The role of finance is very crucial. It is the backbone of every activity. For example: suppose you’ve to purchase a car, you’ll start your planning only if your finances allow you. But there’s a huge difference between amount of capital required for purchasing a car and sanctioned by selecting different types of finance.
Finance is divided mainly into three categories which are:
For the purposes of this article we focusing mainly on everything about personal finance.
What is personal finance?
Personal finance is the process of planning and managing personal financial activities such as
income generation, spending, saving, investing , and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan. This guide will analyze the most common and important aspects of individual financial management.
Matters in personal finance revolve around:
– Protection against unforeseen personal events, as well as events in the wider economies
-Transference of family wealth across generations (bequests and inheritance)
-Effects of tax policies (tax subsidies or penalties) management of personal finances
-Effects of credit on individual financial standing
-Development of a savings plan or financing for large purchases (auto, education, home)
-Planning a secure financial future in an environment of economic instability
-Pursuing a checking and/or a savings account
-Preparation for retirement/ long term expenses.
The financial planning standard board have categories personal finance into five key areas which are income, saving, spending, investing and protection.
Each of these areas we be explained in detail below. So hang on as we examine these areas of finance that help you improve your financial status
Let dive in
Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their family. It is the starting point for our financial planning process.
Common sources of income are:
These sources of income all generate cash that an individual can use to either spend, save, or invest. In this sense, income can be thought of as the first step in our personal finance roadmap.
Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (i.e., not an investment). All spending falls into two categories: cash (paid for with cash on hand) and
credit (paid for by borrowing money). The majority of most people’s income is allocated to spending.
Common sources of spending are:
– Mortgage payments
– Credit card payments
The expenses listed above all reduce the amount of cash an individual has available for saving and investing. If expenses are greater than income, the individual has a deficit. Managing expenses is just as important as generating income, and typically people have more control over their discretionary expenses than their income. Good spending habits are critical for good personal finance management.
Saving refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings or investments. Managing savings is a critical area of personal finance.
Common forms of savings include:
– Physical cash
– Savings bank account
– Checking bank account
– Money market securities
Most people keep at least some savings to manage their cash flow and the short-term difference between their income and expenses. Having too much savings, however, can actually be viewed as a bad thing since it earns little to no return compared to investments.
Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back more money than they originally invested. Investing carries risk, and not all assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return.
Common forms of investing include:
– Mutual funds
– Real estate
– Private companies
Investing is the most complicated area of personal finance and is one of the areas where people get the most professional advice. There are vast differences in risk and rewards between different investments, and most people seek help with this area of their financial plan.
Personal protection refers to a wide range of products that can be used to guard against an unforeseen and adverse event.
Common protection products include:
– Life insurance
– Health insurance
– Estate planning
This is another area of personal finance where people typically seek professional advice and which can become quite completed. There is a whole series of analysis that needs to be done to properly assess an individual’s insurance and estate planning needs.
The Personal Finance Planning Process
Good financial management comes down to having a solid plan and sticking to it. All of the above areas of personal finance can be wrapped into a budget or a formal financial plan.
These plans are commonly prepared by personal bankers and investment advisors who work with their clients to understand their needs and goals and develop an appropriate course of action.
Generally speaking, the main components of the financial planning process are:
– Plan development
– Monitoring and reassessment
Personal Finance Budget – Example
Preparing a budget or a financial plan is critical for giving you the best shot at achieving your personal and family goals. Below is an example of a simple monthly budget that could be used to manage your income, expenses, savings, and investments.
As you can see in the example below, there are three potential sources of income (salary, bonus, and other), followed by a list of expenses (rent, food, groceries, restaurants, entertainment, childcare costs, vacations, etc.), and the difference between the two is the person’s monthly surplus or deficit.
If you’d like to use this free template to help you with your personal finances and planning, please download the Excel spreadsheet and edit it as appropriate to fit your own needs. Additionally, you should always consult a professional advisor before making any financial or investment decisions.
Wouldn’t it be nice if there were a magic formula or simple trick that allowed you to never have to worry about money or manage your finances again?
While that may not be realistic, there are some simple things you can do right now to improve your money situation. Try these five steps for successfully managing your personal finances . Another bonus? If you stick to these five tips, your
financial problems may start to diminish, and you can start reaping the rewards of lower debt, saving for the future, and a solid credit score.
Detail Your Financial Goals
Take some time to write specific, long-term financial goals. You may want to take a month-long trip to Europe, buy an investment property, or retire early. All of these goals will affect how you plan your finances. For example, your goal to retire early is dependent on how well you save your money now. Other goals, including homeownership, starting a family, moving, or changing careers will all be affected by how you manage your finances.
Once you have written down your financial goals , prioritize them. This ensures that you are paying the most attention to the ones that are of the highest importance to you. You can also list them in the order you want to achieve them, but a long-term goal like saving for retirement requires you to work towards it while also working on your other goals.
Below are some tips on how to get clear on your financial goals:
Flesh Out Your Plan
A financial plan is absolutely essential in helping you reach your financial goals. The plan should have multiple steps or milestones. A sample plan might include creating a monthly budget and spending plan, then getting out of debt.
Once you’ve accomplished these three things and have followed through on your new plan for a few months, you may find that you have extra cash, and the money you free up from your debt payments can be used to reach your next round of goals.
Again, it’s key to decide what priorities are most important to you. Keep steadily working toward your long-term retirement goals , but also start to focus on the most important near-term goals you have set for yourself. Do you want to take an extravagant trip? Start investing ? Buy a home or build your own business? These are all things to consider when deciding on your next step.
Your goals, along with an emergency fund, will help you stop making financial decisions based on fear and help you get control of your situation.
When creating a financial plan, remember these things:
Make and Stick to a Budget
Your budget is one of the biggest tools that will help you succeed financially. It allows you to create a spending plan so you can allocate your money in a way that will help you to reach your goals.
You can make your budget as high-level or detailed as you want, as long as it helps you reach your ultimate goal of spending less than you earn, paying off any debts, padding your emergency fund, and saving for the future.
A budget will also help you decide how to spend your money over the coming months and years. Without the plan, you might spend your cash on things that seem important now, but don’t offer much in terms of enhancing your future. Many people get caught in this quagmire and get down on themselves for not reaching the financial milestones they want for their family and for their own life.
Don’t forget to celebrate small victories along the way. For example, congratulate yourself once you pay off your debt, or reward yourself when you stick to your budget for three months solid, or when you successfully pad your emergency fund.
If you are married, you and your spouse need to work together on the budget so that it feels fair to both of you, and you both have the same level of commitment towards achieving it. This can go a long way towards helping you prevent money-related arguments. Below are some tips for married couples who want to create a budget together:
Pay Off Debt
Debt is a huge obstacle for many when it comes to reaching financial goals . That’s why you should make eliminating it a priority. Set up a debt elimination plan , to help you pay it off more quickly. For example, while making minimum payments on all of your debt accounts, pay any
extra money towards one debt at a time. After paying off one debt account, move all the money you were paying on the first debt to the next debt and continue from there, creating a debt-paydown “snowball effect.”
Once you are totally out of debt, make a commitment to stay out of debt. Leaving them
credit cards at home may be a wise strategy. Save up an emergency fund to cover unexpected expenses so you aren’t tempted to use a credit card to cover them.
Try these tips to help you pay off debt more quickly:
Don’t Be Afraid to Ask for Advice
Once you have grown your savings and want to begin investing to increase your wealth, speak to a financial planner to help you make wise investment decisions.
A good adviser will share the risks involved in each investment and help you find products that match your comfort level and investing return needs while helping you work toward your goals as quickly as possible. A financial planner can also help you with your budget, which is another plus.
Investing is a long-term strategy that helps you in
building wealth . You can also find financial help elsewhere, such as:
Getting debt paid off, money saved and progress made towards your financial goals doesn’t have to be a difficult experience. Invest in yourself and your financial future so that you won’t ever need to worry about your finance status again.
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