Personal finance

This article has multiple issues. Please help improve it or discuss these issues on the talk page. It needs additional citations for verification. Tagged since July 2008. It may not represent a worldwide view of the subject. Tagged since October 2010. It contains instructions, advice, or how-to content. Tagged since October 2010.

Personal finance
Credit and debit Pawnbroker Student loan
Employment contract
Salary Wage Employee stock option Employee benefit Deferred compensation Direct deposit
Retirement
Pension Defined benefit Defined contribution Social security Business plan Corporate action
Personal budget
Financial planner Financial adviser Financial independence Financial renovator Estate planning
See also
Banks and credit unions Cooperatives
edit this box

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, which is a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:

1. 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 income statement lists personal income and expenses.
2. Setting goals: Two examples are "1. Retire at age 65 with a personal net worth of $1,000,000," and, "2. Buy a house in 3 years while paying a monthly mortgage servicing cost that is no more than 25% of my gross income." Having multiple goals is common, including a mix of short term and long term goals. Setting financial goals helps to direct financial planning. Goal setting is done with an objective to meet certain financial requirements.
3. 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.
4. 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.
5. Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.

Typical goals most adults and young adults have are paying off credit card and/or student loan debt, investing for retirement, investing for college costs for children, paying medical expenses, and planning for passing on their property to their heirs (which is known as estate planning).^{[citation needed]}

The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are ^[1]:

1. Financial position: this area is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person's balance sheet, calculated by adding up all assets under that person's control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished.
2. Adequate protection: the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.
3. Tax planning: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as your income grows, you pay a higher marginal rate of tax. Understanding how to take advantage of the myriad tax breaks when planning your personal finances can make a significant impact upon your success.
4. Investment and Accumulation Goals: planning how to accumulate enough money to acquire items with a high price is what most people consider to be financial planning. The major reasons to accumulate assets is for the following:
   1. purchasing a house
   2. purchasing a car
   3. starting a business
   4. paying for education expenses
   5. accumulating money for retirement, to generate a stream of income to cover lifestyle expenses.

   Achieving these goals requires projecting what they will cost, and when you need to withdraw funds. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savings to be invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. This asset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash and alternative investments. The allocation should also take into consideration the personal risk profile of every investor, since risk attitudes vary from person to person.

5. Retirement Planning: retirement planning is the process of understanding how much it costs to live at retirement, and coming up with a plan to distribute assets to meet any income shortfall.
6. Estate Planning: involves planning for the disposition of your asset when you die. Typically, there is a tax due to the state or federal government at your death. Avoiding these taxes means that more of your assets will be distributed to your heirs. You can leave your assets to family, friends or charitable groups.

See also

	Book: Finance
Wikipedia books are collections of articles that can be downloaded or ordered in print.

• Accounting software
• Asset Allocation
• Asset location
• Corporate finance
• Debt consolidation
• Equity investment
• Family planning
• Insurance
• Investment
• List of personal finance related articles
• Pension
• Personal budget
• Personal finances of professional American athletes
• Separately managed account
• Settlement (finance)
• Wealth
• Wealth management

v d e Consumer debt Alternative financial services  · Financial literacy Unsecured debt Credit card debt (cash advance)  · Overdraft  · Payday loan  · Personal loan / Signature loan  · moneylender Secured debt Mortgage loan / Home equity loan / Home equity line of credit  · car title loan / logbook loan  · tax refund anticipation loan  · pawnbroker Debt management Debt consolidation  · Credit counseling / Debt management plan / Debt settlement  · Personal bankruptcy  · Foreclosure / Repossession  · Debt Support Trust Key concepts Annual Percentage Rate (APR)

References

1. ^ http://www.fpsb.org/component/docman/doc_download/1008-financial-planning-curriculum-framework.html

• Kwok, H., Milevsky, M., and Robinson, C. (1994) Asset Allocation, Life Expectancy, and Shortfall, Financial Services Review, 1994, vol 3(2), pg. 109-126.

External links

• Free Journal of Financial Counseling and Planning articles.
• Free Center for Financial Planning and Investment personal finance education resources for all ages .