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
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.
What are the 3 major components in the financial planning process? ›
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.
Get started on path to financial success with these three steps: determining budgets, tracking spending, and creating realistic savings goals.
What is Step 3 in creating a financial plan? ›
3. Have a savings strategy. Once you have set your financial goals and organized your, you need to make sure you are planning your savings. It helps to prioritise your savings according to needs. Depending on the amount you have to save, these can be done one at a time or all at once.
What are the principles of personal financial planning? ›
The key principles of financial planning include setting specific and measurable goals, creating a budget and sticking to it, investing wisely, managing debt, and regularly reviewing and adjusting your plan.
What are 3 of the four principles that modern finance is based on? ›
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.
What are the three 3 categories of financial management goals? ›
The objectives or goals of financial management are:
- Profit Maximization.
- Wealth Maximization.
- Return Maximization.
Step 3: Research financial strategies
First, get your high-interest debts out of the way quickly before you start to save and invest. You can do so by consolidating your debt or using the debt avalanche or snowball method. Second, consider opening a savings account if you haven't already.
What are the three key financial decision-making areas? ›
FINANCIAL DECISIONS IN A FIRM
There are three broad areas of financial decision making – capital budgeting, capital structure and working capital management.
What is the stage 3 in financial life cycle? ›
Stage Three: Nearing Retirement.
You may take this time to adjust your plan, considering any life changes that may affect the costs required for your retirements, such as health concerns or new ambitions for your retirement, such as travelling the world.
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What are the three stages of the financial planning life cycle? ›
Generally, financial life stages fall into three categories: wealth accumulation, preservation, and distribution.
What are the 3 fundamental decisions in financial management and why are they important? ›
When it comes to managing finances, there are three distinct aspects of decision-making or types of decisions that a company will take. These include an Investment Decision, Financing Decision, and Dividend Decision.
Which of the following are the three basic finance principles? ›
3 Financial Principles All Professionals Should Know
- Cash Flow. Cash flow—the broad term for the net balance of money moving into and out of a business at a specific point in time—is a key financial principle to understand. ...
- Time Value of Money. ...
- Risk and Return.
Budget Your Money - Create an annual budget to identify expected income and expenses. Including savings. This will serve as a guide to help you live within your income. Money Doubles By “The Rule of 72" - To determine how long it will take your money to double, divide the interest rate into 72.
