All You Need To Know About Personal Finance
What is Personal Finance?
The concept of Personal finance revolves around innovative and effective ways of planning & managing your personal financial activities, for example, budgeting, banking, insurance, risk allocation, mortgages, investments, personal banking, retirement and tax planning, etc. The process of personal finance can be summarized in a budget or financial plan and can be executed for an individual, or a group of people. It requires a certain knowledge of finance expertise such as tax laws and depends on a particular person’s income & expenses, and individual financial goals.
Principles of Personal Finance
Finance has always been an important part of our lives and in the present situation of trade finance and COVID-19, it has become even more necessary.
In this blog, we are going to discuss the most important areas or principles of personal finance with their intricate details. Below are the main areas of personal finance. Let’s have a look:
1. Income - Income refers to the various sources of cash flows from where an individual is getting money to support himself and his family. It is the first step of the financial planning process. The very common sources of income are salary, bonus, wages, pension or dividends, etc. They all generate cash flows for an individual.
2. Spending - It deals with all types of expenses an individual incurs to buy goods and services or anything essential. It can be done in two ways which are in either cash or credit. Common sources of spendings include Rent, Mortgage payments, taxes, food or credit card payments, etc. If expenses are higher than income, it can cause a lack of cash flow.
3. Saving - The principle of saving is the most essential principle of personal finance when it comes to managing money. The more are the savings, the more you can invest. It is the surplus between earnings and spendings that is a critical area of personal finance. The sources are physical cash, bank account, or money market securities.
4. Investing - The term investing deals with putting your saved money into different modes of investments to have multiple sources of income. It includes the purchase of assets capable of generating a rate of return. The common modes of investments include stocks, bonds, mutual funds, real estate, and commodities, etc. It is the most complex area of personal finance that needs professional advice.
5. Protection - It includes a variety of products to save assets from any type of adverse event in future. It includes life insurance, health insurance, and estate planning, etc.
6. Priority -There are several sources in which the money can be utilized and one must be clear about the priority sources.
Process And Strategies Of Personal Finance
1. The very first step starts with studying and evaluating the current condition where you stand financially or how you are handling your current financial situation to get an efficient knowledge of the strengths and weaknesses.
2. Next, you need to establish goals as per your requirements and preferences. It is necessary to find out in which direction your next step should be placed.
3. After this, you need to figure out various sources of action that you can consider in the existing situation. Also, evaluate their time-period, costs as well as the risk associated with each course of action.
4. An individual needs to keep an eye on the alternatives so that he/she could pick out the most suitable one after checking their pros and cons depending on their limitations and risks.
5. The next step includes implementing a suitable area of action.
6. The process ends with taking the follow-up.
Types of Personal Finance
Below are the essential types of Personal finance:
1. Banking - It refers to the fundamental banking functions of handling and managing accounts with easier facilitation of transactions.
2. Mortgages and loans - It deals with a set of facilities and services allowing a person to achieve leverage or loans and possession of assets to fulfill its financial goals. For example, home loan or education loan, etc.
3. Investments -It is initiated by analyzing all the possible alternatives and picking out the most suitable one to get a certain rate of income. It is associated with a pre-decided amount of risks.
4. Counseling - It can help get an overview of the situation and guide in the existing scenario.
Personal finance is a vast field to understand and it is always recommended to take the help of professional banking and trade finance services to manage all your personal finance. It has a great role in determining the personal growth of yourself as well as your family.