PERSONAL FINANCE

Personal finance defines all financial decisions and activities of an individual or household, including
budgeting, insurance, mortgage planning, savings and retirement planning.

EXPLAINING 'Personal Finance'

All individual financial activities fall under the purview of personal finance; personal financial generally
involves analyzing your current financial position, predicting short-term and long-term needs and executing a plan to
fulfil this need within individual financial constraints.

Personal finance is a very individual activity that depends largely on one's earnings, living requirements and
individual goals and desires.

Among the most important aspects of personal finance are:

 Assessing your current financial position - looking at expected cash flow, current savings, etc.
 Buying insurance to protect yourself from risk and making sure your material standing is secure
 Calculating and filing taxes
 Savings and investment
 Retirement planning

As a specialized field, personal finance is a fairly recent development, though forms of personal finance have
been taught in universities and schools as "home economics" or "consumer economics".

Many consumers simply do not have the information to make the most rational financial decisions for
themselves, or they are manipulated by circumstance or misinformation to perceive a decision as being more
rational than it actually is. As such, many colleges and universities have begun to offer personal finance courses, and
almost all media publications regularly produce material doling out personal finance advice to consumers.

Matters of personal finance include, but are not limited to, the purchasing of financial products for personal
reasons, like credit cards, life and home insurance, mortgages and retirement products. Personal banking is also
considered a part of personal finance, including checking and savings accounts.

THE PHILOSOPHY AND PRACTICES IN PERSONAL FINANCE (the money management philosophy)

Money management is the process of budgeting, saving, investing, spending or otherwise in overseeing the cash
usage of an individual or group. The predominant use of the phrase in financial markets is that of an investment
professional making investment decisions for large pools of funds, such as mutual funds or pension plans.

EXPLAINING 'Money Management'

While the term is usually used in reference to professional money managers, everyone practices some form of
investment management with their personal finances. There are a wide range of money management services, from
the operation of passively managed mutual funds with low fees to in-depth estate planning and consulting.

Setting aside time to create a plan and then following through on it is the one thing all financially successful people
have in common. The success experienced by those who do this occurs regardless of their relative wealth. Likewise
the failure of those who do not follow a plan is unrelated to their wealth.

Planning Ahead

It is important to anyone who is stressed out about their finances to consider creating a plan using the following
basic philosophy.
1. Focus on What Matters

o When it comes to budgeting and financial problems many people spend too much time obsessing over
the past. Spouses who share finances will often times spend hours debating who spent what and why.
This can lead to division and hurt feelings that are counter-productive to formulating a healthy plan for
the future. The past only tells you where you have been and while that is of some use you shouldn’t put
too much time or emotional energy into it.

o Knowledge of the past is of some importance but it should not be the focus of your planning. When you
do spend time on reviewing your past finances do so only for information. Looking at your past can help
you spot problems to be corrected or changes that need to be made but the past should not be your
focus as you move forward. Use the past as information to build on and not a reality to be lamented or
debated.

2. Focus on What You Can Control

o Most everyone reading this article can control that second fundamental input mentioned above—how
much money they spend. Fewer people can immediately change how much money they have so as you
formulate your plan assume that most of the changes you need to make will be on spending side of the
equation.

o Most of life’s big expenses are more or less fixed obligations. Things like housing, food, childcare,
transportation, taxes and debt payments are known and usually cannot be manipulated. When
formulating your plan list those known expenses first and then with the income you have left over begin
to fill out the discretionary categories.

o When it comes to the discretionary planning keep your overall goal in mind. If your plan calls for P 1,000
or less of “meals out and entertainment” per month don’t see that as an end to itself. Remember that
you are cutting back and committing to a new plan to achieve a greater goal.

o Keep your goals in mind and focus on them regularly. If you want to change to achieve new goals make
them a part of reality by talking about them and then acting on them. Write out notes about them or
discuss them with those you share your finances with. If date night has to be fast food and a walk in the
park celebrate the fact that you had the discipline to go out on the cheap to work toward your bigger
goal.

o It is also important to keep the small items in mind. Never underestimate the value of skipping a store
bought latte for the office coffee. If you like to give gifts consider giving smaller more meaningful gifts
and spend more time writing out a thoughtful note rather than opting for a flashy gift. As you get older
the chances are many of the people you are buying gifts for already have more than they need and
would appreciate a personalized gift more than an expensive one.

3. Focus on Your Future

o Your current financial state is largely determined by past decisions your past self-made. While you
cannot change what you did in the past you can determine what your future self will experience.
 o Be kind to your future self and pay yourself first. No matter what your budget looks like put some
money away out of each paycheck towards savings. All banks have auto transfer abilities so
schedule it ahead of time and then let it run.

o Most financial planners will tell you that you should get to a savings rate of 20%. However, if that is
too much do what you can. Those who can participate in an employer sponsored retirement plan
should at the very least save whatever their employer will match. For most companies this is 3% to
6% of your salary. By getting the match that savings rate is automatically beefed up and it cost you
nothing to do so.

Finally, the key to any successful change in your financial life is the belief that you can control your finances
and that you can change. Mere belief won’t change anything, but apart from this belief no lasting change will
take hold. Once you have a plan schedule time to review and track your progress. If you manage your finances
with someone else make sure to include them in the discussion. Managing your finances is a little like farming
or raising kids—it isn’t glamorous and rarely do you see monumental changes but a consistent and disciplined
approach followed over years will yield great rewards.

Personal financial process include the following:

a. Objective setting
b. Data Gathering
c. Data Analysis
d. Financial Plan Recommendation
e. Plan Implementation
f. Plan Monitoring

A. Objective Setting
• Quantify monetary objectives with definite time frames.
• Prioritize objectives.
• Examine these objectives with an individual’s resources and limitations.

B. Data gathering
• Use surveys, questionnaires, and interviews to gather quantitative and qualitative information from the
individual.
• Quantitative – for assessing financial status (i.e. investments, cash flow, liabilities, etc.)
• Qualitative – to identify individual’s goals and objectives, lifestyle, risk-tolerance, etc.

C. Data Analysis
• Analyze the individual’s financial position and cash flows.
• Review legal papers (i.e. insurance policies, trust agreements, wills, etc.).
• Evaluate objectives vis-à-vis the individual’s resources and economic conditions.

D. Financial Plan Recommendation

• Propose financial products.
• At this point, the individual can comment on the proposed solutions.

E. Plan Implementation
• Assist the individual in the execution of the recommended financial plan.
• Implementation may involve other entities so assist the individual in dealing with the parties involved in
the execution of the financial plan.

F. Plan Monitoring
 • Review the financial plan periodically to evaluate changing market conditions (i.e. economic conditions,
taxes, interest rates, etc.).
• Evaluate the financial plan regularly to see if it effectively meets the individual’s goals and objectives.

BASIC PERSONAL FINANCE PRINCIPLES AND PRACTICES (in earning, spending, saving, and investing
money)

Essentials of personal finance

The scope of personal financial planning covers these aspects of our life.

 Earnings
 Saving
 Expenses
 Budgeting
 Taxes
 Insurance
 Loans
 Investment
 Debt Management
 Estate planning

Your income determines your financial muscle power. The more income you have the better life you can lead. In
order to grow your income/assets, you need to work towards salary increase and find passive income sources to
diversify income.

Your savings secure your future life from monetary trouble when you no longer be working for income. You should
always save some part of your salary so that you can have enough money to manage your own expenses when you
retire. Personal finance is also about controlling shopping addiction and controlling impulse buy.

While saving is important, personal finance is also about spending Money on self-improvement and about finding a
balance between earning and spending and not missing good opportunities to spend.

A budget would take you to the path of the most basic personal finance fundamentals, earning more and spending
less. With a budget,

 You can prioritize expenses; determine which expense is required, which can be deferred.
 You can control your day-to-day finances.
 You can take into account the unexpected need for funds.
 It checks you from overspending.
 You can start researching on alternative investments if you see surplus cash in future months.

Another fundamental aspect of personal finance is keeping records of financial transactions. It provides the
foundation for everything else to build on. Keeping records means keeping track of all of your financial transactions.
This includes what you earn, what you spend, what and where your savings are. Record keeping enables us to
understand what’s our financial position is now and how you’ve progressed over time. It will also provide valuable
input into the future financial planning process.

These are the crux of personal finance and we should always plan and provide for. We should always spend the
money carefully and should save it for future use. You should try to cut back your expenses without sacrificing fun,
look for fun which is available for free and feel richer in life. We should care for our money should remain debt free.
Having necessary and sufficient insurance coverage is one important aspect of managing personal finance. We don’t
want to see our hard earned money to be wiped out by an act of nature and negligence. Whether its house, car,
health or even life, we need to make sure we have enough insurance for anything worse happen to us.

Tax and risks are two very important but often ignored aspects of personal finance. File your income tax returns on
time every time and safeguard wealth from natural disasters. When we start our career we should put our best and
should become one of the most valuable employees. We should also try to get self-employed, being a salaried
employee we probably won’t ever work to our full potential. We should be on a lookout for opportunities and take
risks to become richer in life.

Loans are as essential as anything else in the list. Although loans on credit cards are bad, loans towards your
mortgage are perhaps unavoidable. A person should manage a good credit to secure a loan at a cheaper cost.

If your credit is not good you may need to pay higher interest on your loans. Managing personal finance thus
requires you to manage good credit score. Fix your bad credit and get your score higher before you apply for a big
loan.

You should always make saving a fun and be a motivated saver and save regularly and should invest in such a place
where to earn interest/dividend. We should prioritize savings goals and save for retirement. We should consider
various investment options and diversify our investment as much as possible.

One day you will no longer work, your money should be prepared to work on your behalf. You would be able to have
enough money when you retire and don’t become a burden on your children. This is financial independence.

Death and taxes are the two certainties of life. While nobody likes to talk about their death, it’s important to
consider your estate. How should it be distributed once you’re gone? Make your will now provision for your death-
related costs. You should plan about your estate when you can.

Earnings

Working for yourself may not be easy; people may also second guess you. Why do you need to have a second job?
Are you still employed? Are you hungry for more money? You may be discouraged by your own circle of friends and
family. But, do not let the naysayer damper your spirit.

Working in a second job is for your better future. You can retire early to enjoy all that life has to offer if you earn
extra money with your side hustle. In the era of recession and outsourcing, your job is no more secure. Some of you
may have seen unemployment or salary cut. Your income is shrinking — but your bills aren’t. This side gigs can help
you gain some padding to your diminishing income.

Savings

These are some coolest and easy to implement ideas that anyone can carry out. Saving money is one of the essential
steps of managing personal finance. You gradually go from bad financial stage to a neutral stage by adopting various
money-saving ways. Then start earning more money, getting a raise, having a side hustle, etc.

A healthy approach to money management should be done focusing on the basics.

 Take the long-term approach: Money and managing it is a fundamental part of life and is as basic as any
other necessary, daily life skill. It’s not like breathing or eating, but it is one of those fundamental tasks the
mastering of which makes life a whole lot easier.
 Living frugally isn’t a punishment: Everyone should live inexpensively and using luxuries as treats. Of course,
as your income flow and money management improved, the definitions of ‘inexpensive’ and ‘treat’ change, but not
out of proportion to your ability to afford them.
 Live below your income level: This is entirely possible and gives you freedom and wealth. If certain aspects
of your lifestyle are forcing your expenses above your income, then question those assumptions.
 Your income level has a role to play in saving: While the cardinal rule is to live below your income, the hard
truth is that people with more income coming in have more money to save. This does NOT mean they are better at
managing money, or will have a more comfortable retirement or be able to give more than someone earning less. It
just means that the potential is there. If you have a good financial philosophy and solid habits, it would be of huge
benefit to you to earn a higher income or avoid any loss of income. Maximize the income flow as any business
would, while of course knowing your limits and what is good for you and your family emotionally or time-wise.
 However, whatever your income level, saving is possible and necessary
 By not managing your money well, you are providing great benefit to those businesses on which you spend
your money. The salesperson who sold you the car, your wireless provider, your landlord or mortgages company,
the clothing stores where your wardrobe came from, are all deriving the benefits of your money. It is just you and
your family who are not. Ultimately, this is about choice…the potential is huge to fully enjoy your income now and in
the
future.

SIX KEY AREAS OF PERSONAL FINANCIAL PLANNING

A. Financial Position
B. Adequate Protection
C. Tax Planning
D. Investment and Accumulation Goals
E. Retirement Planning
F. Estate Planning

A. Financial Position
• Understanding of personal resources by checking an individual’s net worth and cash flow.
• Net worth = assets less liabilities at a point in time • Cash flow = expected sources of income less expected
expenses within a period (i.e. year)
• Helps in determining the time frame to which personal goals can realistically be met.
• May need to answer the following questions:
• Do they have a clear understanding of their goals?
• How do they track their income, expenses, and net worth?
• What financial benefits do they get from their employer?

B. Adequate Protection
• Analysis of protection needed for unforeseen risks.
• Includes risks of liability, property, death, disability, health, and long-term care.
• Some insurance plans enjoy some tax benefits.
• May need to answer the following questions:
• What things can they not afford to lose?
• How will they take care of their dependents?
• How have they planned for financial risks such as disability, illness, long-term care, and death?

C. Tax planning
• Management of when and how much taxes will be paid.
• Understanding possible tax incentives, deductions, rebates, etc. can have a significant impact on managing
personal finances given the magnitude of taxes paid by an individual.
• May need to answer the following questions:
• How do they manage their taxes?
• How do they plan the timing of income and deductions for tax purposes?
• Are they comfortable with the tax environment applicable to them?
D. Investment and Accumulation Goals
• Planning on wealth accumulation for large purchases such as house, educational expenses, investments
for retirement, etc.
• May need to answer the following questions:
• What are their goals for wealth accumulation? (i.e. education, home, business, retirement
comfort, etc.)
• How are their current investments performing to meet their goals?
• How much will they need? When will they need it?

E. Retirement Planning
• Understanding the cost of retirement.
• Analysis of cash flows to come up with investment plans that will meet the costs of retirement in the
future. • May need to answer the following questions:
• How are they preparing for their retirement?
• How are their liabilities affecting their retirement objectives?
• Do they think they can maintain their standard of living during their retirement?

F. Estate Planning
• Planning for disposition of one’s assets after death.
• Estate taxes paid to the government are huge, so avoiding these taxes can significantly impact one’s
personal finances.
• May need to answer the following questions:
• How should their assets be distributed upon death?
• How will their intentions be carried out? (i.e. will, trust, power of attorney, etc.)