A quantitative individual financial planning model with practical implications
by Manuel Tarrazo
International Journal of Applied Decision Sciences (IJADS), Vol. 1, No. 2, 2008

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.

Online publication date: Tue, 16-Sep-2008

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