Personal Finance

Personal finance is the application of the principles of finance to plan the budget required by an individual or a family. Components of personal finance include checking and savings accounts, credit cards, and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management. This article gives information about your personal financial planning.

Personal financial planning

The following are the five steps to personal financial planning

Assess your finance: We can assess our personal finance by compiling financial balance sheets and income statement. A personal balance sheet lists the values of assets like car, house, clothes etc. along with liabilities like credit card debt, bank loan etc. A personal income statement lists personal income and expenses.

Set financial goals: Setting financial goals helps to direct financial planning. For example, you can plan to buy a house within five years and have a monthly loan not more than 25% of salary.

Plan your finances: You can plan your finances by reducing unnecessary expenses, increasing your monthly income etc.

Execute your financial plan: You can execute your financial plan through steady pursue. You can take the assistance of financial planners, accountants, advisors and lawyers.

Monitor your finances: You must monitor your finances regularly in order to make adjustments.

Areas of financial planning

The following are the six areas of financial planning

Financial Position: You must know the personal resources available. Calculate the sum of all the expected sources of income within a year and minus all expected expenses within the same year. From this analysis, you can determine to what extent and time your personal goals can be accomplished.

Adequate Protection: You have to analyse how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long-term care. You have to determine how much insurance to get, at the most cost effective terms.

Tax Planning: Income tax is the largest expense in a household. You have to understand when and how much to pay. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden.

Investment goals: You must plan how to accumulate enough money. The major reasons are, to purchase a house, starting a business, paying for education expenses, saving for retirement or to cover lifestyle expenses.

Retirement Planning: You must plan how much it costs to live at retirement and come up with a plan to distribute assets to meet any income shortfall.

Estate Planning: You must also plan for the disposition of your asset when you die. There is a tax due to the state at your death. To avoid these taxes, you can distribute your assets before your death to your heirs.

Conclusion: If planned properly, you can have a secure financial future even in an environment of economic instability.