TOPIC ONE: INTRODUCTION

GENERAL OVERVIEW
This topic will provide an analytical foundation for understanding the personal finance process,
the need for personal financial planning, and the various ways personal decisions could impact
on achievement of personal financial goals

TOPIC OBJECTIVES
At the end of the topic, learners should:
• Understand the meaning of personal finance
• Know various sources of personal finance
• Identify components of sound personal financial decision
DEFINITIONS
• Finance is a field that deals with the study of investments. Finance can also be
defined as the science of money management. The discipline can be broken into
three different sub-categories: public finance, corporate finance and
personal finance.

• Personal finance –is the process of planning your finances and spending to
optimize your financial situation. This planning process allows you to control your
financial situation.

• Personal finance is the financial management which an individual or a family unit

performs to budget, save, and spend monetary resources over time, taking into
account various financial risks and future life events.
• Personal finance is defined as the management of money and financial decisions
for a person or family including budgeting, investments, retirement planning and
investments.

• Personal finance is an activity that involves all the individual financial decisions,
which includes budgeting, saving, insurance, mortgages. When a person plans
his personal finances, he needs to take a range of financial products and other
personal factors into consideration. Personal finance has a huge influence on
one’s life and future.
 
• Therefore, personal finance education is needed to help individual or family make
rational financial decisions throughout their life.
ESSENTIALS OF PERSONAL FINANCE

• Budgeting Basics
Budgeting is the foundation to your financial success. It teaches you how to control
spending and shows you how much it will cost to live the life of your dreams. Learn
how to make a realistic budget and stick to it every month.

• The Art of Saving

There’s a fine art to saving successfully. Find how to kick-start your savings plan and
the best places to save your money.

• Dealing with Debt

Debt is not your enemy—unless you allow it to get out of control. Find out the
differences between good debt and bad debt. Learn how to use good debt to your
advantage, and how to break free of bad debt forever.
• Achieving Financial Goals
Do you have a financial dream? Learn how to apply systems to buy your own
home, save for your children’s education, or to achieve any other financial goal.

• Creating Extra Income

Learn three simple steps to creating income—how to find needs and fill them, find
problems and solve them, and find your talents and market them.

• Investing
What exactly is investing, and how can it help you to achieve your financial goals?
Learn some of the major ways to invest your money, and discover how factors such
as taxes and inflation can affect your investments.
IMPORTANCE OF PERSONAL FINANCE
An understanding of personal finance enables you to:
• Make informed decisions about your financial decisions.

• Helps you to judge the guidance of financial advisers and know if the advice is in
your best interest or their best interest.

• It can also help you become a financial adviser.

N/B :A comprehensive financial plan can enhance the quality of your life and
increase your satisfaction by reducing uncertainty about your future needs and
resources
SOURCES OF PERSONAL FINANCE
• Individual savings
• Loans/borrowings
• Investments
• Sales of personal properties
• Inheritance
• Sponsors including;
• Donation from friends
• Business angles – this are wealthy individuals who invest in a company on condition that
they are appointed as company board members.
• Venture capitalists – invests on a new company that is less risky and with high chances of
success. They give capital in exchange for equity (ordinary share capital).
KEYS TO PERSONAL FINANCIAL SUCCESS
• 1. Take charge of your finances.
Procrastinating is detrimental to your long-term financial health. Don’t wait for a
crisis or major life event to get your act together.
• 2. Don’t buy consumer items (cars, clothing, vacations, and so on) that lose
value over time on credit.
Use debt only to make investments in things that gain value, such as real estate, a
business, or an education.
• 3. Use credit cards only for convenience, not for carrying debt.
If you have a tendency to run up credit card debt, then get rid of your cards and
use only cash, checks, and debit cards.
• 4. Live within your means and don’t try to keep up with your co-workers,
neighbors, and peers.
Many who engage in conspicuous consumption are borrowing against their future;
some end up bankrupt.
• 5. Save and invest at least 5 to 10 percent of your income.
Preferably, invest through a retirement savings account to reduce your taxes and
ensure your future financial independence.
• 6. Understand and use your employee benefits.
If you’re self employed, find the best investment and insurance options available to
you and use them.
• 7. Research before you buy.
Never purchase a financial product or service on the basis of an advertisement or
salesperson’s solicitation.
• 8. Avoid financial products that carry high commissions and expenses.
Companies that sell their products through aggressive sales techniques generally
have the worst financial products and the highest commissions.
• 9. Don’t purchase any financial product that you don’t understand.
Ask questions and compare what you’re being offered to the best sources
recommended in this book.
• 10. Invest the majority of your long-term money in ownership vehicles that have
appreciation potential, such as stocks, real estate, and your own business.
When you invest in bonds or bank accounts, you’re simply lending your money to
others, and the return you earn probably won’t keep you ahead of inflation and taxes.

• 11. Avoid making emotionally based financial decisions.

For example, investors who panic and sell their stock holdings after a major market
correction miss a buying opportunity. Be especially careful in making important
financial decisions after a major life change, such as a divorce, job loss, or death in
your family.

• 12. Make investing decisions based upon your needs and the long-term
fundamentals of what you’re buying.
Ignore the predictive advice offered by financial prognosticators — nobody has a
working crystal ball. Don’t make knee-jerk decisions based on news headlines
• 13. Own your home.
In the long run, owning is more cost-effective than renting, unless you have a
terrific rent-control deal. But don’t buy until you can stay put for a number of years.
• 14. Purchase broad insurance coverage to protect against financial
catastrophes.
Eliminate insurance for small potential losses.
• 15. If you’re married, make time to discuss joint goals, issues, and concerns.
Be accepting of your partner’s money personality; learn to compromise and
manage as a team.
• 16. Prepare for life changes.
The better you are at living within your means and anticipating life changes, the
better off you will be financially and emotionally.
• 17. Read publications that have high quality standards and that aren’t afraid to
take a stand and recommend what’s in your best interests.

• 18. Prioritize your financial goals and start working toward them.
Be patient. Focus on your accomplishments and learn from your past mistakes.
• 19. Hire yourself first.
You are the best financial person that you can hire. If you need help making a major
decision, hire conflict-free advisors who charge a fee for their time. Work in
partnership with advisors — don’t abdicate control.
• 20. Invest in yourself and others.
Invest in your education, your health, and your relationships with family and
friends. Having a lot of money isn’t worth much if you don’t have your health and
people with whom to share your life. Give your time and money to causes that
better our society and world.
PERSONAL FINANCIAL PLANNING
• First step in personal financial planning is preparing a personal cash-flow
statement which measure cash-inflows and cash out-flows.

• By comparing cash inflows and outflows, you can determine the amount available
to allocate to savings and other purposes
FACTORS THAT AFFECT CASH-INFLOWS
• 1. Stage in your career path. Cash-flows are relatively slow at start of career. They
tend to increase as you gain job experience and progress within your chosen
career.

• 2. Stage in life cycle. Younger people tend to be at the beginning of career while
older people tend to be more experienced and this advanced in career hence
more income.

• 3. Type of job. Jobs that require specialized skills tend to pay more than those
that require skills that can be acquired quickly and easily. Skills demand also
affect the level of pay for those jobs, e.g. nursing

• 4. Number of income earners in your household

FACTORS AFFECTING CASH OUT-FLOWS

• 1. Size of family/dependents

• 2. Age. As people grow older they tend to spend more on expensive houses, cars
vacations. This may be as a result to their increased income.

• 3. Personal consumption behavior

• CREATING A BUDGET
• A budget is a cash-flow statement that is based on forecasted cash-flows for a
future time period.
• A personal budget can help one to determine if the expected cash inflows will be
sufficient to cover cash outflows or the extra cash that is available for
investments.
• It also focuses with issues on how to deal with anticipated cash shortages.

• Having control over your money is important, both for your financial well-being
and for your peace of mind.

• Creating a budget can help you feel more in control of your finances and allow
you to save more money for your short- or long-term goals
• STRATEGIES CAN HELP IN BUILDING A PERSONAL BUDGET
1. Set your goals
• Make a list of all the financial goals you want to accomplish over the short and
long term.

• Ask yourself basic questions about why those goals are your priorities, how you
are planning to achieve them and how quickly you need to see the results.

• Short-term goals should take no longer than a year to achieve. For example, you
may want to save for holiday presents.

• Long-term goals may take years to reach. A typical example would be saving for
retirement or your child's education.
• 2. Know your net income
• In creating a budget, its wise is to identify the money you have coming in -
income.
• Keep in mind, however, that it's easy to over-estimate what you can afford if you
think of your total salary as what you have to spend.

• Remember to subtract your employer deductions and flexible spending account

allocations when creating a budget worksheet.

• Your final take-home pay is called net income and that is the number you should
use when creating a budget.
3. Make your plan
• Start by dividing your net income into 2 broad spending categories: fixed
expenses and variable expenses.

• Some of your expenses, such as your mortgage, are fixed because they stay the
same each month. Other expenses, such as entertainment or fuel for your car, are
variables that change from month to month.

• For both fixed and variable expenses, you'll want to record how much you spend
on each.

• You may also want to divide your spending into 3 basic categories: needs, savings
and wants.
• 4. Personalize your budget
• The great thing about creating a budget is that you can customize it to your own
needs. After you've determined what to set aside for your fixed expenses, you
can alter the amount earmarked for variable items.

• The variable category gives you more room in how much you decide to spend
where, allowing you to prioritize as you see fit.

• For example, you might decide you can spend less on clothes each month in
order to give yourself more money to save toward buying a new tv.
• Have a monthly check-in take a look at your spending every month and compare
it to your personal budget worksheet to see how things are going.
• If you find that you're often going overbudget in some areas out of necessity, you
should consider cutting elsewhere to keep things under control.
PERSONAL BALANCE SHEET

• A personal balance sheet is a worksheet for finding the difference between what
you owe and what you possess.

• It provides a clear picture of your financial situation at a specific moment.

• Businesses use a balance sheet to compute their net worth and track their
growth. Likewise, you can use a personal balance sheet as a tool for improving
your finance. Personal balance sheet comprises of personal assets and liabilities
• HOW TO CREATE A PERSONAL BALANCE SHEET
• Calculating your personal net worth is the best way to know exactly what your
starting point is, in any financial plan you develop.

• A balance sheet calculates your net worth by comparing your financial assets
(what you own) with your financial liabilities (what you owe others).

• The difference between the two is your personal net worth. Don’t be
discouraged if your net worth is negative—keep in mind that this should be an
accurate depiction of your financial situation.

• Setting goals is much easier once you know what your current net worth is.
• Before you get started, pull together all of the information that you have
available.

• You’ll need your latest bank statements, as well as the principal balance of any
loans you have.
• Once you have all of that information available, start developing your balance
sheet by listing all of your assets (financial and tangible assets) with the values
which may include  
 Cash (in the bank, money market accounts, or CDs)
 All investments (mutual funds, savings accounts, individual securities)
 Home value (the resale value of your home)
 Automobile value (the resale value of your car)
 Personal Property Value (resale value of jewelry, household items, etc)
 Other assets
The sum of all of those values is the total value of your assets. Your goal should be
to continually increase your assets.
Next, you can look at your liabilities, which should be everything you owe. Here are
some common liability categories:

 Remaining mortgage balance

 Car loans
 Student loans
 Any other personal loans
 Credit card balances

• The sum of all of the money you owe is your liabilities. As you start to pay down
your debt, your total liabilities will decrease.
SUMMARY
• Importance of personal finance
a) Make informed decisions about your financial decisions.
b) Helps you to judge the guidance of financial advisers and know if the advice is in
your best interest or their best interest.
c) It can also help you become a financial adviser.
• Sources of personal finance
Individual savings
Loans/borrowings
Investments
Sales of personal properties
Inheritance
Sponsors including Donation from friends
Strategies can help in building a personal budget
• 1. Set your goals
• 2. Know your net income
• 3. Make your plan
• 4. Personalize your budget