should beconsidered when planning the subject’s finances.The planning rules database may be compiled by recording datacorresponding to the subject’s preferences relating to the investment of cashsurpluses and the funding of cash deficits.The plarming rules database may further include data relating to predictedfuture income and expenses of the subject.Preferably, the data relates to priorities set by the subject for allocating cashsurpluses to liquidate debts or fund investments, and liquidating assets orincreasing liabilities to fund cash deficits.The planning rules derived from the planning rules database are preferablyapplied automatically to the data representing the c1ient’s unplarmed futurefinancial situation by an allocation and funding routine, thereby to generatea suggested future financial situation usable in calculating the subject’splanned future financial situation.PCT/U S97/ 15358W0 98/ 14902101520CA 02264680 1999-02-26PCT /US97/15358The method may include, on an iterative basis, selectively altering datarepresenting the subject’s planned future financial situation and recalculatingthe planned future financial situation by applying the planning rules to thealtered data.The method is preferably carried out using a computer which generates thefinancial model and the planning rules database and applies the planningrules automatically to the relevant data after entry of the data.BRIEF DESCRIPTION OF THE DRAWINGSFigure 1 is a simplified overall flow diagram illustrating themethod of the invention;Figure 2 is a simplified block diagram illustrating the operationof an automatic funding and allocation program usedto implement the method, and the subsequentcalculation of a suggested financial model;Figure 3 is a simplified flowchart illustrating the method ofcalculating a financial model utilising the method ofthe invention;Figure 4 is a more detailed flowchart of the block "Process oneyear through model" in Figure 3;Figure 5 is a simplified flowchart of an automatic allocationWO 98/14902101520CA 02264680 1999-02-26and ftmding program utilized in the method of theinvention; andFigures 6, 7 & 8 are tables utilized in the method to set parameters forthe allocation of surpluses and the funding of deficitsby a subject.DESCRIPTION OF AN EMBODIMENTThe present invention revolves around a software program designed tofacilitate the entry of detailed financial data relating to a subject’s currentand future financial situation, to generate a detailed financial model from thedata, using data corresponding to predicted future circumstances andassumptions, and especially to allow the model to be altered and developedusing rules and preferences set by the subject, thus allowing a detailedprojection of the subject’s future financial situation which takes both externalfactors and the subject’s own personal choices into account. In particular,the method allows probable future annual cash flow surpluses and shortfallsto be identified, and automatically applies the rules and preferences set bythe subject to invest the surpluses and to fund the deficits. The result is asuggested model representing a plarmed future financial situation of thesubject, which can be analyzed and adjusted as required until a satisfactoryfinancial plan results. The software generates displays allowing thecalculated data to be viewed in a user friendly manner, and generatesprintouts as a record of its operation.The overall operation of the method of the invention, as implemented usingPCTIUS97/15358W0 98/ 14902101520CA 02264680 1999-02-26a purpose-written software program, typically running on a personalcomputer (PC), is shown in Figure 1.The method will typically be carried out by a financial advisor whointerviews and advises the subject whose financial situation is under analysis,although it will be appreciated that the subject could operate the softwaredirectly.Assuming the first mentioned scenario, the first step in the method is for thefinancial advisor to interview the subject, and to obtain two types ofinformation; firstly, actual financial information in respect of the subject’spersonal details, assets, liabilities, income and expenses and so on; andsecondly, the subject’s overall financial objectives and strategy, from whichthe subject’s preferences and rules for the allocation of cashflow surplusesand the funding of cashflow deficits can be determined.The first category of information is utilised to create a basic financial modelwhich contains sufficient information to project the subject’s net assets andnett cashflow year-by-year into the future, using conventional assumptions,and applying known tax and estate duty rules and rates, thereby to projectan unplanned future financial situation of the subject.The basic financial model is copied to provide the starting point for aplanned model, which is altered and updated interactively by the user,utilizing data generated by an automatic allocation and funding routine of thesoftware, until the plarmed future financial situation of the subject isconsidered satisfactory. Thus, the plarmed model starts out as a copy of thebasic model, and the suggested model is initially a copy of the plannedPCT/US97/15358W0 98/ 14902101520CA 02264680 1999-02-26model. The difference is that the basic or unplanned model is left unaltered,while the suggested model is acted on by the automatic allocation andfunding program, and the planned model is updated and altered in the lightof the results thereof, as well as further choices of the subject.The following description relates to all three models, since their structure isessentially the same. The model comprises the following:(a) one entry for each of the subject’s current and anticipatedfuture assets;(b) one entry for each of the subject’s current and anticipatedfuture liabilities;(c) one entry for each of the subject’s current and anticipatedfuture sources of income; and(d) one entry for each of the subject’s current and anticipatedfuture expenses.These entries are grouped into various sections and each section has asection heading. There are also totalled entries within the model. Some ofthese are section totals, while others are calculated by applying formulae tothe figures on other entries or combinations of entries. Appendix 1 gives anexample of sections and the types of entries that may appear in thosesections, under the main heading "Known Cash Inflows". The studying andauditing of the model is facilitated by the grouping of similar items together.PCT/US97/15358CA 02264680 1999-02-26wo 98/14902 PCT/US97/15358The extent and level at which information is fed into the model dependsupon the degree of detail required by the subject for whom the model isbeing built, but will typically include the following:(a) current and future income and expenses;5 (b) current and future assets and liabilities;(c) current and future assumptions relating to growth rates,interest rates, dividend rates, etc.;(d) known or anticipated retirement date; and(e) estimated date of death.10 ’ It can be seen that the model is custom—built for each subject as the databaseof the model is being compiled, and a formula is associated with each entryas it is loaded. The particular formula applied to any entry is dependent onthe type of entry.The programs to calculate the three different types of models all function in15 exactly the same way.The calculation program reads through the model database and on eachentry, performs calculations according to the formula associated with theitem.The following are brief descriptions of the information carried in the modelW0 98/ 1490210152025CA 02264680 1999-02-26PCTIUS97/15358database for each type of entry and of the types of processing performed oneach. The processes are shown graphically in the flow charts of Figures 3and 4.AssetDatabase information* Line number.* Type of asset eg. shares, fixed property, personal asset likea 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.* Date of purchase. This is the date on which the subject intends topurchase the asset if he does not already own it in the baseyear."RET" = Retirement date."DEA" = Estimated date of death."‘ Liquidation percentage. This shows the percentage of the assetvalue to be liquidated in the year of sale.* Date of sale. This is the date on which the subject intends to sellor liquidate the asset. In the case of an item such as aninsurance policy that is paid out in cash in its year ofmaturity this would be that year."RET" = Retirement date.“DEA" = Estimated date of death.W0 98/ 1490210152025CA 02264680 1999-02-26PCT/US97/15358* 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 peryear being planned.This would be used, for example, if the intention were topurchase a motor car in the future. The value is entered asthe price of the car in the base year. The model escalates theprice by this percentage each year until the year of purchaseis reached. In that year the investment is made at theescalated price and depreciation starts immediately using theGrowth/Depreciation percentage.* Escalated purchase price. When it is planned to purchase the itemin the future this is the value in the base year escalated by theprice escalation rate percent for each year up to the year ofpurchase.* 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 plarmed.* Closing asset value. One entry per year being plarmed.Other types of assets may require more or less information than isshown above. For example, a retirement annuity policy needs thepercentage of its value to be taken as a lump sum on maturity andthe percentage to be taken annually as a pension to be indicated.Some assets such as motor vehicles require both a market value forcash flow projection and a cost value for tax calculations.W0 98/ 14902101520CA 02264680 1999-02-26There are various other essential pieces of modelling informationrelating to an asset. Again, the actual items of information requireddepend on the type of asset.Some examples of these are income items from the asset such asrental, dividends, interest; others are expenses such as maintenancecosts, 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 theasset because the purchase or sale of the asset can control theirapplicability or else they may be carried together with the asset tofacilitate checking and auditing. In this case, the entries and totalsrequiring these figures will fetch them as needed.Method of ProcessingIf the asset has not yet been purchased in the Base year, its expectedpurchase price is escalated each year at the price escalation rate until thepurchase year is reached. In that year the escalated purchase price is addedto the amount invested in the asset.For each year that the asset is owned, its closing balance is brought forwardfrom the previous year. The new closing balance for the year beingprocessed is calculated as Brought forward balance plus amount investedduring year minus amount liquidated during year plus growth amount.Growth amount is calculated at the growth rate percent for the year. In thecase of a depreciating asset the growth percentages are negative numbers.When calculating growth amount, amounts invested or liquidated during thePCT/US97/15358CA 02264680 1999-02-26W0 98/14902 PCT/US97/15358-12-year are normally treated as though they occurred half way through the yearunless they are specifically dated.In the year in which the asset is to be sold or liquidated, the liquidationpercentage is applied to the asset value and that amount is put into the5 amount liquidated for the year.In addition to the above, actual amounts to be invested or liquidated may beentered on the asset for any year.For cashflow calculations, amounts invested during a year are treated as cashoutflow while amounts liquidated are cash inflow.1 0 LiabiligDatabase information* Line Number.* Type of liability. eg. Bond on property, Bank overdraft, etc.* Description of liability.15 * 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 therein base year and if not linked to an asset or if not same asdate of purchase of linked asset.20 "ASS" = Date of purchase of linked asset."RET" = Retirement date."DEA" = Estimated date of death.CA 02264680 1999-02-26wo 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.5 * Annual repayment amount. This may be calculated by the modelor 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.10 * Value escalation rate percent until date of incurrence. One entryper 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.15 * Interest amount. One entry per year being planned.* Repayment amount. One entry per year being plarmed.* Closing liability amount. One entry per year being plarmed.Method of processingIf the liability has not yet been incurred in the Base year, its value in the2 0 Base year and its repayment amount are escalated at the value escalation ratefor each year until the date of incurrence. That date may be the start dateshown 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 intoamount increased on the liability and the escalated repayment amount25 becomes the annual repayment.W0 98/14902101520CA 02264680 1999-02-26As each year is processed, the closing liability amount is brought forwardfrom the previous year to become the opening liability amount. Therepayment amount is also copied from the previous year unless a differentfigure has been specified or calculated for the year being processed. Interestis calculated at the rate for the year. The closing liability amount for theyear is calculated as opening liability amount, plus amount increased andinterest amount, minus amount decreased and repayment amount.In the year in which the liability has to be settled, the liability amount is putinto the repayment amount after raising half a year’s interest. The date ofsettlement may be the date of sale of the corresponding asset where theliability is linked to an asset.Apart from the above automatic calculations, any amount may be enteredinto amount increased or amount decreased in any year. For the purpose ofcalculating cashflow for the year, amount increased is part of cash inflowwhile amount decreased and repayment amount form part of cash outflow.On certain types of liabilities (eg. loans, bonds and hire purchaseagreements) the rates, data requirements and processing may vary greatlyfrom one to the next as there are numerous variations in the conditionspertaining to loans of different types.Expense or cash outflow itemDatabase information * Line number.* Type of expense, eg. medical, entertainment, holiday, insurance,PCT/US97/15358W0 98/1490210152025CA 02264680 1999-02-26PCT/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 apercentage of the value of the linked asset or liability orincome item then this is that percentage.* Start date. Date on which expense will begin if not already therein base year and if not linked to an asset or liability or anincome item or if not same as date of purchase of linked assetor date of incurring of linked liability or start date of linkedincome 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 anasset or a liability or an income item or if not same asdisposal date of linked asset or date of settlement oflinked 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.W0 98/ 14902101520CA 02264680 1999-02-26* Link pointer to related income item, if any.* Amount of expense. One entry per year being planned.Method of ProcessingThe amount of the expense may be carried as an actual amount in the Baseyear or as a percentage of the value of a linked asset, liability or incomeitem. In addition, certain types of expense may require formulae and/ortables of figures for their calculation. If it is an amount and it has not yetbeen incurred in the Base year it is escalated at the growth rate for each yearuntil its first date of incurrence. If the expense is linked to an asset then thatdate may be the date of purchase of the asset. If it is linked to a liabilityit may be the date of incurring of the liability. Otherwise, if it is linked toan income item it may be the start date of the income item. In the first yearof incurrence the escalated amount is reflected as an expense (cash outflow)for the first time. Each year henceforth the amount is escalated by thegrowth factor for the year. Of course, if the amount is calculated byapplying a formula or a percentage to another figure or combination offigures in the model then the growth factor may not apply.The expense continues until its end date which again may be dependent ona linked asset, liability or income item.The expense amount may also just be specified as an amount for each yearwith or without a growth rate. In that case start and end dates override theseamounts.PCTIU S97/ 15358CA 02264680 1999-02-26“'0 98/1490? PCT/US97/15358-17-Income sourceDatabase information* Line number.* Type of income source eg. Salary, Dividends, etc.5 * 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 the10 value of the linked asset or liability then this is thatpercentage.* Start date. Date on which income will begin if not already therein base year and if not linked to an asset or a liability or ifnot same as date of purchase of linked asset or date of15 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.20 * End date. Date on which income will end if not linked to an assetor a liability or if not same as disposal date of linked assetor settlement date of linked liability."ASS" = Date of disposal of linked asset."RET" = Retirement date.25 "LIA" = Date of settlement of linked liability."DEA" = Estimated date of death.* Link pointer to related asset or liability. if any.WO 98114902101520CA 02264680 1999-02-26* Income amount. One entry per year being planned.Method of processingThe income amount may be carried as an actual amount in the base year oras a percentage of the value of a linked asset or liability. In addition, certaintypes of income may require formulae and/or tables of figures for theircalculation. If it is an amount and it has not yet started to flow in the BaseYear it is escalated at the growth rate for each year until the start date. Ifthe income is linked to an asset then that date may be the date of purchaseof the asset otherwise if it is linked to a liability it may be the date ofincurrence of the liability. In the start year the escalated amount is reflectedas income for the first time. Each year henceforth the amount is escalatedby the annual growth rate for the year. If the amount is calculated byapplying a formula or a percentage to another figure or combination offigures in the model then the growth factor may not apply.The income continues until its end date which again may be dependent ona linked asset or liability.The income amount may also just be specified as an amount for each yearwith or without a growth rate. In this case start and end dates override theseamounts. For cashflow calculations, income is, of course, treated as cashinflow.PCT/US97/ 15358CA 02264680 1999-02-26“'0 93’149“2 PCT/US97/15358-19-Total or Sub—TotalDatabase information* Line number* Total type5 * Total description* Total amount. One entry per year being plarmed.Method of ProcessingEach total in the model has a unique method to find and process the figuresit needs. This is best explained by examples.10 a) To calculate total income tax for the year, the total entry formulalocates the information it needs in the various parts of the model. Itknows the entry types required and the areas in the model in whichthey reside. It then does whatever calculations are necessary tocalculate tax according to the tax laws prevailing in the year being1 5 processed.b) To calculate nett cashflow for the year, the formula for that entrylocates every cash inflow and cash outflow item and sums them.c) Total nett assets for the year is arrived at by summing the carriedforward balances for the year being processed on all assets and2 0 liabilities.CA 02264680 1999-02-26W0 93’1“9°2 PCT/US97/15358-20-Section headingDatabase information* Line number.* Type of entry. ie. Section heading.5 * Section heading in words.Method of ProcessingNo processing is performed on Section headings by the Model calculationprograms.Cash Float1 0 Database information* Line number.* Type of entry. ie. Cash Float.* Description, "CASH FLOAT".* Surplus interest rate percent. This is the armual rate of interest15 earned on a positive amount. One entry per year beingplarmed.* Deficit interest rate percent. This is the armual rate of interestcharged on a negative amount. One entry per year beingplarmed.20 * Brought forward balance. One entry per year being planned.wo 98/14902 PCT/US97/15358- 21 -* Surplus for year. One entry per year being plarmed.* 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 plarmed.5 * Carried forward balance. One entry per year being planned.101520CA 02264680 1999-02-26Method of ProcessingFor 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 forwardbalance using either the surplus or deficit interest percentagefor the year depending on whether the balance is positive ornegative.- The balance and either the surplus or deficit for the year(depending on which one is present) are then summedtogether and a further half year’s interest is calculated ontheir total.Again, the interest percentage used depends on whether the total is positiveor negative. The two calculated interest amounts are totalled. If the totalis positive it is put into interest on surplus for the year, otherwise intointerest on deficit. The carried forward balance for the year is thenWO 98/14902101520CA 02264680 1999-02-26-22-calculated as the sum of the brought forward balance, surplus for the yearand the interest on it and the deficit for the year and the interest on it.For cashflow calculations the interest on deficit is included in cash outflowfor the year while the interest on surplus forms part of the cash inflow.The detailed and comprehensive structure of the models described abovealready provides highly useful information to the subject when projectedforward. However, because of the complexity involved in attempting todetermine the effect of different choices, rules and other variables on theprojected financial situation, the invention further provides for an automaticallocation and funding program to operate on the model, thereby to illustrateto the subject the effect of his or her chosen strategy and choices. Thisroutine operates automatically, using the data entered originally into theplanning rules database, and allows a complex sequence of priorities andchoices to be applied to the unplanned future financial situation of thesubject so that he or she can be satisfied that the rules and preferencesoriginally entered into the planning rules database are suitable, oralternatively, so that the necessary adjustments to the planned future financialsituation can be made.A planning program or routine is provided which allows the subject to viewthe data in the three model databases, to make changes to the planned modeldatabase, inter alia by transferring figures from the suggested model databaseto the plarmed model database, and, in particular, to run the automaticallocation and funding program of Figure 5 when required.Once the user is satisfied that the basic model has been correctly built, aPCT/U S97/ 15358W0 98/ 1490210152025CA 02264680 1999-02-26-23-routine is run to create the plarmed model, which starts off as a copy of thebasic model and which is subsequently updated.The subject will typically start by examining a financial summary andvarious graphs generated by the model and displayed on the computer’sVDU, allowing the projected financial situation to be accessed. The user canmake changes to the entries in the planned model and recalculate the modelto see the effect thereof. The user can access any entry in the plannedmodel. A multi-level index is provided to enable any item to be accessedvia main section headings, section headings and sub-sections. The financialsummary 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, thesubject can run the automatic allocation and funding program whenever theneed is felt for a suggested future projection based on the data in theplanning rules database. A number of different planned future projectionscan be created for comparison.The automatic allocation and funding program utilises data entered by thesubject relating to the allocation of surpluses (see Figure 6), and the fundingof deficits (see Figures 7 and 8). For each item to which future surplusesmay be allocated an entry reflecting the subject’s preferences is filled in onthe screen for surplus allocation parameters which is used to build a surplusallocation table (see Appendix 2). This surplus allocation table forms partof the planning rules database. Similarly, deficit funding preferences areentered into the screens of Figures 7 and 8, according to the parameters setout in Appendices 3 and 4, respectively, and utilised as a deficit fundingPCT/US97/15358W0 98/ 14902101520CA 02264680 1999-02-26-24-table in the planning rules database.A deficit funding routine is utilised to build up a deficit funding array(Appendix 5) from the data in the deficit funding table prior to thecalculation of each year’s data in the automatic allocation and fundingprogram.The program reads through the entries in the Deficit funding table in theplanning rules database. For each table entry whose parameters allow it tobe used to fund a deficit automatically in the Cale year (the year beingworked on), it sets up an entry in the deficit funding array. Each entry inthe array shows the amount of money available for deficit funding in theyear being worked on, this being dependent on the subject’s rules andperhaps, the value of the asset or liability in that year. (See layout of Deficitfunding array entry - appendix 5). The entries are placed in the array in themost useful sequence. Refer to the layouts of the asset and liability entriesin the deficit funding table (Appendix 3 and Appendix 4) to see theparameters 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 computedin the following way:- For a liability the program selects the lesser of the "Maximumamount to be funded from this item" in the table or the"Funding value percentage" of the brought forward value ofthe linked asset for the Calc year in the suggested model.From the selected amount it subtracts the "Opening liabilityamount" for the Calc year on the item in the suggestedPCT/US97/15358W0 98/ 14902101520CA 02264680 1999-02-26PCT/U S97/ 15358-25-model.- For an asset the lesser amount is selected between the"Maximum amount to be liquidated from this asset" in thetable and the "Maximum liquidation value percentage" of thebrought forward value of the asset for the Calc year in thesuggested model. If there is a liability linked to the asset andit has to be settled when the asset is liquidated then theopening liability amount for the Calc year on the linked itemin the suggested model is subtracted from the selectedamount.- When the array has been built, its entries are sequenced onSequence number, type (assets then liabilities) and Amountthat can be raised in Calc year.Apart from the funding rules set by the subject, another factor considered bythe program is the future pattern of expected surpluses and deficits. Whena deficit is found in a year the future cashflow can follow three basiccourses, possibly requiring different funding strategies. These are referredto in the program as patterns 1, 2 and 3.In pattern 1, the deficit year being worked on may be followed by one ormore further deficit years but these are followed by surplus years for the restof the period being planned. In this case the program tries to fund fromliabilities without touching assets but will use assets where necessary.In future pattern 2 there will be a mixture of deficit and surplus years in theW0 98l14902101520CA 02264680 1999-02-26-26..future.In future pattern 3 there are continuous deficits until the last year beingplanned.For patterns 2 and 3 the program funds from assets and liabilities in thesequence specified by the user.The entries in the deficit funding array are accessed in sequence when tryingto fund a deficit. Because of the way in which the entries are sequenced theprogram handles them firstly in the preferred sequence set by the subject andsecondly in ascending value so that the assets with the lowest possible valueswill be liquidated.A situation can arise where despite one or more smaller assets beingliquidated it still becomes necessary to entirely liquidate a large item whichin itself is sufficient to cover the deficit for the year. In this case theprogram 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 settledautomatically. If a liquidated asset or a settled liability has income orexpense items linked to it those items are ended automatically in the sameyear. Likewise, where a liability is incurred for the first time, any linkedincome or expense items are started up automatically.When the program liquidates an asset partially or completely it adds theliquidated amount to the "Amount liquidated" for Calc year on the item inthe suggested model. To raise money on a liability it adds the amount toPCT/US97/15358W0 98/ 14902101520CA 02264680 1999-02-26-27-"Amount increased" for the Cale year on the liability in the suggested model.The automatic allocation and funding program allocates a cashflow surplusaccording to the parameters set in the planning rules database. Each entryin the surplus allocation table is examined in turn, in the sequence specifiedby the subject. On each one, the decision parameters are considered to seewhether or not any of the surplus for the Calc year can be allocated to theitem. In considering the minimum period of investment, the program looksahead at the projected cashflow in future years to see the timing andmagnitude of any anticipated deficits. Working with the decisionparameters, the amount of the surplus and the amount already invested in theitem as shown in the suggested model, the program calculates the amount tobe 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 tableuntil either the surplus is completely allocated or the table is exhausted.Event reportingCashflowThe cashflow related to any particular asset, liability, expense item or sourceof income can be of two types, continuous or intermittent. One-off cashflowitems may be considered as intermittent for the purpose of this explanation.Some examples of the different types of cashflow on a fixed property are:PCT/US97/ 15358WO 98/14902101520CA 02264680 1999-02-26PCTIUS97/15358-28-Continuous cashflow items:Rates and taxesRepairs and maintenanceDomestic staff salaries etc.InsuranceLights and waterRental incomeIntermittent cashflow items:Purchase price and other charges on purchase of propertyCost of major renovations to propertyCost of major improvements to propertyIncome from sale of propertyEvents"Events" related to an asset, liability, expense item or source of income areoccurrences or actions that result in a significant change in the continuouscashflow or that result in intermittent cashflow via the item.The events relating to a fixed property would be:The purchase of the propertyThe sale of the propertyMajor renovationsMajor improvementsThe beginning or end of any expense or type of incomeA significant change to the amount of any expenseCA 02264680 1999-02-26W0 98/ 14902 PC'l‘/US97/l5358-29-A significant change to the amount of any type of incomeDifferent types of items have different events. For example, in the case ofa loan the events may be:The raising of the loan5 The settlement of the loanThe borrowing of additional amounts on the loanThe payment of significant additional amounts off the loan from timeto time ie. amounts in excess of the required instalment.Event Messages10 By examining the information contained in the model after performingprojection calculations, the Event Reporting programme identifies everysignificant event occurring on every entry in the model.The programme generates a "Normal language" event message to report eachevent that has a meaningful effect on the subject’s cashflow, assets or1 5 liabilities.Examples of messages are:Client purchases fixed property "23 Johnson Ave" for R450000 on23/1 1/2002Client raises first mortgage bond of R3000O0 on fixed property "2320 Johnson Ave" on 23/1 1/2002. Bond to be settled by 30/11/2022.Client begins to earn rental of R48000 per armum from fixedW0 98/ 14902101520CA 02264680 1999-02-26-30-property "23 Johnson Ave" on 1/5/2003.Client donates R250000 to spouse.The generated "Event messages" are used in various ways to producedifferent types of reports. One example of such a report is the "AnnualEvents and Actions" report. This report may be run on any of the models(unplarmed, suggested, planned). It shows, year by year, the events thatoccur in each year. The report makes it easy for anyone to understand aplan, to compare it to other plans and to decide whether or not a plan isacceptable. For example the plan may indicate that the subject should sellhis house and buy a smaller property in a certain year. On this report thesubject will clearly see the implications thereof.It will be appreciated that the described method, implemented with theassistance of a sophisticated software program, allows a highly detailedanalysis and projection of a subject’s financial situation, with the subject’sown rules and preferences being applied automatically in projecting asuggested future financial situation year by year, thereby greatly simplifyingwhat would otherwise be an unwieldy, complex and very laborious task.The result is that a more thorough, detailed and in-depth assessment of thesubject’s future financial position can be carried out in a reasonable time,with consequent benefits to the subj ect. In particular, the method permits thesimultaneous examination of various alternative choices and the financialconsequences thereof.PCT/U S97/ 15358CA 02264680 1999-02-26wo 9s/14902 PCT/US97/153583‘ APPENDIX 1Examples of sections within the model and the types of items whichappear within those sectionsSection names Types of itemsKNOWN CASH INFLOWS: Income From Employment- Retirement Funding (RIF) Income Salary, Wages. Bonus- Non-Retirement Funding (Non-R/F) Income Leave pay, Commission- Tax-Free Income Transfer allowanceFringe Benefits Company carLow interest loansPensionslAnnuities From Growth/Income Plans:From Pension/Provident Funds & RA'sLump Sums Received FromResignationslRetirementJRedundancy Pension Fund (up to 1/3)Provident FundRetirement Annuities (up to 1/3)Deferred compensationGratuityAccumulated leave payInterest Income Unit Trusts/Managed Share PortfolioShort Term DepositsDividend Income Unit TrustsBuilding SocietyRental Income ResidentialTimeshareBusinessIProfessionaI Income Consulting feesSalesForeign Income InvestmentsCapital Income Fixed AssetsSale of Unit Trusts. EquitiesExempt Income Interest (max. R2000)DividendsGross Contributions Made Pension funds, RA‘sTax Allowable Deductions Pension funds,, RA'sCar allowance, Entertainment. MedicalLess:— Tax Paid Tax on: Salary, Growth 8. Income plansANTICIPATED CASH INFLOWS:Expected future income lnneritances. DonationsSUBSTITUTE SHEET (RULE 26)CA 02264680 1999-02-26wo 98/14902 PCT/US97/1535832APPENDIX 2Entry in surolus allocation tableItem codeTypeA = AssetL = LiabilityDescriptionSequence number (Priority number)Shows the position of this item in the sequence in whichsurpluses must be applied to the table entries.Line number of this item in the model.Decision parametersOnly 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 nolimit)Allocation percentage(Percentage of surplus to put into thisitem. If zero, then no limit)Minimum amount required (Asset only. If zero then nominimum)Maximum year number (Assets only. Do not invest in thisitem after this year. If zero then nomaximum year)SUBSTITUTE SHEET (RULE 26)CA 02264680 1999-02-26W0 98/ 14902 PCT/US97/1535833APPENDIX 3Deficit funding table entrv - LiabilityDescription of liabilitySequence no.This positions the item in the preferred sequence in whichthe items may be used for deficit funding. More than oneitem may have the same sequence number.Line number of this item in the modelLine number of linked assetLink typeA = If linked asset is liquidated then this item must besettled.Funding value %Percentage of value of linked asset that can be raisedZero = Not applicableFunding controllerA = Never fund from this item automaticallyMaximum amount to be funded from this itemMinimum amount to fund from this itemSUBSTITUTE SHEET (RULE 25)CA 02264680 1999-02-26WO 98/14902 PCT/US97/ 1535834APPENDIX 4Deficit fundinq table entry - AssetDescription of assetSequence no.This positions the item in the preferred sequence in whichthe items may be used for deficit funding. More than oneitem may have the same sequence number.Line number of this item in the modelLine number of linked liabilityLink typeA = If this item is liquidated then its linked liabilitymust be settled. This can only apply to assets that cannotbe partially liquidated.Maximum liquidation value fiPercentage of the value of this asset that can beliquidatedZero = Not applicableLiquidation controllerA = Never liquidate this item automatically eg. Pension,favoured assets, etc.B = If a surplus arises in the future do not liquidate thisitem automatically.Maximum amount to be liquidated from this assetMinimum amount of deficit to fund from this item.zero = Not applicableMinimum liquidation yearzero = This item may be liquidated in any yearAnynumber = First year in which this item may be liquidatedPartial liquidation Y or NY = This item can be partially liquidated.SUBSTWUTESHEET(RULE2fiCA 02264680 1999-02-26W0 93/149” PCT/US97l1535835APPENDIX 5Deficit fundina arrayDescription of itemAmount that can be raised on this item in Calc year.Sequence numberType (Asset or liability)A AssetL LiabilityLine number of this item in the modelLine number of linked asset or liabilityLink typeA = If this item is liquidated then its linked liabilitymust be settledFunding controllerA = Never fund a deficit from this item automatically8 = If a surplus arises in the future do not fund a deficitfrom this item automaticallyMinimum amount of deficit to fund from this item.Zero = Not applicablePartial liquidation Y or NY = This item may be partially liquidatedSequence of table entries :-Ascending sequence numberLiabilities and then assetsAscending amount that can be raised —\SUBSTITUTE SHEET (RULE 25)

Claims (13)

WE CLAIM:

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.

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.

5. 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.

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.

10. 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-discernable 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-discernable 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.