Understanding the importance of personal finance is very crucial for everyone, but normally does not become much of a priority until people experience financial hardships. In the following paragraphs you can learn more about what personal finance is and how one can effectively learn to manage personal funds.
As far as understanding the importance of personal finance, many people ignore just how crucial the subject is until they experience a devastating financial hardship. Of course, by now it is often too late. The upcoming paragraphs discuss the basics of personal finance and how people can properly manage their personal funds.
Day-to-day bank accounts (checking and savings) Credit and Borrowing products (credit cards, loans, lines of credit) Property and equity investments Retirement savings Insurance coverage Government-funded benefits (social security) Taxation
All the above aspects of personal finance are addressed in a manner to ultimately help an individual develop a budget, save, and spend keeping in mind all the financial risks that life holds ahead.
The importance of personal finance can be summarized in two simple words: effective planning. This, however, does not need to be a long, drawn out process. In fact, we can boil the process down to five basic steps:
Assessment: The financial situation is assessed by collecting the balance sheets and the income statements of the individual. The income statement would include the list of personal income and expenses. The balance sheet would include a summary of the entire wealth and assets owed by the individual. It would also list his various personal liabilities like credit card debt, mortgage and bank loans.
Setting goals: Once an accurate financial picture is created, it comes time to setting realistic short- and long-term goals. Ideally, short-term goals should focus on debt repayment while longer-term goals focus on savings, such as retirement savings.
Establish a Plan: Now that goals have been set, the plan needs to evolve the current financial situation so that the goals can be achieved. The planning process normally involves cutting expenses and/or increasing disposable income so that these funds can be deployed toward the goals.
Implementing the plan: The importance of personal finance becomes more visible at this stage as it requires taking action. Often, this stage requires the involvement of experts or paid professionals, such as lawyers for writing a will, accountants for taxation, and investment advisors in areas that the individual is not considered “proficient.”
Measuring Progress and Adapting: As far as the importance of personal finance is concerned, this final stage is often downplayed. However, regular monitoring and adjustments are necessary in order to be successful with one’s financial plan.
If managing debt is something of a struggle, the importance of personal finance is probably a lot more prevalent now than ever before. Since debts seem to accumulate and spiral out of control rather quickly, focusing on personal finance can certainly help change the course of one’s finances.
Given the heightened importance of personal finance in our current economic climate, focusing on debt repayment should take priority. This not only allows individuals to improve their cash dilution rate, but frees up cash for longer-term financial goals.
