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My personal financial goals in life: financial freedom.

As I embark on the journey of life, I recognize the profound impact that my personal financial goals will have on shaping my future. In this essay, I delve into the aspirations and plans that define my financial path, highlighting the importance of setting clear...

• Personal Finance

The Importance of Saving Money for Students

For students, the concept of saving money might seem distant amidst the pressures of academic life and the allure of immediate gratification. However, cultivating the habit of saving has far-reaching benefits that extend beyond the classroom. Learning to manage finances early on not only prepares...

Being Smart With Your Money: the Importance of Financial Literacy

Many people have discussed personal finance. Articles 'Should Financial Literacy Be Taught in More Schools' by Ramsey and 'Why is Learning Personal Finance Important' by Ryan discuss the reason why personal finance is beneficial to the educational system. Benefits of adding Personal finance to our...

Unlocking Financial Literacy: Exploring the World of Finance and Money Management

Finance is a business term that is associated with banking, investments, capital, debt and credit. Managing money, such as balancing a checkbook, involves finance. At one point in every person's life, one must deal with finances. An important topic among finance is assets and liabilities....

The Value of Understanding Personal Finance Management for Students

As a student, learning this course about personal financial statement is important. It shows the individual's net worth 'their assets minus their liabilities' which reflects what that person has in cash if they sell all their assets and pay off all their debts. If their...

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Why Personal Finance Should Be Taught in Modern Schools

About 59% of Americans have less than 1,000 dollars in savings. I think that Financial Literacy should be a requirement in schools all around the country. Financial planning should be taught in schools because finances affect everything, a lack of financial knowledge has consequences eventually,...

General Purpose Financial Report

General Purpose Financial Report basically provides the information and analysis about the scarce resources of a public sector or a private sector company. It normally focuses the general and overall financial information and produces the result for shareholders and board of directors to analyze the...

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Best topics on Personal Finance

1. My Personal Financial Goals in Life: Financial Freedom

2. The Importance of Saving Money for Students

3. Being Smart With Your Money: the Importance of Financial Literacy

4. Unlocking Financial Literacy: Exploring the World of Finance and Money Management

5. The Value of Understanding Personal Finance Management for Students

6. Why Personal Finance Should Be Taught in Modern Schools

7. General Purpose Financial Report

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What Is Personal Finance?

The importance of personal finance, areas of personal finance, personal finance services, personal finance strategies, personal finance skills, personal finance education.

• What Classes Can't Teach

Breaking Personal Finance Rules

Frequently asked questions, the bottom line.

• Personal Finance

What Is Personal Finance, and Why Is It Important?

Investopedia / Sydney Saporito

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning. The term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.

Individual goals and desires—and a plan to fulfill those needs within your financial constraints—also impact how you approach the above items. To make the most of your income and savings, it’s essential to become financially savvy—it will help you distinguish between good and bad advice and make intelligent financial decisions.

Key Takeaways

• Few schools have courses on managing your money, so it is important to learn how through free online articles, courses, blogs, podcasts, or books.
• The core areas of managing personal finance include income, spending, savings, investments, and protection.
• Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and much more.
• Being disciplined is important, but it’s also good to know when you shouldn't adhere to the guidelines.

Personal finance is about meeting your personal financial goals. These goals could be anything—having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It depends on your income, spending, saving, investing, and personal protection (insurance and estate planning).

Not understanding how to manage finances or be financially disciplined has led Americans to accumulate enormous debt. In August 2024, the Federal Reserve Bank reported household debt had increased by $3.7 trillion since December 2019, prior to the recession. In addition, the following balances increased from the first quarter of 2024 to the second:

• Credit card balances : Up by $27 billion
• Auto loans : Up by $10 billion
• Consumer loans and store cards : Up by $1 billion
• Total non-housing : Up by $28 billion
• Mortgages : Up by $77 billion

Student loans remained unchanged, at about $1.6 trillion.

Americans are taking on an ever-increasing amount of debt to finance purchases, making managing personal finances more critical than ever, especially when inflation is eating away at purchasing power and prices are rising.

The five areas of personal finance are income, saving, spending, investing, and protection.

Income is the starting point of personal finance. It is the entire amount of cash inflow that you receive and can allocate to expenses, savings, investments, and protection. Income is all the money you bring in. This includes salaries, wages, dividends, and other sources of cash inflow.

Spending is an outflow of cash and typically where the bulk of income goes. Spending is whatever an individual uses their income to buy. This includes rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel, and entertainment.

Being able to manage spending is a critical aspect of personal finance. Individuals must ensure their spending is less than their income; otherwise, they won't have enough money to cover their expenses or will fall into debt. Debt can be devastating financially, particularly with the high-interest rates credit cards charge.

Savings is the income left over after spending. Everyone should aim to have savings to cover large expenses or emergencies. However, this means not using all your income, which can be difficult. Regardless of the difficulty, everyone should strive to have at least a portion of savings to meet any fluctuations in income and spending—somewhere between three and 12 months of expenses.

Beyond that, cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time. Instead, cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow, such as investments.

Investing involves purchasing assets, usually stocks and bonds, to earn a return on the money invested. Investing aims to increase an individual's wealth beyond the amount they invested. Investing does come with risks, as not all assets appreciate and can incur a loss.

Investing can be difficult for those unfamiliar with it—it helps to dedicate some time to gain an understanding through readings and studying. If you don't have time, you might benefit from hiring a professional to help you invest your money.

Protection refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health insurance and estate and retirement planning.

Several financial planning services fall under one or more of the five areas. You're likely to find many businesses that provide these services to clients to help them plan and manage their finances. These services include:

• Wealth Management
• Loans and Debt
• Risk Management
• Estate Planning
• Investments
• Credit Cards
• Home and Mortgage

The sooner you start financial planning , the better, but it’s never too late to create financial goals to give yourself and your family financial security and freedom. Here are the best practices and tips for personal finance.

The 2022 Investopedia Financial Literacy Survey surveyed 4,000 adults and found that most Americans are concerned about personal finance basics, retirement funding, and investing in crypto.

1. Know Your income

It's all for nothing if you don't know how much you bring home after taxes and withholding. So before deciding anything, ensure you know exactly how much take-home pay you receive.

2. Devise a Budget

A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:

• Fifty percent of your take-home pay or net income (after taxes) goes toward living essentials, such as rent, utilities , groceries, and transport.
• Thirty percent is allocated to discretionary expenses, such as dining out and shopping for clothes. Giving to charity can go here as well.
• Twenty percent goes toward the future—paying down debt and saving for retirement and emergencies.

It’s never been easier to manage money, thanks to a growing number of smartphone personal budgeting apps that put day-to-day finances in the palm of your hand. Here are just two examples:

• YNAB (You Need a Budget) helps you track and adjust your spending to control every dollar you spend.
• PocketGuard is available in both free and paid versions. It uses an algorithm to help you avoid overspending by analyzing your income, bills, goals, and budget.

3. Pay Yourself First

It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses, such as medical bills, a significant car repair, day-to-day expenses if you get laid off, and more. The ideal safety net is three to 12 months of living expenses.

Financial experts generally recommend putting away 20% of each paycheck every month. Once you’ve filled up your emergency fund , don’t stop. Continue funneling the monthly 20% toward other financial goals, such as a retirement fund or a down payment on a home .

4. Limit and Reduce Debt

It sounds simple enough: Don't spend more than you earn to keep debt from getting out of hand. But, of course, most people have to borrow from time to time, and sometimes going into debt can be advantageous—for example, if it leads to acquiring an asset . Taking out a mortgage to buy a house might be one such case. Still, leasing sometimes can be more economical than buying outright, whether renting a property, leasing a car, or even getting a subscription to computer software.

On the other hand, minimizing repayments (to interest only, for instance) can free up income to invest elsewhere or put into retirement savings while you’re young when your nest egg gets the maximum benefit from compounding interest . Some private and federal student loans are even eligible for a rate reduction if the borrower enrolls in auto pay.

Student loans account for $1.59 trillion of consumer debt—if you have an outstanding student loan, you should prioritize it. There are myriad loan repayment plans and payment reduction strategies available. If you’re stuck with a high interest rate, paying off the principal faster can make sense.

Flexible federal repayment programs worth checking out include:

• Graduated repayment—progressively increases the monthly payment over 10 years
• Extended repayment—stretches out the loan over a period that can be as long as 25 years
• Income-driven repayment—limits payments to 10% to 20% of your income (based on your income and family size)

5. Only Borrow What You Can Repay

Credit cards can be major debt traps, but it’s unrealistic not to own any in the contemporary world. Furthermore, they have applications beyond buying things. They are crucial to establishing your credit rating and a great way to track spending, which can be a considerable budgeting aid.

Credit needs to be managed correctly , meaning you should pay off your entire balance every month or keep your credit utilization ratio at a minimum (that is, keep your account balances below 30% of your total available credit).

Given the extraordinary reward and incentives offered these days (such as cashback), it makes sense to charge as many purchases as possible—if you can pay your bills in full.

Avoid maxing out credit cards at all costs, and always pay bills on time. One of the fastest ways to ruin your credit score is to constantly pay bills late—or even worse, miss payments.

Using a debit card , which takes money directly from your bank account, is another way to ensure that you will not be paying for accumulated small purchases over an extended period with interest.

6. Monitor Your Credit Score

Credit cards are the primary vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you’ll need a solid credit report . There are a variety of credit scores available, but the most popular one is the FICO score .

Factors that determine your FICO score include:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

FICO scores are calculated from 300 to 850. Here’s how your credit is rated:

• Exceptional: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 579 and below

To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. In addition, you can detect and address mistakes or fraudulent activity by monitoring your credit report. Federal law allows you to obtain free credit reports once a year from the “Big Three” major credit bureaus : Equifax, Experian, and TransUnion.

Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport.com, a federally authorized site sponsored by the Big Three.

Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, but it may not be your FICO score. Instead, Capital One's CreditWise program offers your VantageScore .

Due to the COVID-19 pandemic, the three major credit bureaus are providing free credit reports weekly. The program was extended twice in 2022 and it is now permanent.

7. Plan for Your Future

To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts . You also should look into insurance and find ways to reduce your premiums, if possible: auto , home , life , disability , and long-term care (LTC) . Periodically review your policy to ensure it meets your family’s needs through life’s major milestones.

Other critical documents include a living will and a healthcare power of attorney . While not all of these documents directly affect you, all of them can save your next of kin considerable time and expense when you fall ill or become otherwise incapacitated.

Retirement may seem like a lifetime away, but it arrives much sooner than expected. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors call the magic of compounding interest—how small amounts grow over time.

Setting aside money now for your retirement not only allows it to grow over the long term but also can reduce your current income taxes if funds are placed in a tax-advantaged plan, such as an individual retirement account (IRA) , a 401(k) , or a 403(b) .

While your children are young, take the time to teach them about the value of money and how to save, invest, and spend wisely.

If your employer offers a 401(k) or 403(b) plan , start paying into it immediately, especially if your employer matches your contribution. By not doing so, you’re giving up free money. Take time to learn the difference between a Roth 401(k) and a traditional 401(k) if your company offers both.

Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people) and converting a term life insurance policy to permanent life .

8. Buy Insurance

As you age, it's natural for you to accumulate many of the same things your parents did—a family, home or apartment, belongings, and health issues. Insurance can be expensive if you wait too long to get it. Health care, long-term care insurance, life insurance; it all increases in cost the older you get. Additionally, you never know what life will send your way. If you're the sole breadwinner for the family, or you and your partner both work to make ends meet, a lot depends on your ability to work.

Insurance can cover most of the hospital bills as you age, leaving your hard-earned savings in your family's hands; medical expenses are one of the leading reasons for debt. If something happens to you, life insurance can give those you leave behind a buffer zone to deal with the loss and get back on their feet financially.

9. Maximize Tax Breaks

Due to an overly complex tax code , many people leave hundreds or even thousands of dollars sitting on the table every year. By maximizing your tax savings, you’ll free up money that can be invested in your reduction of past debts, enjoyment of the present, and plans for the future.

You should start saving receipts and tracking expenditures for all possible tax deductions and tax credits . Many office supply stores sell helpful “tax organizers” that have the main categories already labeled.

After you’re organized, you’ll want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income on which you are taxed, whereas a tax credit reduces the amount of tax that you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.

10. Give Yourself a Break

Budgeting and planning can seem full of deprivations. Make sure you reward yourself now and then. Whether it’s a vacation, a purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.

Last but not least, don’t forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn’t mean you should. Setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant (CPA) or a financial planner —at least once—might be a good way to jump-start your planning.

The key to getting your finances on the right track is using skills you likely already have. It’s also about understanding that the principles that contribute to success in business and your career work just as well in personal money management. Three key skills are finance prioritization, assessing the costs and benefits, and restraining your spending.

• Finance Prioritization : This means that you can look at your finances, discern what keeps the money flowing in, and make sure that you stay focused on those efforts.
• Assessing the Costs and Benefits : This key skill keeps professionals from spreading themselves too thin. Ambitious individuals always have a list of ideas about other ways that they can hit it big, whether it is a side business or an investment idea. While there is a place and time for taking a flier, running your finances like a business means stepping back and honestly assessing the potential costs and benefits of any new venture.
• Restraining Your Spending : This is the final big-picture skill of successful business management that must be applied to personal finances. Time and again, financial planners sit down with successful people who still manage to spend more than they make. Earning $250,000 a year won’t do you much good if you spend $275,000 annually. Learning to restrain spending on non-wealth-building assets until after you’ve met your monthly savings or debt reduction goals is crucial in building net worth .

Personal money management isn't one of the most popular topics in educational systems. Many college degrees require some financial education, but it isn't geared toward individuals, which means that most of us will need to get our personal finance education from our parents (if we’re lucky) or learn it ourselves.

Fortunately, you don’t have to spend much money to find out how to manage it better. You can learn everything you need to know for free online and in library books. Almost all media publications regularly dole out personal finance advice, too.

Online Blogs

Reading personal finance blogs is a great way to start learning about personal finance. Instead of the general advice you’ll get in personal finance articles, you’ll learn exactly which challenges real people face and how they address them.

Mr. Money Mustache has hundreds of posts full of insights on escaping the rat race and retiring early by making unconventional lifestyle choices. CentSai helps you navigate a myriad of financial decisions via first-person accounts. Million Mile Secrets and The Points Guy each teach you how to travel for a fraction of the retail price using credit card rewards. These sites often link to other blogs, so you’ll discover more sites as you read.

Of course, we can’t help tooting our own horn in this category. Investopedia offers a wealth of free personal finance education. You might start with our special sections on budgeting , buying a home , and planning for retirement —or the thousands of other articles in our personal finance section.

At the Library

You may need to visit your library in person to get a library card if you don’t already have one, but after that, you can check out personal finance audiobooks and e-books online without leaving home. Some of the following best sellers may be available from your local library: "I Will Teach You to Be Rich," "The Millionaire Next Door," "Your Money or Your Life," and "Rich Dad Poor Dad." Personal finance classics such as Personal Finance for Dummies," "The Total Money Makeover," "The Little Book of Common Sense Investing," and "Think and Grow Rich" are also available as audiobooks.

Free Online Classes

If you enjoy the structure of lessons and quizzes, try one of these free digital personal finance courses:

• Morningstar Investing Classroom offers a place for beginning and experienced investors alike to learn about stocks, funds, bonds, and portfolios. Some of the courses you’ll find include “Stocks Versus Other Investments,” “Methods for Investing in Mutual Funds,” “Determining Your Asset Mix,” and “Introduction to Government Bonds.” Each course takes about 10 minutes and is followed by a quiz to help you make sure that you understood the lesson.
• EdX is an online learning platform created by Harvard University and the Massachusetts Institute of Technology. It offers at least three courses that cover personal finance: 'Personal Finance, Part 1: Investing in Yourself" from Wellesley College, “Personal Finance” from Purdue University, and “Finance for Everyone: Smart Tools for Decision-Making” from the University of Michigan. These courses will teach you how credit works, which types of insurance you might want to carry, how to maximize your retirement savings, how to read your credit report, and what the time value of money is.
• “Planning for a Secure Retirement” is an online course from Purdue University. It’s broken up into 10 main modules, and each has four to six sub-modules on topics such as Social Security, 401(k) and 403(b) plans, and IRAs. You’ll learn about your risk tolerance , think about what kind of retirement lifestyle you want, and estimate your retirement expenses.

Personal finance podcasts are a great way to learn how to manage your money if you’re short on free time. While you’re getting ready in the morning, exercising, driving to work, running errands, or preparing for bed, you can listen to expert advice on becoming more financially secure. In addition to “The Investopedia Express with Caleb Silver,” you may find these valuable:

• Freakonomics Radio and NPR’s Planet Money both make economics enjoyable by using it to explain real-world phenomena such as “how we got from mealy, nasty apples to apples that actually taste delicious,” the Wells Fargo fake-accounts scandal, and whether we should still be using cash.
• American Public Media’s Marketplace helps make sense of what’s happening in the business world and the economy.
• So Money with Farnoosh Torabi combines interviews with successful business people, expert advice, and listeners’ personal finance questions.

The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If one blog, book, course, or podcast is dull or difficult to understand, keep trying until you find something that clicks.

Education shouldn’t stop once you learn the basics. The economy changes, and new financial tools like the budgeting apps mentioned earlier are always being developed. Find resources you enjoy and trust, and keep refining your money skills through retirement and beyond.

What Personal Finance Classes Can’t Teach You

Personal finance education is a great idea for consumers, especially people starting out who want to learn investing basics or about credit management; however, understanding the basic concepts is not a guaranteed path to financial sense. Human nature can often derail the best intentions to achieve a perfect credit score or build a substantial retirement nest egg. These three key character traits can help you stay on track:

One of the most important tenets of personal finance is systematic saving. For example, say your net earnings are $60,000 per year, and your monthly living expenses—housing, food, transportation, and the like—amount to $3,200 per month.

There are choices to make surrounding your remaining $1,800 in monthly salary. Ideally, the first step is to establish an emergency fund or perhaps a tax-advantaged health savings account (HSA) .

To be eligible for a health savings account, your health insurance must be a high-deductible health plan (HDHP) .

Establishing an emergency fund takes financial discipline—without it, giving in to the temptation to spend rather than save can have dire consequences. In the event of an emergency, you may not have the money to pay the expenses—leading you to finance them through debt.

Once you have your emergency stash, you'll need to develop investing discipline—it’s not just for institutional money managers who make their living buying and selling stocks. Average retail investors tend to do better by setting an investment target and abiding by it rather than buying and selling stocks trying to time the market.

A Sense of Timing

Timing can be crucial. For instance, imagine you're three years out of college, have established your emergency fund, and want to reward yourself. A Jet Ski costs $3,000, but you want to start investing also. "Investing in growth stocks can wait another year," you say. "I have plenty of time to launch an investment portfolio."

However, putting off investing for one year can have significant consequences. The opportunity cost of buying a personal watercraft can be illustrated through the time value of money.

The $3,000 used to buy the Jet Ski would have amounted to nearly $49,000 in 40 years at 7% interest, a reasonable average annual return for a growth mutual fund over the long haul. Thus, delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 65.

Doing tomorrow what you could do today also extends to debt payment. If you were to put the Jet Ski on your credit card, the $3,000 credit card balance would take 222 months (18.5 years) to pay off if you only made minimum payments of $75 each month. And don’t forget the interest you’re paying: at an 18% annual percentage rate (APR) , it comes to $3,923 over those months. So, if you were to plunk down the $3,000 to pay the balance rather than let it compound, you'd see substantial savings—nearly $1,000.

Emotional Detachment

Personal finance matters are business, and business should not be personal. A difficult but necessary facet of sound financial decision-making involves removing emotions from a transaction.

Making impulsive purchases feels good but can significantly impact long-term investment goals. So can making unwise loans to family members. Your cousin Fred, who has already burned your brother and sister, will likely not pay you back, either. The smart thing to do is decline his requests for help—you're trying to make ends meet also.

The key to prudent personal financial management is to separate feelings from reason. However, when loved ones are experiencing real trouble, it pays to help if you can—just try not to take it out of your investments and retirement.

Many people have loved ones who always seem to need financial help—it is difficult to refuse to help them. If you include planning to assist them in real emergencies using your emergency fund, it can make the burden easier.

The personal finance realm may have more guidelines and tips to follow than any other. Although these rules are good to know, everyone has their own circumstances. Here are some rules prudent people, especially young adults, are never supposed to break—but can break if necessary.

Saving or Investing a Set Portion of Your Income

An ideal budget includes saving a portion of your paycheck every month for retirement—usually around 10% to 20%. However, while being fiscally responsible is important and thinking about your future is crucial, the general rule of saving a given amount for retirement may not always be the best choice, especially for young people just getting started.

For one thing, many young adults and students need to consider paying for their biggest expenses, such as a new car, home, or postsecondary education. Taking away 10% to 20% of available funds would be a definite setback in making those purchases.

Additionally, saving for retirement doesn’t make much sense if you have credit cards or interest-bearing loans to pay off. The 19% interest rate on your Visa card probably would negate the returns you get from your balanced mutual fund retirement portfolio five times over.

Finally, saving money to travel and experience new places and cultures can be especially rewarding for a young person who’s still unsure about their life path.

Long-term Investing/Investing in Riskier Assets

The rule of thumb for young investors is that they should have a long-term outlook and stick to a buy-and-hold philosophy. This rule is one of the easier ones to justify breaking. Adapting to changing markets can be the difference between making money or limiting your losses and sitting idly by and watching your hard-earned savings shrink. Short-term investing has its advantages at any age.

Common investing logic suggests that because young investors have such a long investment time horizon, they should be investing in higher-risk ventures; after all, they have the rest of their lives to recover from any losses that they may suffer; however, you don’t have to take on undue risk in your short- to medium-term investments if you don’t want to.

The idea of diversification is an important part of creating a strong investment portfolio; this includes both the riskiness of individual stocks and their intended investment horizon .

At the other end of the age spectrum, investors near and at retirement are encouraged to cut back to the safest investments—even though these may yield less than inflation —to preserve capital . Taking fewer risks is important as the number of years you have to earn money and recover from bad financial times dwindles, but at age 60 or 65, you could have 20, 30, or even more years to go. Some growth investments could still make sense for you .

Personal finance is the knowledge, instruments, and techniques used to manage your finances. When you understand the principles and concepts behind personal finance, you can manage debt, savings, living expenses, and retirement savings.

What Are the 5 Main Components of Personal Finance?

The five main components are income, spending, savings, investing, and protection.

What Is an Example of Personal Finance?

One of the key ideas behind personal finance is not to spend more than you make. For instance, if you make $50,000 a year but spend $65,000, you'll end up with debt that continues to compound because you'll be spending more than you make to pay for past expenses.

Why Is Personal Finance So Important?

The concepts behind managing your personal finances can guide you in making intelligent financial decisions. In addition, the decisions you make throughout your life on what to buy, sell, hold, or own can affect how you live when you can no longer work.

Personal finance is managing your money to cover expenses and save for the future. It is a topic that covers a broad array of areas, including managing expenses and debt, how to save and invest, and how to plan for retirement. In addition, it can include ways to protect yourself with insurance, build wealth , and ensure wealth is passed on to the people you want it to pass to.

Understanding how to manage your finances is an important life-planning tool that can help set you up for a life without debt; you gain control of financial stresses and have a way to manage the expensive surprises that life can throw at you.

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Personal Financial Plan Essay Examples

Type of paper: Essay

Topic: Family , Taxes , Wealth , Unemployment , Time Management , Planning , Retirement , Finance

Words: 2000

Published: 02/02/2020

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Personal Finance

Personal Financial Plan Introduction A person’s financial success is determined by his ability to allocate and utilize his own financial resources. Planning is an integral part of every person’s future aspirations for a better life even retirement. However, financial planning is not as simple as outlining the current personal assets versus liabilities because similar to business financial planning it also considers both external and external environmental attributions. Internal factors vary from risk tolerance, projected financial situation, discipline, goals, spending, saving and investment patterns and consumption. On the other hand, external factors include social, legal, political, taxation and technological influences that has either direct or indirect effects to personal finances (Dalton, 2005, p. 38). In order to create a comprehensive personal financial plan, the step is to analyze the current financial situation and assess possible outcomes using the appropriate financial tools. Secondly, short-term, mid-term and long-term goals will be identified and ranked according to their importance in relation to expected and available resources. Lastly, due considerations will be given to asset protection, budgeting, time value of money, savings, debit/credit, estate planning and investment. After which, the first two steps will be incorporated to complete a financial development plan that will provide a clear picture of future finances.

Financial Plan

The financial model represents the family’s current financial situation and some illustrations of the possible direction that my family’s financial situation may take. The future market and economic conditions are generally unknown and at any time will changes at any point. These assumptions were made to represent the economic and market conditions that may occur in the future and was designed to promote actions needed to address any possibilities of risk. The main objective is to aid the family in terms of managing and maintaining a steady financial situation under changeable circumstances.

Current Situation:

- The family currently has assets estimated at $433,000. - Current liabilities are estimated at $140,000. - The entire family’s combined net worth is estimated at $293,000. - The family currently has a total of $183,000 worth of working assets adding $16,000 more per annum.

- My dad wants to retire at 64 and mom wants to retire at the same age as well. - The monthly after-income tax needed at the moment is $4,792 - In order to sustain finance until the age of 90 my parents would still need income even after retirement. - Meeting my educational goals will need an annual savings of $11,252 or $938 every month. Actions: It is apparent that my parents may run out of money before they reach the last life expectancy of 90 years old. However, there are range of possible options that they can take in order to improve the situation including increasing the rate of investments, increase annual savings by as much as $2,200 per year, reduce their retirement spending needs by means of deferring retirement for about 1 year and lastly, combine all the aforementioned and decrease requirement for each.

Asset Allocations

It is necessary for the success of the financial planning to ensure that the asset allocation is aligned with the goals. Therefore, it is important that the suggested assets should be compared to the current allocation because it the appropriateness of the allocation is beneficial to the situation provided that the assets have been allocated precisely. Below is the graphical representation of the asset allocation in relation to the above asset worksheet. The above represents a simple allocation of assets, which can be improved by diversifying the types of securities within the mix (Warschauer, 2002). Below is the suggested allocation, which represents a variation of asset allocation mix.

Goal Evaluation

Financial planning for the future requires organizing situations wherein the family would not be able to all the desired financial goals. Prioritizing is the key in achieving the desired goals by means of differentiating the goals and evaluating the long-term impacts of expenses towards the current financial situation for financial sustainability (Trochim and Linton, 1986). In addition, expenses associated with financial goals appeared to have a potential effect that would lead to a sustainable financial stability throughout life. Based on the current plan and suggested mix it appears that the success rate of the plan is likely to reach 25% Since it was indicated earlier that the planned expenses are also important, evaluations need to be conducted in order to determine the effects of such expenses to the sustainability of the long-term plans. In order to create the illustration, the current plan has been re assessed of its calculations several times excluding the associated expenses along with the various priorities of the financial goals. It starts with calculating the only the highest priority goals, retirement expenses and other expenses identified as important. Furthermore, the highest priority items will be categorized accordingly as primary and secondary and options will also be included. There are three expenses mentioned earlier, which are reconstructing the garage, remodeling of the basement rooms and a vacation in France. The categorizations of each expense are based on the current need for them to be executed. For example, the reconstruction of the garage is relatively important because it poses a hazard to other assets such particularly to the vehicles. The secondary priority is the remodeling of the basement room, which is designated as an office and study area. Finally, the French vacation is considered as least important because it is only regarded as a leisure trip, which has no long-term significant benefit to the family other than a self-compensation for long years of hard work.

Essential expenses only

Reconstruction of the garage: Start Year: 2014 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $8,000 Essential and Primary expenses Remodeling of the Basement rooms: Start Year: 2016 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $12,000 Essential, Primary, and Secondary expenses French Vacation: Start Year: 2018 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $20,000 After reconsiderations have been made to the future expenses, the next step in the process is to create a retirement expense forecast to determine the amount required to spend for retirement. The retirement expense forecast is a combination of estimated Social Security benefits together with pre-defined pension benefits and plotted to show estimated living expenses on an annual basis during retirement. The estimation will begin during the legal retirement age of 60 years old and will continue until the pre-determined life expectancy. The basis of retirement expenses is the goal objective that has been adjusted according to inflation rate (personal.vanguard.com, N.D.). There is a rule of thumb being suggested when planning to live at a rate of about 80% of one’s current yearly income. It may sound feasible for a moment, but other factors such as cost of healthcare, cost of living, tax hikes and inflation also poses an immense impact to the overall outcomes of the retirement forecast. Ultimately, the amount allotted to the retirement fund is a kind of decision that will depend upon several factors such as the type of lifestyle intended in the future. It also explains the reason for maintaining a considerable plan that will serves as a guide in making financial decisions. In addition, several steps need to be considered when it comes to estimating expenses. First, is the non-discretionary spending, which includes residence mortgage, transportation, healthcare, insurance premiums, utility bills and taxes. Secondly, discretionary spending, these are the things that can either be reconsidered to be stopped at will or can be identified as the least priority. Some examples may include hobbies, travel, gifts, entertainment and charitable donations. Third, is inflation, this is a kind of expense that cannot be modified at will. Financial planning always needs an estimation of the inflation rate because the likelihood that the budget allotted for retirement may change over the years. There could either be an excess or variance to the budget depending on the increase and decrease on the time value of money. Lastly emergency funds, unexpected circumstances will call for an immediate financial response. For instance, one of the family members is being hospitalized and the current healthcare plan will not be sufficient to cover the cost. It is important that the budget also includes expenses during times of immediate need. After determining expenses, the next step is to sum up the gross income. Income may come from social security, pension plan, retirement portfolio, part-time employment and annuities. Determining all the aforementioned will measure the amount of money coming in to the household and will serves as a benchmark for spending. Maximizing the potentials of the said income streams would alleviate potential risks of running out of money and jeopardizing the long-term financial goals. Subsequently, any instances of shortfalls should resort to reduction of expenses, late retirement, saving more today or taking more jobs than the usual. If there a surplus of funds at hand, it would be best to reinvest excess money back to the retirement portfolio or put more money in the emergency reserves.

Other Considerable Factors in Planning

Like any other financial planning the complex and critical components include considerations for estate planning. An effective financial plan needs careful coordination of various areas in the financial plan. The primary goal of the estate planning section is highlighting the concept of illustrating potential benefits of estate planning basic techniques. Back in 2010 the estate tax rate was at zero (Larsen, 2010). Most people would minimize estate tax exposure as part of their primary goal. Some of the basic techniques used for estate planning are the maximization of the Applicable Exclusion Amount, Revocable Living Trust, Unlimited Marital Deduction, Annual Gift Exclusion, Irrevocable Life Insurance Trust and Unlimited Charitable Deductions. Other goals might also include minimizing income tax, estate liquidity and managing administrative, probate and other expenses. General assumptions made based on the family’s current financial standing and planning data, it can be assumed that funding a credit shelter will allow the family to utilize the available exclusion amounts, which is currently at $1,000,000 per person. Assumptions also include life insurance benefits that were kept out of the taxable estate. If the household has a $211,706 plus other assets amounting to $250,000 minus the estate tax base of $303,572 and exclusion amount of $2 Million ($1Million for each parent) the estimated tax would be $0.00.

Financial planning is crucial for the survival of an individual or in this case, our family. Determining the amount of money at hand including assets and liabilities is essentially helpful in terms of foreseeing the financial health of the entire family or any survivor after life expectancy. Personal financial planning ultimately leads to the achievement of future goal, being knowledgeable about own finances and being familiar with budgeting. A the budget becomes more familiar, the more the family would be able to cope up with untoward circumstances that has a adverse effect in the family’s financial health. With the apparent unstable economy, unexpected tax hikes and diminishing financial options, it becomes more apparent that financial survival is a key for a sustainable future.

Dalton, M. A. (2003). External Environmental Analysis. In Personal financial planning: Theory and practice (5th ed., p. 38). St. Rose, LA: DF Institute, Inc. Larsen, K. (2010). Overview of personal financial planning. Professional Development Network, 1(0). Personal.vanguard.com (n.d.). Evaluate your retirement expenses and income. Retrieved April 24, 2013, from https://personal.vanguard.com/us/insights/retirement/nearing/evaluate-expenses-and-income-needs Puelz, A. V., & Puelz, R. (1991). Personal financial planning and the allocation of disposable wealth. Financial Services Review, 1(2). Trochim, W. M., & Linton, R. (1986). Conceptualization for planning and evaluation. Evaluation and Program Planning, 9(4), 289–308. doi:10.1016/0149-7189(86)90044-3 Warschauer, T. (2002). The Role of Universities in the Development of the Personal Financial Planning Profession. Financial Services Review, 11(3).

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Home — Essay Samples — Law, Crime & Punishment — Personal Finance

Essays on Personal Finance

The importance of writing an essay on personal finance.

Writing an essay on personal finance is important because it helps individuals understand the importance of managing their money and making informed financial decisions. It also provides a platform for discussing various aspects of personal finance, such as budgeting, saving, investing, and managing debt. By writing about personal finance, individuals can improve their financial literacy and develop important skills that will benefit them in the long run.

Writing Tips for an Essay on Personal Finance

• Research: Before you start writing, make sure to research the topic thoroughly. Look for reliable sources of information and gather relevant data to support your arguments.
• Organize your thoughts: Create an outline to organize your ideas and ensure that your essay has a clear and logical structure. This will help you stay focused and on track while writing.
• Be clear and concise: Use clear and concise language to communicate your ideas effectively. Avoid using jargon or complex terminology that may confuse your readers.
• Provide examples: Use real-life examples to illustrate your points and make your essay more relatable to your audience. Personal anecdotes or case studies can help readers understand the practical implications of personal finance concepts.
• Revise and edit: After you have written your essay, take the time to revise and edit it. Check for grammar and spelling errors, and make sure that your arguments are well-supported and coherent.

Writing an essay on personal finance can be a valuable exercise in improving your understanding of financial concepts and developing your writing skills. By following these tips, you can create a well-organized and informative essay that effectively conveys the importance of personal finance.

Creating a budget is the first step in taking control of your personal finances. This essay will discuss the importance of budgeting, how to create a budget that works for you, and tips for sticking to it.

This essay will explore the benefits of saving and investing for the future, including the power of compound interest, the various investment options available, and tips for getting started with saving and investing.

Credit scores play a crucial role in personal finance, affecting everything from loan approvals to interest rates. This essay will discuss what goes into a credit score, how to improve it, and the importance of maintaining good credit.

Debt can be a significant burden on personal finances, but there are strategies for managing and paying off debt. This essay will discuss the different types of debt, strategies for paying it off, and tips for avoiding future debt.

Financial literacy is the foundation of good personal finance. This essay will explore the impact of financial literacy on personal finance, including the importance of understanding concepts like budgeting, saving, investing, and credit.

Insurance is an essential part of personal finance, providing protection against unforeseen events. This essay will discuss the different types of insurance, the importance of having insurance, and tips for choosing the right coverage.

Our attitudes and beliefs about money can have a significant impact on our financial decisions. This essay will explore the psychology of money, including common money mindsets and how they influence our financial behavior.

Taxes can have a significant impact on personal finances, but there are strategies for minimizing taxes and maximizing returns. This essay will discuss tax planning strategies, including retirement accounts, deductions, and credits.

Major life events can have a significant impact on personal finances. This essay will discuss financial planning for major life events, including buying a home, getting married, and having children.

Financial advisors can provide valuable guidance and expertise in navigating personal finance. This essay will explore the role of financial advisors, including the services they provide and tips for selecting the right advisor for your needs.

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