Personal finance defined
Our Personal finance a combination of many factors that involve how we spend and save money. It includes the various financial events that occur, planned or unplanned over a period of time. Personal finance includes our budgets and spending plans, our checking and savings accounts, credit cards, personal and consumer loans, investments and retirement plans, insurance and even our state, local and federal taxes and even charitable donations.
Why are personal finances important?
Personal finances make up a large portion of our lives. We start learning from a very early age the importance of money in our society, therefore it’s especially impotant to understand our own personal finances and how to control them. Planning our personal finances usually consist of five important components which include: know your finances, setting goals, creating a plan, following the plan, and giving yourself a checkup.
Knowing your own financial situation is a very important step in financial planning. You need to make an assessment of all the assets and liabilities of your household. Assets include car, house, nice furniture, stock, savings accounts, etc., anything that could be sold for money. Calculate an estimated value of all of these items. Next, list your liabilities, anything that you own money toward and yes this can include the items you just mentioned. Write down the balance of each of these items and again get the total liability amount. Subtract the liability total from the asset total to get your net worth, hopefully this number is positive, if not we’ll work on that later. This total will help you understand where you stand financially and where you need to go with your personal finances.
The next step is to create a detailed plan for your life, set some goals that you would like to accomplish over an extended period of time. For example, you may have $5,000 in credit card debt, 2 car payments and a house payment. I’m sure this is not too uncommon in today’s financial society. Your goal may be to pay off the credit card debt in 1 year and knock out both car payments in the next 3 years. You would like to retire at age 62 so you make a retirement plan and start depositing small amounts into your company 401k. You would also like to have the house paid off by age 55 freeing up more income in the years before retirement. This is a good start to a plan, you will have to come up with more details on how you would like to accomplish these goals and we can help you with that on this site.
Once you have put all this hard work into creating a plan you MUST stick to the plan. I realize there will be unexpected events and you should have an emergency plan in place so these unexpected events aren’t so unexpected, after all you can expect the unexpected to happen…. so is it really so unexpected?
Finally, and one of the most important steps is to keep a check on yourself. Sit down once a week, month, year and evaluate your plan. Make sure you are staying on course. If you start to get off course it’s very easy to give up completely and all your hard work will be lost. Reward yourself each period that you stay on course so it makes financial planning fun. With a little hard work and sacrifice you can have very healthy personal finances.
