What is Personal Financial Planning?
The term ‘financial planning’ may sound unfamiliar to the common man; however, financial planning is an inherent part of a person’s life. Undeniably true, every person has had to manage money at least once in their lifetime. To manage money as efficiently as possible, people must devise a financial plan. Therefore, this article will provide anyone, regardless of prior knowledge, with a detailed understanding of what a financial plan is. To learn about how to successfully devise a financial plan, click here.
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The link above is a more recently updated article that contains all the information you need to know about what personal financial planning is.
Understanding What Personal Financial Planning Is
Personal financial planning is the management of one’s income and other finances that effectively balance expenditures and savings. In simple terms, it helps people to use their money wisely, such as proper savings, profitable investment, avoiding debt, purchasing essentials/wants, and being financially secure.
The natural tendency of a person is to spend as much money as necessary for their expenses, and save the rest. Although this may sound ideal, it is not as efficient as a financial plan because it does not allow one to achieve all their long-term financial goals.
The natural tendency of a person is to spend as much money as necessary for their expenses, and save the rest. Although this may sound ideal, it is not as efficient as a financial plan because it does not allow one to achieve all their long-term financial goals.
What is a Financial Plan?
A financial plan creates a systematic guide to effectively utilize available funds, while considering future goals. This plan is modified based on the person’s finances and needs.
For example, if a college student were to prepare a financial plan, he would most likely have to be considerate about limited pocket money. He could devise a new plan monthly, based on that month’s expected travel, entertainment, shelter, clothing, and food expenses. Furthermore, if he wishes to save up for something, he can also allot a portion of his money to savings. Such a plan would allow the student to spend wisely while achieving all his long-term financial goals.
A financial plan provides a strategy for one to achieve their long-term financial goals, while meeting current expenditures. This happens because of the crucial components of personal finance. These components are integrated into the development of a financial plan, making a financial plan exceptionally useful.
For example, if a college student were to prepare a financial plan, he would most likely have to be considerate about limited pocket money. He could devise a new plan monthly, based on that month’s expected travel, entertainment, shelter, clothing, and food expenses. Furthermore, if he wishes to save up for something, he can also allot a portion of his money to savings. Such a plan would allow the student to spend wisely while achieving all his long-term financial goals.
A financial plan provides a strategy for one to achieve their long-term financial goals, while meeting current expenditures. This happens because of the crucial components of personal finance. These components are integrated into the development of a financial plan, making a financial plan exceptionally useful.
Components of Personal Finance
1. Earnings
An obvious component of personal finance, earnings are the money that a person receives in return for any work done, such as a job. Any stream of income is included in this aspect.
Earnings are the foremost component because without a stream of income, it is impossible to pay expenses and meet any financial goals. Therefore, it is crucial for one to attain a steady stream of income.
Earnings are the foremost component because without a stream of income, it is impossible to pay expenses and meet any financial goals. Therefore, it is crucial for one to attain a steady stream of income.
2. Expenses
Expenses are anything that money is spent on, including both needs and wants. Some examples are food, clothing, rent, entertainment, education, travel, etc.
Due to the comprehensive list of expenses, planning out how much money will be spent will make it easier to plan for other things. If your expenses are excessive, you can prioritize them so that you can achieve your financial goals without experiencing a financial crisis.
For instance, you can purchase fewer things that aren’t vital. In this scenario, a financial plan would allow you to allot a reasonable amount of money to spend on your wants.
Another way you could reduce your expenses is by making your own food instead of buying it from restaurants.
Regardless of what your budget allows for, a financial plan will make it easier for you to record all your expenses and determine whether you need to cut expenses or not.
Due to the comprehensive list of expenses, planning out how much money will be spent will make it easier to plan for other things. If your expenses are excessive, you can prioritize them so that you can achieve your financial goals without experiencing a financial crisis.
For instance, you can purchase fewer things that aren’t vital. In this scenario, a financial plan would allow you to allot a reasonable amount of money to spend on your wants.
Another way you could reduce your expenses is by making your own food instead of buying it from restaurants.
Regardless of what your budget allows for, a financial plan will make it easier for you to record all your expenses and determine whether you need to cut expenses or not.
3. Savings
Savings mainly occur when earnings are higher than expenses, leading to surplus funds. These funds can be deposited into banks for safekeeping in the form of fixed deposits or bonds. You can utilize these funds during emergencies by withdrawing the amount you need from your bank account.
People save because savings are crucial for meeting unexpected expenditure. For instance, if your arm breaks, you’re going to have to go to the doctor to get it checked out, causing an unplanned expenditure. To cover expenditures like this, you have to save a portion of your money.
People save because savings are crucial for meeting unexpected expenditure. For instance, if your arm breaks, you’re going to have to go to the doctor to get it checked out, causing an unplanned expenditure. To cover expenditures like this, you have to save a portion of your money.
4. Investments
Investing is a method to generate more income; however, you risk losing money as well. You can invest a portion of your surplus funds in bonds, securities, mutual funds, government bonds, shares/stocks/equity, etc.
By investing, many people are able to attain more money, which they can spend, save, or reinvest. However, many people also lose money while investing, causing them to have to adjust their financial plans.
If you lose money while investing, you may have to reduce expenses or savings. However, if you reinvest all your money regardless, you will not suffer immediately. You may suffer in the long-term if you continue to lose money while investing, which will result in a failure to achieve your financial goals.
By investing, many people are able to attain more money, which they can spend, save, or reinvest. However, many people also lose money while investing, causing them to have to adjust their financial plans.
If you lose money while investing, you may have to reduce expenses or savings. However, if you reinvest all your money regardless, you will not suffer immediately. You may suffer in the long-term if you continue to lose money while investing, which will result in a failure to achieve your financial goals.
5. Tax Planning
Most families are required to pay income tax, which is determined by the government. Every country has their unique taxation laws that determine how much income tax people must pay. For instance, in the United States, you pay a predetermined percentage of your income. You can find the exact percentages here: https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets
Taxes are exasperating for everyone because they make it increasingly onerous to spend, save, and invest as much as your original earnings would allow you to. However, with a financial plan, you can take action to make it easier to meet your financial goals.
For instance, you can further compromise the amount you spend on unnecessary products or you can try to increase your earnings. If neither of these options are possible, an alternative is to invest more. Although it is risky, investing may prove to be beneficial for you, allowing you to achieve your long-term financial goals.
However, it is also possible that you are not comfortable with investing a large portion of your money. Another alternative is that, with some research, you can learn which investments will provide you with tax benefits. Tax benefits allow you to legally reduce the amount of tax you pay.
Taxes are exasperating for everyone because they make it increasingly onerous to spend, save, and invest as much as your original earnings would allow you to. However, with a financial plan, you can take action to make it easier to meet your financial goals.
For instance, you can further compromise the amount you spend on unnecessary products or you can try to increase your earnings. If neither of these options are possible, an alternative is to invest more. Although it is risky, investing may prove to be beneficial for you, allowing you to achieve your long-term financial goals.
However, it is also possible that you are not comfortable with investing a large portion of your money. Another alternative is that, with some research, you can learn which investments will provide you with tax benefits. Tax benefits allow you to legally reduce the amount of tax you pay.
Conclusion
Now that you have read this article, you should have a strong understanding of what a financial plan is.
Many people may think that financial planning is not something they would ever consider. This is because they may be satisfied with the general tendency of saving their funds in bank deposits.
However, they are not accomplishing an ultimate balance of their earnings and expenses to achieve maximum security for their future. Making a personal financial plan will pave the way for an individual to gain optimum value from their earnings, adjust their expenses, make appropriate investment decisions, and achieve their financial goals.
Many people may think that financial planning is not something they would ever consider. This is because they may be satisfied with the general tendency of saving their funds in bank deposits.
However, they are not accomplishing an ultimate balance of their earnings and expenses to achieve maximum security for their future. Making a personal financial plan will pave the way for an individual to gain optimum value from their earnings, adjust their expenses, make appropriate investment decisions, and achieve their financial goals.
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Works Cited
“Personal Finance.” Corporatefinanceinstitute.com, CFI Education Inc.,
https://corporatefinanceinstitute.com/resources/knowledge/finance/personal-finance.
Voigt, Kevin and Alana Benson. “What is a financial plan, and How Can I Make One?” nerdwallet.com, Nerdwallet, Inc, Aug.4, 2021,
https://www.nerdwallet.com/article/investing/what-is-a-financial-plan.
Kenton. Will. “Personal Finance.” Investopedia, Dotdash, March 30,2021,
https://www.investopedia.com/terms/p/personalfinance.asp#personal-finance-principles
Fried, Carla. “Personal Finance 101: The complete guide to managing your money.” CNBC.com, CNBC LLC, Jan. 12, 2021, https://www.cnbc.com/guide/personal-finance-101-the-complete-guide-to-managing-your-money.
https://corporatefinanceinstitute.com/resources/knowledge/finance/personal-finance.
Voigt, Kevin and Alana Benson. “What is a financial plan, and How Can I Make One?” nerdwallet.com, Nerdwallet, Inc, Aug.4, 2021,
https://www.nerdwallet.com/article/investing/what-is-a-financial-plan.
Kenton. Will. “Personal Finance.” Investopedia, Dotdash, March 30,2021,
https://www.investopedia.com/terms/p/personalfinance.asp#personal-finance-principles
Fried, Carla. “Personal Finance 101: The complete guide to managing your money.” CNBC.com, CNBC LLC, Jan. 12, 2021, https://www.cnbc.com/guide/personal-finance-101-the-complete-guide-to-managing-your-money.