The general belief in many quarters is that personal finance is for the rich, but the reality is that personal finance is for every one and not only for the rich.
Personal finance include aggregation of ones wealth management plans to position the individual for a more rewarding future life either on retirement or towards the accomplishment of target project/s.
Wikipedia defines Personal finance as 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 such as stock market, bonds, mutual funds and insurance such as life insurance, health insurance, disability insurance products.
It also include participation and monitoring of, as well as employer-sponsored retirement plans, like social security benefits, and income tax management.
Personal finance main processes
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.
Evaluating your assets & liabilities or assessment: This has to do with income statement of a person. A personal income statement lists personal income and expenses.
Before venturing into personal finance, one needs to do thorough evaluation of his/her assets and liabilities and determine how leveraged (indebted) or buoyant you are.
A person’s financial situation is assessed by gathering basic kinds of financial statements including balance sheets and income statements.
Investopedia reveals that a personal balance sheet lists the values of personal assets such as car, house, clothes, stocks, bank account, alongside personal liabilities such as credit card debt, bank loan, and mortgage amongst others.
Agenda setting: for a personal finance planner, having several goals is common, including a blend of lesser- and long-lasting goals. For instance, a personal finance planner’s long- term could be to “retire at age 60 with a personal net worth of N5, 000, 000,” while a short-term goal could be to save up for a new car or holiday trip abroad in the next one year.
Aiming and setting financial goals helps to direct financial planning. Agenda setting is done with an objective to meet specific financial requirements.
Plan design: The financial plan details how to accomplish the goals. It could include, for example, reducing unnecessary expenses, increasing the employment income, or saving in the stock market, investing in the money market, debt instruments or taking various forms of insurance policies.
Plan Implementation: Execution of a financial plan often requires, will, discipline and determination. Many personal finance planners often seek support from specialists such as accountants, financial planners, investment advisers, and lawyers.
Monitoring and reassessment: As time passes, the financial plan is scrutinized for probable modifications or reexaminations.
According to findings, personal finance goals vary according to age brackets, but always have convergence.
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 amongst others.
Focus of personal finance
Areas of focus should be on how much you save and not how much you earn. As long as one earns money either as an entrepreneur or as an employee in an organization, one can personally plan for the future.
Financial position: According to Investopedia personal finance, is concerned with understanding the personal resources available by examining net worth and household cash flow.
Net worth is a person’s balance sheet, calculated by adding up all assets under that person’s control, minus all liabilities of the household, at one point in time.
From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished.
Delayed gratification: Delayed gratification, or deferred gratification is the ability to resist the temptation for an immediate reward and wait for a later reward. For creation of personal wealth this is one of the key. .
Adequate protection: This has to do with analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long-term care.
Some of these risks may be self-insurable while most will require the purchase of an insurance contract.
Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance.
Tax planning: typically, the income tax is the single largest expense in a household. Managing taxes is not a question whether or not taxes will be paid, but when and how much.
Investment and accumulation goals: This has to do with planning how to accumulate enough money for large purchases and life events which is what most people consider to be financial planning.
Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement.
Achieving these goals requires projecting what they will cost, and when one needs to withdraw funds. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation.
Retirement planning is the process of understanding how much it costs to live at retirement, and coming up with a plan to distribute assets to meet any income shortfall.
Methods for retirement plan include taking advantage of government allowed structures to manage tax liability including: individual (IRA) structures, or employer sponsored retirement plans.
Benefits of financial planning
Benefits of financial planning include,
Freedom to do things one wants to do
One is more likely to be out of debt
Guaranteed financial security for the future