Title: A quantitative individual financial planning model with practical implications

Authors: Manuel Tarrazo

Addresses: School of Business, Department of Finance, University of San Francisco, 2130 Fulton Street, San Francisco, CA 94117-1045, USA

Abstract: This study proposes a state preference-enhanced, Linear Expenditure (LE) system as a framework for household financial planning. Individual (small) investors first identify necessary and discretionary consumption; then, they dedicate fixed income funds to cover expected necessary consumption. The remaining funds are then available for variable income investing. The fixed income component can be implemented by buying a single, corporate bond of the highest quality possible to achieve the cash flows required to cover necessary consumption. With respect to equity, the investor could invest indirectly (index funds, or other equity mutual funds), or directly by buying a portfolio of stocks.

Keywords: individual financial planning; household financial planning; individual investors; fixed income investment; variable income investment; financial services; annuities; asset allocation; asset dedication; mutual funds; portfolio optimisation.

DOI: 10.1504/IJADS.2008.020325

International Journal of Applied Decision Sciences, 2008 Vol.1 No.2, pp.212 - 244

Published online: 16 Sep 2008 *

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