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'''Personal finance''' is the application of the principles of [[finance]] to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, [[personal budget|budget]], save and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include [[checking account|checking]] and [[savings account]]s, [[credit card]]s and consumer [[loan]]s, investments in the [[stock market]], [[retirement plan]]s, [[social security]] benefits, and [[income tax]] management. |
'''Personal finance''' is the application of the principles of [[finance]] to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, [[personal budget|budget]], save and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include [[checking account|checking]] and [[savings account]]s, [[credit card]]s and consumer [[loan]]s, investments in the [[stock market]], [[retirement plan]]s, [[social security]] benefits, and [[income tax]] management. |
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==Personal financial planning== |
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A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps: |
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# Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial [[balance sheet]]s and [[income statement]]s. A personal balance sheet lists the values of personal [[asset]]s (e.g., car, house, clothes, stocks, bank account), along with personal [[liability|liabilities]] (e.g., credit card debt, bank loan, mortgage). A personal [[cash flow statement]] lists personal [[income]] and [[expenses]]. |
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⚫ | # Setting goals: Setting financial goals helps direct financial planning. Examples of financial goals are: "To retire at age 50 with a personal net worth of £800,000", or "To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term, and some long term. |
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# Assessing your financial situation is usually done by compiling several lists. These lists are simplified versions of corporate [[balance sheet]]s and [[income statement]]s. On your personal balance sheet, you list all your [[asset]]s (e.g., car, house, clothes, stocks, bank account) and give their values. You also list all your [[liability|liabilities]] (e.g., credit card debt, bank loan, mortgage) and give their values. Subtracting your total liabilities from your total assets will indicate your personal net worth. To understand how your personal net worth will change in the future, you compile what is called a personal [[cash flow statement]]. This lists your [[income]], and your [[expenses]]. By subtracting your expenses from your income, you obtain your net cash flow for the period. If your net cash flow is positive, your personal net worth will increase. Most people grossly underestimate how much they spend each year. |
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⚫ | # Setting goals |
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⚫ | # The financial plan details how |
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# Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments. |
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# As time passes, it is important to monitor your progress. If it looks like you will not obtain your goal, you can either alter your plan or adjust your goal. |
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==See also== |
==See also== |
Revision as of 13:31, 6 August 2006
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Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, and income tax management.
Personal financial planning
A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:
- Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal cash flow statement lists personal income and expenses.
- Setting goals: Setting financial goals helps direct financial planning. Examples of financial goals are: "To retire at age 50 with a personal net worth of £800,000", or "To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term, and some long term.
- Creating a plan: The financial plan details how to accomplish your goals. It could include for example, reducing unnecessary expenses, increasing your employment income, or investing in the stock market.
- Execution: Execution of one's personal financial plan often requires discipline and perseverance, and many people obtain assistance from professionals such as accountants, financial planners, investment advisors, and lawyers.
- Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.
See also
- Accounting software
- Credit card debt
- Debt consolidation
- Equity investment
- Finance software
- Insurance
- Investment
- List of personal finance related articles
- Mortgage
- Wealth
References
- Kwok, H., Milevsky, M., and Robinson, C. (1994) Asset Allocation, Life Expectancy, and Shortfall, Financial Services Review, 1994, vol 3(2), pg. 109-126.