Personal Finance
Personal Finance
Personal finance is “financial planning for individuals. Generally, it involves analyzing their current financial position, predicting short-term and long-term needs, and recommending a financial strategy. This may involve advice on pensions, school fees, mortgages, life insurance, and investments.” This definition truly touches on the key elements of personal finance. It is important to develop a strong in the personal financial planning process, because ultimately it can lead to achieving life goals. By analyzing your current situation and setting a plan with goals you are on your way to a good start.
Personal financial planning is the process of managing your money to achieve personal economic satisfaction (Kapoor, pg. 3). By creating a personal plan as your first step, you may benefit in many ways. A financial plan allows you to understand and protect your finances in each step of your life. You are able to be more organized, helping decrease the risk of excessive debt, foreclosure etc. You will also feel more at ease knowing where you are and where you are headed. In order to determine where you are headed in the future you need to begin by setting personal financial goals. There are different types of goals. Goals may be short term, achieved in the next year; intermediate, achieved in two to five years; or long term, achieved in more than five years. These goals should be integrated with each other. Short term goals should help lead you to your long term goals. Goal setting helps you be successful in financial planning, helps you take action, and allows you to evaluate your progress. Guide lines must be followed in order to set effective goals. First you must make sure your goals are realistic. Ask yourself if your life situation, including your income allow for such goals? Next your goals should be very specific including a time frame where your goals may be measured for success. Saying, “I’m going to save money this year” is not measurable nor is it specific. Stating, “I am going to save $100 a week for the next year” is a specific, measurable short term goal. Finally, determine the action steps you must take in order to implement the goal. With this you will have strong goals that will aim you in the right financial direction.
Another important step in personal financial planning is evaluating and understanding the time value of money. Time value of money is an increase in an amount of money as a result of interest earned (Kapoor, pg. 12). Every time you shift money, whether for purposes of, saving, buying, investing etc. you should consider what you may be giving up or losing out on, also called the opportunity cost, in terms of money. If you are deciding to put money into your checking account opposed to your savings account you may be losing out on possible interest earned. Interest can lead to many gains and or losses in your