Personal finance is the application of the principles of finance to the monetary
decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial risks and
future life events. Components of personal finance might 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.
Personal financial planning
A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and
reevaluation. In general, it has five steps:
- Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial
balance sheets and income statements. A personal
balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank
account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A
personal cash flow statement lists personal income
and expenses.
- Setting goals: Two examples are "retire at age 65 with a personal net worth of $200,000 American" and "buy a house in
3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several
goals, some short term and some long term. Setting financial goals helps direct financial planning.
- Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing
unnecessary expenses, increasing one's employment income, or investing in the stock market.
- Execution: Execution of one's personal financial plan often requires discipline and perseverance. Many people obtain
assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
- Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments
or reassessments.
Typical goals most adults have are paying off credit card and or student loan debt, retirement, college costs for children,
medical expenses, and estate planning.
See also
References
- Kwok, H., Milevsky, M., and Robinson, C. (1994) Asset Allocation, Life Expectancy, and Shortfall, Financial Services
Review, 1994, vol 3(2), pg. 109-126.
- The Ernst and Young Tax Guide 2007 by Ernst & Young LLP, Peter W. Bernstein - Paperback - ISBN 1-59315-434-8.
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