You may have heard about Personal Finance buy you were left alone in the sidelines when people talk about it because you really have no idea what is Personal Finance.
Personal Finance basically is the understanding and the proper application of the basic principles of finance to every and all decisions of an individual that involves money or its valuable equivalents.
It also deals with how an individuals or families obtain, acquire or make money, how they should make their budget, how they spend money or save money or how they invest their money and money equivalents over time, taking into account all the perceived and inherent financial risks and opportunities for growth and factoring all possible future events that happen in life. It is about taking charge of your money.
Things like checking account, savings account, credit cards, consumer loans, investments in mutual funds, stock market, corporate bonds, treasury bills, government bonds, foreign exchange trading, retirement plans, investments in social security, health insurance, life insurance, accident insurance, and even income tax management.
Why Is It Important
Financial Planning is a key component of Personal Finance. Financial Planning is a dynamic process that needs monitoring and periodic reevaluation as time goes, where much of the decision-making hinges on current and future issues that materially affects the planned financial route.
Personal Financial Planning generally involves the following steps:
1. PERSONAL ASSESSMENT
You need to assess your current financial situation to see where you now financially, and it can be done by listing down your personal ASSETS like cash on hand, cash in bank, jewelries, clothes, cars, house, investments, land, and other valuable items like paintings, antique collections, etc.
A wealthy boyfriend or filthy rich girlfriend too is an asset but they are not part of the kind of an asset that is being taken into consideration here. No offense meant.
You also need to list down all your personal LIABILITIES like credit card debts, bank loans, mortgage for the car or house, tuition, and the like.
Your Assets and your Liabilities compose the BALANCE SHEET. It is called a Balance Sheet because all the Assets should always be equal to your liabilities. It is like if you get a loan for your car, the loan amount or mortgage amount becomes part of your liabilities while the value of the car which is equivalent to your loan becomes part of your assets. These can get so complex at times but let us make it as simple as possible at this point.
And on another sheet of paper you also need to list all your INCOME either derived from your employment, professional practice, or from your business or dividends from investments. The same process should be done in listing all your EXPENSES - anything that you need to pay for - like rentals, power and water bills, telephone bills, food, etc.
The combined list of all your Income and all your Expenses now becomes your INCOME STATEMENT. Now that you are aware of how much money comes in (income) and how much money goes out (expenses), and how much you owe or are obliged to pay (liabilities) and how much ownership you have (assets) to cover and settle all your obligations, you can now in a better position to assess where you are now in terms of your personal standing.
To assess yourself in light of the lists that you have just made, after having summed them up, you need to ask yourself these questions: Questions like - "Is my income enough to cover my expenses?". If the answer is yes then you are in Deficit - meaning, you always tend to be short of funds to cover your current financial obligations or payables. So after assessing yourself, you need to decide if you choose to remain in your current situation or you need some change and move from where you are now to where you want to be, financially!
2. GOAL SETTING
Deciding to change your financial situation by moving from where you are to a better financial situation that you want to be in is what we call Goal Setting. For example, if you are now in deficit - meaning - your expenses is more than what you normally earn, then you need to set some goals to change your situation. You either find ways to increase your income or you need to cut on your expenses, or even do both!
Or if you plan to pay off your entire home mortgage in 18 months instead of paying for it for the next 5 years so you have to compute how much do you still need to raise to cover for that shortened period of payment because it will increase your monthly amortizations, things like that.
3. PLAN AHEAD
Now that you have seen your situation and now that you are decided that you want some change and it is now very clear to you where you want to be financially, then you now have to make a Financial Plan which details in concrete and doable steps how you accomplish the goals that you have set for yourself, like how you plan to increase your income, what steps are you willing to do to cut on your expenses, or what investment options you plan to pursue and how much you think you can earn from that investment, etc.
I need to remind you though that you only plan for things that you are willing to do yourself, otherwise this whole exercise can just be another waste of time. But I know you are seriously considering to do them all the way to progress, right?
4. EXECUTION
This is now I think is the harder part, because this time you don't just wish to become rich and get out of debt, because now you have to do it - implement and execute your plan. Yes it requires your personal commitment, discipline and perseverance to see the fruits of your labor and efforts. If you think it will help you to get the advice and assistance from those who have been successful in these areas or from professional practitioners like the financial planners, accountants, investment advisers, and lawyers then go ahead and get all the necessary help to bring you there.
5. MONITORING AND REASSESSING YOUR PROGRESS
Over time, the desired outcome of your financial plan may not be perfectly realized because of some other external factors that are beyond your control and influence like how the economy goes, the inflation, etc. so whenever necessary you should make some adjustments, then monitor the outcome, then reassess, then adjust your plan and implement them again until you finally reached your desired goal.Different folks also have different needs but most of the typical goals of adults are paying off their credit cards or student loan debts, go on a vacation, or move to a bigger house, fund the college education of your children or anticipate some medical expenses, plan for retirement, and even estate planning.
Professional financial planners can very well help you do that, go and find somebody that you can trust. Happy Financial Planning and may you reach your financial goals!
Somebody said: "Those who have no plan in life have no idea that they have already arrived."
Other Relevant Articles:
+ Learn To Take Charge of Your Money
+ Teach Your Kids To Save Money
+ Practical Ways To Save Money
+ Money-Saving Techniques With Your Credit Cards
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