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 circ*mstances.
FAQs
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.
What are the three fundamentals of personal finance? ›
Personal finance means the course of planning and managing personal financial activities. This includes earning, spending, saving and investment. Some of the other aspects can include mortgages and risk allocation as per an individual's financial strategy. Q.
What are the principles of personal finance planning? ›
Before committing to significant expenditures, estimate how much income is likely to be available for you. 2. Pay yourself first. Before paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.
What are the three aspects of financial planning? ›
Three main types of financial plans are cash flow plan, investment plan and insurance plan.
What is step 3 in creating a financial plan? ›
Step 3. Analyzing Your Current Financial Situation. With your financial information meticulously gathered, it's time to delve into a comprehensive analysis of your current financial commitments. Scrutinize your income, expenses, assets, debts, investments, and other financial commitments.
What are the three principles of personal finance by the founder of Mint? ›
"There are three principles of personal finance: spending less than you earn, making money work for you, and protecting your downside.
What are the three 3 main components of the statement of financial position describe each component? ›
The three main components of the statement of financial position are assets, liabilities, and equity, which are broken down into various categories. However, the way in which the statement is presented varies from company to company, depending on the types of assets, liabilities, and equity they have.
What are the four principles of personal finance? ›
The four principles of finance are income, savings, spending, and investing. Following these core principles of personal finance can help you maintain your finances at a healthy level. In many cases, these principles can help people build wealth over time.
What is the first principle of personal finance? ›
1. Spend less than you earn. This first principle is by far the most important. The only way you can be successful is by having more income than expenses every month.
What are the five principles of personal finance? ›
Financial literacy refers to the knowledge and skills needed to make well-informed financial decisions. According to the U.S. Financial Literacy and Education Commission, everyone should know the five major financial literacy principles. These principles are: earn, save and invest, protect, spend, and borrow.
Get started on path to financial success with these three steps: determining budgets, tracking spending, and creating realistic savings goals.
What is the stage 3 in financial life cycle? ›
Generally, financial life stages fall into three categories: wealth accumulation, preservation, and distribution.
What are the 5 importance of personal financial planning? ›
Expenditure, income, savings, investments, and protection are the five areas that are critical to shaping your personal financial planning.
What are the 5 steps of the personal financial planning process? ›
With or without a financial planner, you can whip up your plan in five easy steps.
- Step 1: Assess your financial foothold. ...
- Step 2: Define your financial goals. ...
- Step 3: Research financial strategies. ...
- Step 4: Put your financial plan into action. ...
- Step 5: Monitor and evolve your financial plan.
Watch to learn about six personal finance topics that can have a big impact on your life: budgeting, saving, debt, taxes, insurance, and retirement.
What are the 7 personal financial planning areas? ›
The following are the seven important components of financial planning.
- Cash flow and debt management: ...
- Risk management and insurance planning: ...
- Tax planning: ...
- Investment planning: ...
- Retirement savings and income planning: ...
- Estate planning: ...
- Psychology of financial planning:
