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.
What are 3 factors to consider when planning and implementing your financial goals? ›
Income, expenses, and financial goals impact financial planning. If you look at these three areas, you can determine how you should allocate your resources, build up your savings, and meet your long-term goals. Your income sets the foundation for budgeting.
What are the 3 steps in creating financial plan? ›
From beginning to end, a certified financial planner professional guides you through the financial planning process - keeping in view your current financial situation and economic background.
- 1) Identify your Financial Situation. ...
- 2) Determine Financial Goals. ...
- 3) Identify Alternatives for Investment.
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 are 3 factors that may influence your ability to make financial decisions? ›
Personal circ*mstances that influence financial thinking include family structure, health, career choice, and age. Family structure and health affect income needs and risk tolerance. Career choice affects income and wealth or asset accumulation.
What are the three key components of financial planning quizlet? ›
budgeting, strategy creation, and implementation.
What is the 3 way financial model? ›
A three-way forecast, also known as the 3 financial statements is a financial model combining three key reports into one consolidated forecast. It links your Profit & Loss (income statement), balance sheet and cashflow projections together so you can forecast your future cash position and financial health.
Which of 3 main financial statements needs to be prepared first? ›
Statement #1: The income statement
The income statement makes public the results of a company's business operations for a particular quarter or year. Through the income statement, you can witness the inflow of new assets into a business and measure the outflows incurred to produce revenue.
What are 4 steps to personal finance planning? ›
Use this step-by-step financial planning guide to become more engaged with your finances now and into the future.
- Assess your financial situation and typical expenses. ...
- Set your financial goals. ...
- Create a plan that reflects the present and future. ...
- Fund your goals through saving and investing.
Financial Security
When people are earning and saving significant funds, creating a financial plan may not be high on their priority list. But creating a financial plan in the good times can help you through uncertain times in the future, such as the loss of a job, a bear market, high inflation, and more.
What are the 5 main areas of personal finance? ›
Five Areas of Personal Finance To Pay Attention To
- The five main areas of personal finance are income, spending, saving, investing, and protection. ...
- Every financial plan starts with income, which comes from a salary, bonuses, hourly wage, dividends, pensions, or a combination of all.
The finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance.
What are the three financial decisions? ›
There are three primary types of financial decisions that financial managers must make: investment decisions, financing decisions, and dividend decisions.
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:
A good financial plan contains seven key components:
- Budgeting and taxes.
- Managing liquidity, or ready access to cash.
- Financing large purchases.
- Managing your risk.
- Investing your money.
- Planning for retirement and the transfer of your wealth.
- Communication and record keeping.
Watch to learn about six personal finance topics that can have a big impact on your life: budgeting, saving, debt, taxes, insurance, and retirement.
