Personal Finance is a term used to describe Financial Management practices. Personal Finance is important for managing your money through budgeting, expenses and savings. It includes how you manage all the important elements of you and your family's finances in the short term and in the long term. It also includes aspects such as investment management and insurance.
Personal finance can differ from person to person depending on their goal and income. However in order to manage your personal finance effectively you must have a Financial Plan. A Financial Plan is a broad view of your current financial status, your financial goals and any other strategies you've set to achieve those goals. A Good financial planning should include details about your savings, debt, investments, insurance or any other component in your financial life. In order to execute your financial plan effectively, you must have a defined set of goal for the future. Thinking about what the goal is or what the goals are and creating realistic steps to achieve them keeping in mind your income and expenditure is the process for a good Personal Financial Plan.
For Example;
Lets say Mr. Tshering got a job in a private company that pays him Nu.25,000/- a month and he wants to purchase a small car in next three years. His parents are also employed and has a stable income but their income is not enough to meet the monthly family expenses so, Mr. Tshering has to help his parents financially. Mr. Tshering plans to save Nu.10,000/- every month for three years in order to purchase the small car and further keep Nu. 3000/- every month as his emergency fund. Since he have to help his parents financially he gives Nu.6000/- to his parents and keeps Nu.6000/- for his personal expenses.
In the above example Mr. Tshering sets a goal to purchase a small car within three years. His strategic Financial Plan is to save Nu.10,000/- every month for three years in order to get the car (Goal), keeps Nu. 3000/- every month as an emergency fund, gives his parents Nu. 6000/- every month to his parents to help them and keeps Nu. 6000/- to himself to meet his personal expenses.
Why is Personal Finance Important?
Personal Finance is important for managing your daily financial needs as well as it is important for your financial future. Personal Finance is important since it gives you a better understanding about investing or planning for your future since you can understand the better opportunities that are available to improve your finances. This understanding can help you budget your short-term needs while planning for the long-term financial goals. To understand Personal Finance you need to understand the Five main aspects of Personal Finance.
The FIVE main aspects of Personal Finance
In order to build a good financial plan for yourself these five aspects are important for you to understand.
Income
Spending
This is the money that you have to give as an expense or expenditure. Controlling the amount of money you spend can allow you to keep aside money to grow your financial future.
Savings
This is the money that you have set aside from your income for the future. It is important for you to set aside some money from your income for savings so that you can tackle the uncertain future.
Investing
This is the money used for purchases that allows you to earn future income. Investing is different from savings since this money is not in the form of cash rather it is in the form of stocks, bonds, or real estate. Investing is done so that you can expect for a good rate of return in the future or expect for an appreciation in the value of the product in the future. But investment comes with risk.
Protection
Protection means making sure that you protect yourself from financial risk. This can be done through insurance such as Life Insurance, annuities, health insurance etc... These can provide financial security or protection from uncertainties in the future.
For you to have a successful Personal Finance you should have a better understanding about the Principles of Personal Finance. According to the Jump$tart Coalition for Financial Literacy, a nonprofit organization that promotes financial literacy education in the U.S there are 12 Principles of Personal Finance;
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