Do you want to analyze the status of your personal finance? If yes, this page is absolutely useful for someone like you. What do you mean by personal finance? Well, in simple words, it is an art of and science of handling money intelligently. What does it include? Personal finance covers all types of financial activities and decisions related to an individual or household. The subject also covers the most important aspects such as spending, investing, earning and saving.
Personal finance is an integral element of each one of us. It broadly covers the purchasing of financial derivatives or products such as home loans, personal loans, vehicle insurance schemes, life insurance policies, credit card offers and other banking products. Moreover, the business of banking is covered under the scope of personal finance, which is gaining importance in today’s financial environment.
In other words, personal finance is the financial management that an individual or a family performs to save, spend monetary resources and budget over a period of time, considering various future life events and financial risks. One should consider the aptness to his or her requirements of an array of financial products, including equities, bonds, mutual funds, options, derivatives, currencies, commodities (gold and silver), etc.
Process of personal finance
The key element of personal finance is financial planning, which requires continuous monitoring and reassessment. It has five steps: 1) evaluation 2) goal setting 3) planning 4) implementation and 5) reassessment and monitoring.
Financial evaluation
The financial status of an individual is evaluated by consolidating streamlined versions of financial statements including profit and loss account and balance sheet. A balance sheet of an individual describes the value of assets and liabilities. Both assets and liabilities can be short-term and long-term.
The examples of short-term assets include stock, cash-in-hand, cash-at-bank, bank advances and other liquid assets whereas the examples of long-term assets include plant and machinery, land and buildings, furniture and fixtures. On the contrary, the examples of short-term liabilities include credit card payments, housing loan repayments and other mortgages. Long-term liabilities can be any type of loans, which are obtained for more than 5 years.
Defining financial goals
After assessing the assets and liabilities of an individual, you should define the financial goal. You can set multiple goals, including a combination of short-term and long-term objectives. An example of a long-term goal may be to retire with a net worth of $1 million while an example of a short-term goal may be to save some money. Defining financial goals-assists an individual to monitor financial planning.
Financial planning and implementation
Financial planning is very crucial not only for big companies but also for individuals to accomplish financial goals. It may include cutting down unnecessary overheads, investing in stock markets or enhancing the employment revenue. The implementation of a financial plan necessitates persistence and discipline. Most people seek assistance from financial professionals such as financial planners, accountants, lawyers and investment advisers. A financial plan is reassessed for adjustments.
Fundamental financial principles
- Pay your credit card bills in time to avoid extra charges.
- Make sure you save 20% of your monthly earnings.
- Maximise contributions to tax-beneficial funds.
- Do not trade individual securities.
- Avoid actively managed and high-fee funds.
- Consider investing in a highly diversified portfolio.
- Choose long-term financial products such as housing loans wisely.
- Key areas of personal finance
Financial status: Financial status is concerned with understanding the personal resources available by evaluating household cash flow and net worth. The difference between an individual’s assets and liabilities is called net worth. Cash flows are the differences between the anticipated income sources and expenses.
Tax planning: Tax planning is very important for everybody. Proper tax planning reduces the tax burden. For instance, buying a life insurance policy is free from the tax liability. Similarly, the agricultural income is not taxable. There are other means of investments to minimise the tax burden. The more you save, the more will be your investments.
Retirement planning: Retirement planning is the process of understanding how much it will cost to lead a post-retirement life. You should consider investing in retirement plans to save the adequate amount of money to lead a stress-free retirement life.
Cash management: An individual should adopt the best cash management techniques. For instance, working capital should be adequate. It means holding more cash than the actual requirement is a poor idea. In finance, working capital is the net difference between current assets and current liabilities of an individual or a business entity.
Run a SWOT analysis
One of the best ways to have a better idea of where you stand is to make a SWOT analysis. SWOT stands for strengths, weaknesses, opportunities and threats. Primarily, a SWOT analysis is a strategic management technique commonly used in business to analyse business competitiveness. The same technique can be used to analyse the financial position of a person or a family.
Know your financial strengths
Evaluate your present financial position based on your financial mission statement. A financial strength could be anything that positively strengthens your present financial position. It helps you to accomplish financial objectives. Ask yourself the following questions:
- What are the key areas of your finances?
- Do you maintain a positive monthly cash flow?
- Do you have short-term or long-term financial obligations?
Know your financial weaknesses
What is holding you back from accomplishing your financial objectives? It can be a loan or a lack of earning potential. Ask yourself the following questions:
Do you have debts? What are your income sources? How do you manage cash?
Know your financial opportunities
You should identify financial opportunities, which can stem from income opportunities, debt reduction, and investments.
Know your threats
You just need to address the issues that threaten your financial situation. Threats are always external forces that can sometimes be predicted. Ask yourself the following questions:
How stable is your job? Which are the present economic forces that may affect your income streams?
Why SWOT analysis?
SWOT analysis should be made to enhance your financial status and manage external and internal forces that can affect you. The key is scouting a way to leverage your opportunities and strengths and mitigate threats and opportunities to set your financial position.
Ratio analysis for personal finance
Ratio analysis is used to analyse the financial position of business entities. The same tool can be used for individuals as well. For instance, liquidity ratio, which measures the relationship between current assets and current liabilities, defines the liquidity of an individual. It is ideal to maintain the balance between current assets and current liabilities. If you think your current liabilities exceed current assets, try striking a balance between both of them. This way you can ensure short-term solvency.
Bottom line
Whether you are a high-net-worth individual or a commoner, be advised to use the aforementioned tips and tools to gauge your personal financial position.
