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.
Personal finance is all about applying certain principles of economics to the monetary expenditures. It has several aspects like:
Checking and savings accounts Consumer loans and credit cards Investments in property and stocks Retirement plans Insurance policies Social Security benefits Income tax
When developing a financial plan, either individually or with the help of a planner, the items discussed above need to be addressed. Whether developing a complete budget, a long-term savings plan, or a debt-repayment schedule, these areas need to be taken into consideration.
The importance of personal finance lies in effective planning. Personal financial planning is a dynamic process that can be divided into five steps:
Assessment: Here, the financial status is captured by outlining one’s net worth and creating a budget. The net worth statement will list all assets and debt. By subtracting the debt from the assets, one captures his or her net worth (it may even be negative in some cases). The budget lists all income and subtracts all expenses, hopefully allow for a positive cash flow.
Set Goals: After completing the Assessment stage, it is time to establish financial goals for the short term and long term. For most, short-term goals involve debt repayment and long-term goals focus on savings.
Establish a Plan: With the goals in mind, creating plan aims to transform the current situation into the situation outlined. This often includes cutting unnecessary expenses and/or increasing disposable income so that funds can be deployed in the right area (e.g. debt repayment or investment savings).
Execution of the plan: The importance of personal finance concerns executing plans as well. In order to effectively execute a financial plan one would need to observe discipline and perseverance. Assistance from professionals like lawyers, financial planners, accountants and investment advisors can also be sought during different stages of plan execution.
Measure Progress and Adapt: No plan is ever complete after its first draft, and a financial plan is no exception. Here, the individual measures his or her progress and adapts to different circumstances.
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.
