Personal finance involves managing income, expenses, and assets to achieve financial security. It includes identifying income sources, setting a budget, saving for retirement, and monitoring and adjusting the budget as needed.
Personal finance is the process of effectively managing the assets owned by an individual or a family. The approach dictates that attention be paid to generating income for the household, allocating specific amounts of that income to cover all expenses associated with the household, and taking steps to build reserves of cash and other assets for continued financial security. A wide variety of resources can be called upon to assist in the personal finance process.
The basics to the task of personal finance is to have a firm understanding of the income stream in the household. Income is generally in the form of wages or salary from a job, although other forms of income may apply. Interest earned on investments, alimony or child support payments, and other forms of compensation all qualify as income.
In addition to identifying the sources and total amount of income, effective personal finance also requires a clear understanding of the fixed and variable expenses associated with the home. Fixed expenses will often include rent or mortgage payments, car payments, and any outstanding loans. Variable payments may include groceries, monthly utility costs, or monthly bank service charges.
Once income and expenses are identified, the next step in a personal finance plan is to set a budget. To some extent, this is already accomplished by determining how much money is coming into the home and how much must be going out to meet debt obligations. Beyond those line items, there’s also the need to set aside some money for expenses that may not recur every month. This can include items like clothing replacement or car repairs.
After identifying all current debt obligations and basic living necessities, the next step is to assess the amount of income remaining. It is from this remainder that it is possible to begin to build financial wealth. Some of this remainder may be reserved for entertainment purposes, such as a meal or a movie. However, this excess income must also be used to create a savings account, set aside money for college expenses, buy life insurance, and fund a retirement plan. Even if there is only a small amount left after all obligations are met, it is still a good idea to reserve this small amount in some type of interest-bearing account. Over the course of a year, that small amount will start to grow and create more financial stability.
An essential part of personal finance is planning for retirement. Even if people in the household have a retirement plan through the workplace, establishing a personal plan should be one of the goals. Along with retirement planning, there is also the need to set aside funds that can be invested in bonds, stocks, real estate, and other ventures that can generate more wealth over time.
In the event that an employer does not withhold taxes, personal finances will dictate how to learn how to calculate those taxes and submit them to the appropriate government agency. Making this a priority will help ensure that money is always available to cover taxes and other legal obligations.
An important aspect of personal finance is monitoring the efficiency of the budget and making adjustments when necessary. An adjustment may be required due to an increase or loss of income, unexpected events such as a natural disaster or health problem, or the expansion of the family unit through marriages or births. The idea is to make the most of available assets while planning future events to the best of your ability.
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