What is personal finance? Personal finance is the activity or group of activities used by an individual to manage his or her finances. It includes an initial assessment of the current position, identification of goals, creating a strategic plan to achieve these goals, executing the plan to handle one’s personal financial affairs and monitoring the effectiveness of the plan.
Personal finance consists of a variety of tools, methods and principles to manage finances. It is a broad area that includes the day to day individual finances. For example, personal finance includes banking; saving; spending; retirement planning; money management; loans and mortgages; insurance; budgeting; debt management; and investing.
Good financial planning includes analysis of one’s financial position and taking steps to improve it. Some people can solve their personal financial problems on their own and do so effectively. Others prefer to free information from personal finance blogs or paid information from a personal finance advisor.
The initial assessment simply entails taking a look at your financial position. At a high level, it encompasses making a list of your income and expenses and seeing how they are generated. At a more detailed level, the assessment entails analysing related items such as savings; credit cards; spending habits; retirement plans; loans and payback periods; and expected short term and long term income and expenses.
Identification of Goals
The way that one manages money can have an impact on the quality of one’s life. Therefore, it is important to create sensible goals that will benefit you and your family in the short term as well as in the long term. Effective goal setting in terms of personal finance can be completed by having a clear understanding of what you want for your future and for your dependents’ future.
Creation of a Strategic Plan
Although strategic planning is often used as term to describe an organisation’s route to achieve its goals and objectives, it can be used by individuals in their personal lives. When planning for the future, one must consider all pertinent factors which may or may not have an impact on one’s life. So, a personal financial plan, which should also be SMART, must be devised to reach one’s personal goals. Additionally, this plan should consist of a list of well defined actions which must be enacted to reach one’s goals.
Execution of the Plan
Making a list of specific actions or creating a targeted action plan, will allow an individual to achieve the financial goals that have been set. As a result of creating a plan that is aimed at reaching a specific personal financial goal, you will be able to monitor the efficiency of that action. Some plans require time and patience and discipline. In many cases, steps in a strategic plan are very difficult to execute, but, the rewards are highly desirable.
Monitoring the Plan
All personal financial plans should be monitored to assess whether or not they are successful in meeting the desired goals. It should be noted that some plans will take longer to execute and results may take longer to manifest. If the plan is not working, change it. It should be adjusted so that it is aligned with your financial goals.
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