Personal finance involves using the basic principles of finance to manage one’s money by keeping a record of income, budgeting, saving, investing and managing financial risks for example. After the 2008 financial crisis, there was a massive shift in focus from consumerism to saving and investing. According to government data from November and December 2008, consumer expenditure fell by 0.8 percent and 1.0 percent respectively - as personal income shrunk by 0.4 percent and 0.2 percent.
What is Personal Finance?
Personal finance covers:
- Budgeting: Determining the 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 coverage planning whether it be life insurance, health insurance, auto insurance, etc.
- Saving and investing in financial markets, including forex, stocks, bonds and commodities.
- Minimizing tax obligations and filing tax returns.
- Social security or government benefits and retirement goals.
- Loans such as consumer loans and credit card loans.
How to Calculate Your Net Worth
An individual’s net worth indicates his/her financial standing. It's calculated by adding all personal assets and subtracting all the liabilities from that.
Net Worth = (Sum of Assets) - (Total Liabilities)
Personal assets generally comprise of:
Financial liabilities may include:
- Car loan
- Education loan
- Personal loan
- Home loan
- Credit card loan
Managing Your Finances
Banks offer to make personal finance more convenient to manage:
- Banks are the easiest source of obtaining and maintaining cash. People can deposit their savings in banks and receive interest on the saved amount.
- 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.
- People can also obtain long-term loans from banks by pledging an asset as collateral. When interest rates come down, is a popular activity
- Home Loans: One can obtain loans to buy a home by keeping the property as collateral.
- 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.
Here are some simple steps to have greater control over your personal finance: