Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. When planning personal finances, the individual would consider the suitability to his or her needs of a range of banking products (checking, savings accounts, credit cards and consumer loans) or investment private equity, (stock market, bonds, mutual funds) and insurance (life insurance, health insurance, disability insurance) products or participation and monitoring of and- or employer-sponsored retirement plans, social security benefits, and income tax management.
Personal financial planning process – August funding
The key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and re-evaluation. In general, it involves five steps
- Assessment: A person’s financial situation is assessed by compiling simplified versions of financial statements including balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
- Goal setting: Having multiple goals is common, including a mix of short- and long-term goals. For example, a long-term goal would be to retire at age 65 with a personal net worth, while a short-term goal would be to save up for a new computer in the next month. Setting financial goals helps to direct financial planning. Goal setting is done with an objective to meet specific financial requirements.
- Plan creation: The financial plan details how to accomplish the goals. It could include, for example, reducing unnecessary expenses, increasing the employment income, or investing in the stock market.
- Execution: Execution of a financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
- Monitoring and reassessment: As time passes, the financial plan is monitored for possible adjustments or reassessments.
Typical goals that most adults and young adults have are paying off credit card/student loan/housing/car loan debt, investing for retirement, investing for college costs for children, paying medical expenses.
Personal finance principles
Personal circumstances differ considerably, with respect to patterns of income, wealth, and consumption needs. Tax and finance laws also differ from country to country, and market conditions vary geographically and over time. This means that advice appropriate for one person might not be appropriate for another. A financial advisor can offer personalized advice in complicated situations and for high-wealth individuals, but ultimately all of it boils down to a few basic points of concern which are all mentioned below.
- Pay off your credit card balance every month, in full
- Save 20% of your income
- Maximize contributions to tax-advantaged funds such as a retirement funds, individual retirement accounts, and education savings plans
- When investing savings:
- Don’t attempt to trade individual securities
- Avoid high-fee and actively managed funds