Personal finance involves the process of managing money and other assets effectively. An individual who exercises keen financial awareness will have an adept understanding of the underlying principles involved in the process. These core principles interconnect to create a solid financial plan leading towards stability and wealth creation. A solid financial plan revolves around time-tested strategies, such as generating income, budgeting, cutting expenses, increasing savings, eliminating debt, building credit, establishing retirement, and choosing wise investments. Ordinary people can take control of their personal finances by following these strategies.
Financial planning is the key component to successful money management. It involves a dynamic process of monitoring and reevaluation of an individual or family's financial progression. In general, a solid financial plan involves five steps: assessment, goal setting, creating a plan, executing it, and monitoring its development. Each of these steps work in tandem to create a solid financial future.
A person interested in creating a financial plan must first assess his or her income level. They can do this by compiling financial statements, such as balance sheets and income statements. A personal balance sheet lists the values of an individual's personal assets, such as a house, car, investment portfolio, and bank account. A balance sheet also lists an individual's liabilities, such as credit card debt, outstanding loans, and existing mortgages. An income statement lists an individual's earnings versus overall expenses.
A person must also formulate multiple goals before creating a plan. Without a list of goals, it becomes nearly impossible to achieve financial success. Goal setting paves the road with markers that provide insight into what works and what fails. Therefore, an individual must create short and long-term goals to help direct financial planning. Some examples of short-term goals are saving for a new computer, paying off a recent charge, and cutting down on the food bill. Long-term goals involve stronger commitment. Some examples of long-term goals are buying a new house, saving for retirement, and building an investment portfolio. Goal setting should be done with the intention of meeting certain financial obligations.
The next step in the financial planning process involves finding ways to accomplish the listed goals. It could include creating a budget, reducing unnecessary expenses, increasing employment income, or taking advantage of investment opportunities. Creating a budget makes it possible to turn any goal into a reality by simply cutting expenses and finding ways to save money. If the ratio of expenses exceeds an individual's income level, then he or she needs to find other ways to make money. Finding a second job or eliminating debt can even the playing field to manifesting those goals.
Creating a financial plan will do nothing unless an individual follows through with it. The execution of a financial plan often requires discipline and perseverance. It may require modifying the plan when things get tough. For this reason, many people seek the assistance of professionals to help them with their financial planning. It keeps them motivated and on track towards financial success. They may also hire a professional to help monitor the progression of the plan. While this is not required, it makes it easier to make adjustments when the time comes.
Most adults and young adults find themselves strained by their financial obligations, which makes them turn to financial planning. This strain usually stems from credit card or student loan debt. Others turn to financial planning to secure their financial future by opening a retirement fund or investing in the stock market to watch their money grow. Regardless of the reason behind wanting to gain insight on personal finance, the drive usually remains the same. People who are determined to achieve their goals will find the success they are looking for with due diligence.