Posted by Shivali Anand
February 8, 2022 | 3-minute read (461 words)
Personal finance planning entails using a budget to manage your income. But it’s not just about paying bills; it’s also about attaining your financial objectives. Your goals may be having enough liquidity to fulfill short-term financial demands, saving for a child's college education and budgeting for retirement. At its core, personal financial planning and management should help you lay the groundwork for a secure financial future.
Finance experts advise that individual finance planning should be guided by three principles: prioritizing, appraisal and restraint. Understanding these concepts is the key to putting your personal finances on track.
The prioritization principle refers to the fact that when examining your personal finances, you should recognize what keeps the money flowing in and stay focused on those activities.
The assessment principle refers the ability to not spread yourself too thin. People with ambition tends to have many ideas about making it big. But running your personal finances like a business requires stepping back and assessing the potential benefits and costs of a new venture.
The restraint principle refers to the ability to spend judiciously. Earning $500,000 a year will not help those much if they spend US$ 550,000 per year. Learning to wait until you have completed your debt reduction objectives and fulfilled your monthly savings goals before spending on items that do not produce wealth is vital to your personal finance plan.
What, exactly, is a personal finance plan?
Below are six phases in the financial planning and management process.
Step 1: Gather facts to clarify your current situation – To create an effective financial plan, the first step is to collect all necessary personal and financial data, such as tax returns, pension plans, insurance policies, asset and liability lists, securities transaction records, wills and trusts and so on.
Step 2: Plan your financial future – This phase necessitates the identification of both financial and personal goals and aspirations for oneself and family members. Supporting elderly parents, investing for a child's college education or minimizing current financial stresses are all examples of family financial planning.
Step 3: Identify financial obstacles – Before remedies can be implemented, the next step is to give potential pain points a name. Inadequate cash flow, a significant tax burden, too little or too much insurance, existing investments suffering from inflation and so on are examples of such obstacles.
Step 4: Document a financial plan – The length of your financial plan document is determined by the intricacy of a person's unique situation.
Step 5: Carry out the plan's steps – A personal financial plan will only be effective if the recommendations are followed.
Step 6: Review and adjust the financial strategy regularly – A financial plan must be reviewed and revised regularly to account for changes in personal and economic circumstances.