Personal finance involves using the basic principles of finance to manage an individual’s money. It includes keeping a record of income, budgeting, saving, investing and managing financial risks. Against the backdrop of the global financial crisis of 2008, focus has shifted from consumption to saving and investing. According to government data for November and December 2008, consumption expenditures fell by 0.8% and 1.0%, respectively, while personal income contracted by 0.4% and 0.2%.
Personal Finance: Components
Personal finance covers the following:
Budgeting: Determining what percentage of personal income should be spent on purchasing and consumables and how much should be saved. This takes into account necessary expenses like children’s education.
Insurance: Planning the coverage (life insurance, medical insurance, auto insurance, property insurance, etc) one should seek.
Investment: Savings may be directed towards the financial markets, including forex, stocks, bonds and commodities.
Tax: Minimizing tax obligations and filing tax returns.
Retirement planning: This takes into account social security benefits and retirement goals.
Loans: This includes consumer loans and credit card loans.
Personal Finance: Calculating Your Net Worth
An individual’s net worth indicates his/her financial standing. It is calculated by adding all personal assets and subtracting all the liabilities from that.
Personal assets generally comprise of:
Cash
Savings account and other
Checking account
Any other bank account or money market accounts
Any assets or investments owned such as stocks and shares, bonds, mutual funds, ETFs, options, futures, currency, forex, commodities or alternative investments
Certificates of deposits (CDs)
Any property or real estate owned
Home inventory value, comprising of valuable home contents
Valuables like jewelry
Financial liabilities may include:
Mortgage
Car loan
Education loan
Personal loan
Home loan
Credit card loan
Personal Finance: Banks
Banks offer banking facilities to make personal finance more convenient to manage:
- Bank Accounts: Banks are the easiest source of obtaining and maintaining cash. People can deposit their savings in banks and receive interest on the saved amount.
- Credit Cards: People can obtain short-term loans on an ad-hoc basis through credit cards. However, the interest rate on credit cards is typically very high.
- Mortgages: People can also obtain long-term loans from banks by pledging an asset as collateral. When interest rates come down, mortgage refinancing is a popular activity
- Home Loans: One can obtain loans to buy a home by keeping the property as collateral.
- Insurance: Protect yourself and your loved ones by insuring against unforseen circumstances.
Investing is an important way of supplementing the regular income stream. Investment choices may range from safer options, like banks accounts and mutual funds, to more risky ones, like the stock, real estate and commodities markets. It is also important to contribute to the employer-sponsored retirement account.
Personal Finance: Guidelines for Managing Expenses
Here are some simple steps to have greater control over your personal finance:
- Start by preparing an annual budget.
- Calculate your approximate expenditure.
- Create a worksheet and divide the annual expenditure into months and days. Keep a track of all expenses.
- Focus on curbing expenditures that are going against the plan.
- Save for emergencies.
- Pay off credit card loans before other loans, since credit cards have the highest interest rates.
Setting financial goals and meeting them within a specified period underlines the role of personal finance.