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Personal finance Language Download PDF Watch Edit Learn more This article has multiple issues. Please help improve it or discuss these issues on the talk page. Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.[1] When planning personal finances, the individual would consider the suitability to his or her needs of a range of banking products (checking, savings accounts, credit cards and consumer loans) or investment private equity, (stock market, bonds, mutual funds) and insurance (life insurance, health insurance, disability insurance) products or participation and monitoring of and- or employer-sponsored retirement plans, social security benefits, and income tax management. History Personal financial planning process Edit The key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and re-evaluation. In general, it involves five steps:[5][6] Assessment: A person's financial situation is assessed by compiling simplified versions of financial statements including balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses. Goal setting: Having multiple goals is common, including a mix of short- and long-term goals. For example, a long-term goal would be to "retire at age 65 with a personal net worth of $1,000,000," while a short-term goal would be to "save up for a new computer in the next month." Setting financial goals helps to direct financial planning. Goal setting is done with an objective to meet specific financial requirements. Plan creation: The financial plan details how to accomplish the goals. It could include, for example, reducing unnecessary expenses, increasing the employment income, or investing in the stock market. Execution: Execution of a financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers. Monitoring and reassessment: As time passes, the financial plan is monitored for possible adjustments or reassessments. Typical goals that most adults and young adults have are paying off credit card/student loan/housing/car loan debt, investing for retirement, investing for college costs for children, paying medical expenses.[7][8] Need for Personal Finance There is a great need for people to understand and take control of their personal finances. These are some of the overarching reasons for it; 1. No formal education for personal finance[9]: Most countries have a formal education across most disciplines or areas of study. Individuals pursue to learn in order to earn a livelihood. Their pursuit translates to earning tangible outcomes in the form of money. Even when we realize the above to be a primary objective, there is no formal education at an elementary level in schools or colleges to learn money management or personal finance. Hence, it is important to understand this gap or disconnect in the education system where there is no formal way of equipping an individual to manage his or her own money. This illustrates the need to learn personal finance from an early stage,[10] in order to differentiate between needs vs. wants[11] and plan accordingly. 2. Shortened employable age: Over the years, with the advent of automation [12] and changing needs; it has been witnessed across the globe that several jobs that require manual intervention, or that are mechanical in nature are increasingly becoming redundant. Several employment opportunities are shifting from countries with higher labor costs to countries with lower labor[13] costs keeping margins low for companies. In economies with a considerably large younger population entering the workforce who are more equipped with latest technologies, several employees in the middle management[14] who have not up-skilled are easily replaceable with new and fresh talent that are cheaper and more valuable to the organizations. Cyclical nature of several industries[15] like automobile, chemicals, construction; consumption and demand is driven by the health of the countries' economy. It has been observed that when economies stagnate, are in recession, in war - certain industries suffer more compared to others. This results in companies rationalizing their workforce. An individual can lose his/her job easily and remain unemployed for a considerable time. All these reasons bring to the realization that the legal employable age of 60 is slowly and gradually becoming shorter. These are some of the reasons why individuals should start planning for their retirement and systematically build on their retirement corpus,[16] hence the need for personal finance. 3. Increased life expectancy:[17] With the developments in healthcare, people today are living till a much older age than their forefathers. The average life expectancy have changed over the years and people even in developing economies are living much longer. The average life expectancy has gradually shifted from 60 to 81[17] and upwards. Increased life expectancy coupled with a shorter employable age reinforces the need of having a large enough retirement corpus and the importance of personal finance. 4. Rising medical expenses:[18] Medical expenses including cost of drugs, hospital admission care and charges, nursing care, specialized care, geriatric care have all seen an exponential rise over the years. Many of these medical expenses are not covered through the insurance policies that might either be private/individual insurance coverage or through federal or national insurance coverage. In developed markets like the US,[19] insurance coverage is provided by either the employers, private insurers or through federal government (Medicare, primarily for senior citizens or Medicaid, primarily for individuals of lower income levels). However, with the rising US fiscal deficit and large proportion of geriatric population it needs to be seen the extent of the Medicare program being sustainable in the long run, therapy exclusions in the coverage, co-pay, deductibles - there are several cost elements that are to be borne by individuals on a continual basis. In other developed markets like the EU, most the medical care is nationally reimbursed. This leads to the national healthcare budgets being very tightly controlled. Many newer therapies that are expensive, many a times are excluded from the national formularies. This means that patients may not have access through the government policy and would have to pay out of pocket to avail these medicines In developing countries like India, China, most of the expenses are out of pocket[20] as there is no overarching government social security system covering medical expenses. These reasons illustrate the need of having medical, accidental, critical illness, life coverage insurance for oneself and ones family as well as the need for emergency corpus;[21] translating the immense need for personal finance. Personal finance principles Edit Personal circumstances differ considerably, with respect to patterns of income, wealth, and consumption needs. Tax and finance laws also differ from country to country, and market conditions vary geographically and over time. This means that advice appropriate for one person might not be appropriate for another. A financial advisor can offer personalized advice in complicated situations and for high-wealth individuals, but University of Chicago professor Harold Pollack and personal finance writer Helaine Olen argue that in the United States good personal finance advice boils down to a few simple points:[22] Pay off your credit card balance every month, in full Save 20% of your incomeFinancial management may be defined as the area or function in an organization which is concerned with profitability, expenses, cash and credit, so that the "organization may have the means to carry out its objective as satisfactorily as possible;" [1] the latter often defined as maximizing the value of the firm for stockholders. Financial managers[2] (FM) are specialized professionals directly reporting to senior management, often the financial director (FD); the function is seen as 'Staff', and not 'Line'. Maximize contributions to tax-advantaged funds such as a 401(k) retirement funds, individual retirement accounts, and 529 education savings plans When investing savings: Don't attempt to trade individual securities Avoid high-fee and actively managed funds Look for low-cost, diversified mutual funds that balance risk vs. reward appropriately to your target retirement year If using a financial advisor, require them to commit to a fiduciary duty to act in your best interest The limits stated by laws may be different in each country; in any case personal finance should not disregard correct behavioral principles: people should not develop attachment to the idea of money, morally reprehensible, and, when investing, should maintain the medium-long term horizon avoiding hazards in the expected return of investment.[citation needed]