The Basics of Personal Finance

The Basics of Personal Finance
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Personal finance refers to major financial decisions an individual has to make with regard to allocating resources for the long term, taking into account life events in the future or potential risks. These decisions should involve banking options, planning for investments, and retirement plans and benefits. Basically, personal finance involves 5 steps, to wit: assessment, goal setting, planning, execution, and monitoring and reassessment.

1. Assessment. This first step involves the compilation of your assets and liabilities, together with your income and expenses into balance sheets and income statements.

2. Goal Setting. Goal setting requires identification of short-term and long-term goals, such as buying a camera and planning for retirement, respectively. These goals should be identified in order to determine financial requirements.

3. Planning. Planning, on the other hand, should include your financial strategies to meet your goals, such as budgeting, saving, and investing.

4. Execution. After planning comes execution. This is the actual phase in which the plans are implemented which may employ the services of financial experts such as financial advisers, lawyers, and accountants.

5. Monitoring and Reassessment. Finally, then all the first four steps are completed, monitoring and reassessment comes in wherein the results are reviewed in order to make adjustments if necessary.

 

Credit and Debts

Discussions on personal finance will never be complete without discussing debt-credit relationship. Analyzing your current debt situation is one of the critical areas of personal finance. It is important not only to determine your liabilities and net worth, but to work on reducing it. Being debt-free allows you to have more uses for that money instead, and improving your credit rating can increase your chances of getting a loan as well.

 

Emergency Funds

Financial experts have repeatedly stressed out the importance of a rainy day fund indicating at least three to six months of living expenses to be kept in a safe investment. Having a nice stash of back up money can protect you in the long run and gives you additional portal to tap into. These emergency funds provide a safety net for you should you meet unfortunate events.

 

Investments

Planning on where to invest can be one of your major and toughest decisions in life. In investing, you need to be able to diversify your portfolio wisely, getting the right mix of low risk and high risk investments. By playing your cards right, you will see yourself increasing your net worth with the profits that you are reaping from your investments.

 

Retirement Planning

Planning for retirement is one of the major life decisions that we should prepare for as early as now. During retirement planning, you need to identify and consider the following: how you picture your lifestyle if already retired, your sources of income, and whether or not it would be enough to meet those hopes. In addition, you need to plan where your assets will go if you die. You need to name your beneficiaries correctly and have the right insurances to protect your family. Proper allocation of financial resources, careful planning, and reassessment can help you meet your retirement goals.

Personal finance comprises of a lot of things and considerations in our financial life that are aimed to avoid mistakes when making big decisions. Having a financial plan as early as now can condition your mind and body to survive more difficult challenges later on in life.

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