What is Personal Finance?
Personal Finance is the financial management that an individual or a family unit performs to budget, save, and spend monetary resources over time, taking in considerations various financial risks and future events of life. At the time of planning personal finances, the individual would consider the aptness to his or her needs of a range of banking products or investment private equity and insurance products or participation and monitoring of and/or employer sponsored retirement plans, social security benefits, and management of income tax.
What is Personal Financial Planning?
It becomes difficult to reach out to the financial goals without having a financial plan. Say for instance; you are planning to drive from Los Angeles to New York City, you might think what path to take? How long would it take? Just like steering the best route for your trip, an organized and structured plan is also needed for personal money management.
There are various factors that help in influencing the goals and decisions of the person. Some might desire a car or home, others may wish to travel, maintain good credit, plan for retirement or rather save.
Financial Planning Steps
Irrespective of a person’s or family’s goals and objectives, there is a six-step process that helps in planning, preparing and executing short and long term financial plans. These six steps can be known by the acronym EGADIM, which stands for:
Establish the goal
Develop a plan
Implement a plan
Monitor the plan
- Establish Financial Goals
What are the things that you want or need? What are the important things for your immediate short term plan and what are your objectives for your long term investments?
This step can be revised in case of any change in your personal situation. Birth or death of a family member, marriage, major change in the career, etc. are some of the factors that affect the financial goals of an individual.
- Gather Relevant Data
What is the time period that is sufficient for you to reach your goals? Months or years? What amount of risk are you ready to take? There are many factors that somehow have an impact on your financial planning decisions. Personal situation- marital status, size of household, retirement, and health goals are some of the influential factors.
In order to create a base of a strong financial plan, it is important to take an honest and detailed assessment that will help in determining your present financial situation. Make sure that you know the current income, debt, monthly expenses, savings or other aspects of the current situation.
- Analyze the Data
At this point of time, you are aware of the present situation and the financial goals, so now, you need to analyze the gathered data. Analyzing the data is important in case of personal financial planning, as it helps in finding out alternative courses of actions that will contribute to make a more informed decision.
- Develop your Financial Plan
It doesn’t matter if a decision is small or large, but a financial action plan needs to be developed and executed to transform your plan into reality. You need to know about your priorities. Think of the steps involved to accomplish goals. Assessing each of the alternatives with help you in developing an appropriate plan.
- Implement the plan
After you have analyzed the data, found out the alternatives, now is the time when you need to implement your financial plan in an effective manner. Make sure that you rightly implement the plan so that your plan yields success and effectiveness in your life.
- Monitor the plan
After the execution of the plan, it needs to be monitored. The implemented financial plan needs to be examined properly so that there is no chance of any sort of error or mistake in the plan. Make sure that there is nothing in the plan that will cause loss to you and your family.
All these steps need to be taken care at the time of financial planning.