What is personal finance? It is everything in life that involves money.
Personal financial planning is the arrangement of spending, saving, and investing money to live comfortably, gain financial security, and achieve financial goals.
Everyone has different financial goals. Goals are things you want to accomplish, such as getting a college education, buying a car, and starting a business. Planning your personal finances is important because it helps you achieve your goals. Financial planning also requires you to make and execute it.
We make hundreds of decisions every day, most of which are simple and have few consequences. However, some of these decisions are complex and have long-term effects on our personal and financial situations. While everyone makes decisions, few people think about how to make better decisions.
- Determine your current financial situation
To determine your current financial situation, list the items related to your finances.
• Deposits.
• Monthly income (income from work, allowances, gifts, and interest on bank accounts).
• Monthly expenses (what you spend).
• Debts (money you owe to others).
A good way to estimate your expenses is to carefully record everything you buy in a month. Once you have determined your financial situation, you can start planning.
- Develop your financial goals
To develop clear financial goals, think about your attitude toward money and ask yourself a few questions: Is it more important to spend money now or to save for the future? Is it more important to find a job after graduation or to continue your education? Will the career you choose require additional training or education in the future? Do personal values influence financial decisions?
Values are beliefs or principles that you believe are important, right, and desirable. Different people have different values for different things.
You should analyze your financial values and goals regularly. The purpose of this analysis is to distinguish between what you need and what you want.
Remember, needs are things that are necessary for survival, such as food, shelter, and clothing. Wants are things that you desire to have or would like to do. For example, if you live in an area where the winters are cold, you need a coat, so you may want a leather jacket, but other less expensive coats will also meet the need for warmth.
Only you can decide the specific goal you are pursuing. For example, if you want to save money, you can save $50 a month or 15% of each paycheck.
- Identify alternative courses of action
Unless you know all the options, you cannot make the right decision. Usually you have several possible courses of action. Let's say you want to save $50 per month. You may have the following options:
• Continue with the same course of action. You can choose not to make any changes.
• Expand your status quo. You can decide to increase the amount you save to $60 per month.
• Change your status quo. You can invest in stocks instead of putting the money into a savings account.
• Take a new course of action. You can use $50 to pay down debt.
Not all of the above options are suitable for every decision. However, in every case, you need to be aware that the costs of a decision may outweigh the benefits.
- Evaluate your alternatives
In this step, as part of financial planning, you will evaluate your alternatives. You can use the multiple sources of financial information available to you to understand your life situation, your current financial situation, your personal values, and the current economic situation, and consider the consequences and risks of each decision.
All stages of the decision-making process require up-to-date and relevant information. Common sources of information to help you make financial decisions include the following:
• The Internet.
• Financial institutions such as banks and investment firms.
• Media sources such as newspapers, magazines, television, and radio.
• Financial professionals such as financial planners, lawyers, and tax agents.
When you choose an option, you forgo other options. You can’t choose all of them. Let’s say you want to be a full-time college student and earn the income of a full-time job. When you choose to get an education, at least at that moment, you give up the opportunity to get a full-time job.
Remember that opportunity cost is the price you pay for making a choice and giving up other options. The opportunity cost of going to college is the income of a full-time job.
However, it is important to understand not only what you may give up, but also what you will gain after making a choice. For example, by going to college, you can get a higher-paying job.
If you decide to ride your bike on a busy city street, you take on the risk of getting in an accident. Similarly, when you make financial decisions, you also need to accept certain financial risks. There are several types of financial risks:
• Inflation risk. If you wait until next year to buy a car, you accept the possibility that the price will increase. • Interest rate risk. Rising or falling interest rates can affect the cost of borrowing money or the profit you can earn from saving and investing.
• Income risk. You may lose your job due to unexpected health problems, family problems, accidents, or changes in your field of work.
• Personal risk. Driving for eight hours on an icy mountain road is dangerous, and it is not worth taking the risk to save money on a plane ticket.
• Liquidity risk. Liquidity refers to the ability to easily convert financial assets into cash without losing value. Some long-term investments, such as real estate investments, are difficult to generate cash quickly.
- Create and use your financial action plan
An action plan is a list of ways to achieve your financial goals.
If your goal is to increase savings, then the action plan may be to cut spending in specific areas of your budget, such as entertainment consumption. If you want to increase your income, you may find a part-time job, increase your hours at your current job, or invest part of your current income. You can use the extra money you earn to pay off debts, save money, buy stocks, or make other investments.
Summary
Financial planning should be an important step, or even the first step, to establish personal consumption, savings, and financial management concepts, and to abandon the important step of developing good consumption, reserve, and financial management behaviors. After all, a journey of a thousand miles begins with a single step. Whether you are the master of your own property or the "bearer" of your finances depends on how you plan your finances.
