Personal finance is simply the strategic financial management that an individual, a family unit, or an organization performs during economic times to budget, save, borrow, and invest money, considering various individual financial risks and long-term life goals. The methodology focuses on identifying, assessing, and evaluating the financial risk and potential reward of alternative course of action to determine the most favorable outcome from the danger. The term “personal finance” is generally used to refer to this discipline.
The primary objective of personal finance is to achieve the long-term financial goals of an individual, family, or organization. The specific situation determines the methods employed to reach these financial goals and objectives. Personal finance methods may include asset allocation, savings plans, investment, real estate planning, and education in retirement planning. In the case of education, funding for schools, colleges, and universities may be allocated toward meeting long-term personal financial goals such as graduate and post-graduate school fees, especially if the student has other long-term personal financial goals or maintaining a business. Allocating assets and raising sufficient funds for retirement is often considered the most crucial objective in personal finance.
The process of saving for a desired future event – retirement, begins in the early stages of a person’s life. Such early investments in protecting and building a portfolio of savings reflect that individuals anticipate a period in which they will require a level of income to support their living expenses after retirement. As such, several methods are used to achieve this long-term goal. Among them are:
- Building a retirement fund (including stock options and mutual funds)
- Using 401(k) s
- Setting aside money for unexpected expenses
- Borrowing from family and friends
- Educating children or other dependents
In most cases, the strategies to save for a long-term goal involve some degree of emotional detachment. However, it should be noted that emotional detachment is not necessarily a negative attribute; on the contrary, it can provide a unique opportunity to take control of one’s money and achieve one’s long-term goals. Most financial planners advise young adults to start investing during their early twenties, but there are several exceptions to this rule. Young adults may also choose to postpone investing for a later age if they are under twenty-five. If an individual’s personal finance goals include building wealth for retirement, they may decide to delay investing until they are an adult (usually around the age of forty).
Credit card debt is one of the most significant obstacles to achieving financial security. As such, individuals must begin investing in credit cards while they are still young. Credit cards are handy tools for personal finance because they provide the opportunity to gain a greater insight into how much money is available to spend, when that money can be used, and how one can manage future expenses in a budget. The key to effectively managing personal finances through credit cards is understanding how to use credit cards to achieve the best results (within the budget established) at the lowest cost. One should not use credit cards to “buy now” but instead wait until he or she has more experience with personal finances before making large purchases, as doing so could result in excessive debt.
Another major obstacle to personal finance is the mismanagement of money in the form of spending. In other words, individuals fail to set and achieve reasonable financial goals because they fail to identify where they “spent” their money and what they should save for. Proper budgeting involves the identification and determination of appropriate expenditures and the allocation of available funds. Individuals who lack a solid understanding of budgeting often make poor financial decisions because they do not understand which expenses are necessary, which can be eliminated, or which can be postponed. This type of inconsistency negatively impacts budgeting and increases the likelihood of making poor financial decisions in the future.
One of the most important keys to long-term success in achieving personal finance goals is education. Many individuals mistakenly believe that they do not need a financial education until they begin to make money, but this is generally not true. Financial education can be achieved through workshops, videos, seminars, books, or by contacting a certified public accountant or financial planner to provide a professional evaluation of one’s finances.
These days, people want to save money for a secure retirement. The combination of steadily rising interest rates and salary decreases has made it difficult for retirees to save for their retirement. Fortunately, personal finance education can help retirees establish a solid financial plan and create a retirement fund that will ensure a comfortable retirement. For those concerned about their long-term financial security, personal finance education is a great way to build a solid foundation of savings for the future. Personal finance education can also help the individual prepare for unexpected emergencies, such as loss of income due to a layoff, accident, or sudden illness.