Personal finance can be described as a procedure of managing personal finances by planning everything related to earning and investment. It helps in planning the ways to generate income, expenses, saving, protection and investing. One can say the way one manages personal finance can be tagged as a financial planning or the most common word, budget. It is important to know the important things behind the financial management of an individual.
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Every Aspect of Personal Finance
Before saying anything else about personal finance planning it is important to know all the areas involved in it. As already said, the major part of personal finance can be divided into several part such as:
- Income
- Saving
- Investment
- Safety
- Expenses
Let us explore each of them in detail:
Income
Income is a common term used by the masses for the fund inflow earned by an individual and spent on themselves and their own family. Financial planning starts from here. There are many ways by which one can earn this income, like:
- Bonus
- Salary
- Dividend
- Wages
- Pension
Whatever a person earns through one source or the other is put towards saving, investment or expenses. One can say constructing the road map of financial planning without income is almost impossible.
Expenses
Here expenses start for the economical term, “Spending.” To meet daily life requirements, one has to pay for several goods and services. These can be of two types-cash and credit. Cash expenditure is done through real cash whereas as the name suggests credit word indicated when expenses are done by borrowing. Though in every life expenses are endless but still they can be categorised under these:
- Food
- Travel
- Medicine
- Rent
- EMI
- Credit Card payments
- Entertainment
These expenses are compulsory and definitely affect funds in a diminished way. The amount which one could have saved or invested reduces through it. As per the theory if income exceeds expenses, you are in a better position but still increasing your income will always help more. On the other side, if the income is lesser than expenditure this is a deficit situation. This often happens when some unplanned expenses arise or when you are not planned. One can actually realise through this, it is impossible to sustain for a longer duration without controlling expenses or increasing income. One should always be in a practice of healthy expenditure. This practice works in favour of personal finance management.
Savings
We all have learnt the value of savings since our childhood from our parents, grandparents or someone else. The question is, why should we save? We all need additional amounts to invest or to meet day-to-day expenses. Whenever there is any amount left after spending and investing, it comes under the subhead of savings. Saving management is a challenging thing to manage. This savings can be in the form of:
- Bank account balance
- Cash in hand
- Money market securities
- Saving account
People mostly have some savings and no savings is always considered as a bad practice. However, people with too much savings is also considered as a wrong practice as the money with them lies like that without actually offering any return which one could have easily gained through investments.
Investment
Everyone invests with the intention of having some additional profits. People have hope that they will take more money home then what they have invested. Definitely, no investment can go without risk and as the economics research indicates more more risk, more profit, people end up spending more than what they can afford. Every investment cannot fetch profit always and hence the direct relationship between return and risk can be explained.
Certain terms that you can always relate while investing are as follows:
- Equity
- Bonds
- Real Estate
- Commodities
- Mutual fund
- Fixed investment
- Antiques or Art
One can say this is the most challenging part to assess when it comes to personal finance. You definitely need professional assistance here. The risk involved and expected returns can never be the same and it is always advisable to take assistance from professionals here.
Safety
Many people plan to cover the unexpected expenses or situation and there are multiple ways to do that.
Some of them are as follows:
- Medicare or Health Insurance
- Life Insurance
- Fixed Deposits
- Estate Planning
One can say that this is the second area that demands personal assistance. It is not easy to reach a particular plan here. Only after assessing the present condition one can choose the right plan. Various analysis are required here to do such planning, especially, insurance.
Simplest way to process Personal Financial Planning
If you really want to start your life plan with a strong financial planning, you should plan your entire budget and stick to it. Remember expenses, savings and investment done within a budget is always what you should rely upon.
The Bottom Line
Generally an experienced bankers or the reliable investment advisors will be the right person to work on your right goal and to suggest the right remedy.
The main steps of personal financial planning starts with the following:
- Setting a goal
- Assessment
- Planning Development
- Executing the set plan
- Monitoring
- Comparing the present situation with the planned one
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