What Is Personal Finance

Photo by CafeCredit - CC BY 2.0
Photo by CafeCredit – CC BY 2.0

Personal finance as the name implies refers to the process of applying sound financial principals in making financial decisions in your personal life. In other words, it refers to what you do with your money on a personal level. It involves many processes such as budgeting, financial planning, estate planning, investing, money management, insurance, investing, record keeping, retirement planning, saving and tax planning.

Terms such as bonds, credit cards, debt, financial goals, investment portfolio, insurance, interest rates, loans, mortgages, refinancing, shares, social security, stocks, stock market are usually associated with personal finance. You should familiarize yourself with these terms and try to expand your knowledge in these areas if you are serious about managing your money better. Issues such as buying your daily groceries, your dream car or home and saving for rainy days or even retirement planning, all these issues have a direct impact on your personal finance which in turn may affect your lifestyle, relationships with others and your status in life.

Put it simply, if you take charge and are in control of your personal finance, you will find that you will live a richer and fuller life compare to your peers who are still struggling to manage theirs. It doesn’t matter if you are looking at saving for college or retirement. At the end of the day, the objective of personal finance is to better manage your money and make them grow so that you can achieve financial security and freedom or even retire early.

The most important aspect of personal finance is financial planning. Financial planning is the process of managing your finances to meet your financial goals. Your financial goals may include assets accumulation, buying your dream car or dream home, managing health care costs, saving for your children’s college education or planning for retirement.

It is an often misunderstood conception that financial planning is a very complex and laborious process that is best left to the professionals to handle. Nothing can be further than the truth. While it may be correct to say if you know nuts about personal finance and financial planning, it is best to engage a professional to advise you initially. However, at the end of the day, you should aim to pick up the necessary skills to manage your money instead of depending on others.

Finance professionals are only there to advise you, they are not you and they may not fully understand and comprehend your lifestyle, preferences, risk appetite and other factors to make proper recommendations. Please note that not having the time to manage your finance is not an excuse. If you are too lazy to learn how to manage your money, you are probably too lazy to care about anything else and good luck to your money if you think that finance professionals are infallible. Managing your own money is not a complex and hard thing if you set your mind to do it.

Financial planning can be broken down into five main areas:

Financial Assessment
The current financial situation of a person can be assessed by simply analyzing their financial balance sheets and income statements. A typical financial balance sheet will consist of data on the values of personal assets such as bank savings, cars, houses, investments, stocks and personal liabilities such as bank loans, credit card debt, student loans, loans and mortgages. A typical income statement will list down the values on personal income and expenses. You can even make use of financial software or calculators to help you access your financial situation better.

Setting Of Financial Goals
Financial goals can be broken down into short, medium and long term goals. Examples of a short term financial goal may be saving for a new computer, whereas a medium term financial goal may be saving for a new car and a long term financial goal may be retiring at the age of fifty years old. By setting financial goals, you will have a direction and meaning to your financial planning.

Creating A Financial Plan
A financial plan is basically a blueprint for reaching your financial goals. It will detail and list down the precise steps involve in achieving your financial goals. Examples of steps may include increasing one’s current income, investing in real estate, reduction of expenses or setting up another income stream.

Execution Of Financial Plan
You can plan all day long but if you do not start taking action to realize your goals, you will never achieve them. Your financial plan is for you to follow. You need to be very disciplined if you want to reach your financial goals.

Periodic Monitoring And Reassessment Of Financial Plan
Financial planning is a dynamic process that needs constant monitoring and readjustment of financial goals and plan. This is especially true for those who started off as a single and move on to have a family and children.

These five main areas of concern can be further broken down into six key areas such as current financial position, adequate protection of assets, tax management and planning, investment and savings goals , retirement planning and last but not least estate planning.

As you can see, personal finance is an important aspect of our life. Therefore, making sound and prudent financial decisions should be part and parcel of your life. It is possible only if you have the correct attitude and discipline in managing your money. You should always strive to expand and increase your knowledge in personal finance to better manage your money so that you can reach your financial goals earlier.

2 thoughts on “What Is Personal Finance

  1. I have learn alot,and I’m going to be discipline from now on and manage my money with prudent by applying these principles of personal finance.

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