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Topic 1: Understanding Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE...

Topic 1: Understanding Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE 1ST TERM Joseph Joekaven L. Ramizares ability to understand the trade-offs and PERSONAL FINANCE decisions that generate wealth for you. It is a term that covers managing your money as TRADE-OFF well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, It is giving up one thing for another investments, retirement planning, and tax estate planning. It is often referring to the entire industry that provides financial services to individuals and For Example: households and advises them about financial and investment opportunities. It is wise to give up some current spending to enjoy a financially comfortable retirement. You have to do only a few things right in personal finance during your lifetime, It is about meeting personal financial goals, as long as you don’t do too many things wrong. whether it’s having enough for short-term Personal finance is not a rocket science. You can financial needs, planning for retirement, or saving succeed very well in your personal finances by making for your child’s college education. appropriate plans and taking sensible actions to implement those plans. FINANCIAL LITERACY Saving V.S Spending It is about knowledge of facts, concepts, Renting V.S Buying a House principles, technological tools that are Time V.S Money fundamental to being smart about money. (Forgue, Personal finance 9th ed.) Having a set of skills and knowledge will permit a specific person to create informed and effective decisions with all SPEND LESS SO YOU CAN SAVE AND INVEST their financial assets. MORE To be financially responsible, one is accountable First, recognize that financial objectives are rarely for their future peace of mind. Financial achieved without forgoing or sacrificing current responsibility means being motivated to come up consumption (spending on goods and services). with good decisions in personal finance. This restraint is accomplished by putting money into savings (income not spent on current It also refers to the practice of properly handling consumption) for use in achieving future goals. money and other similar assets in a way that is considered fruitful and in the best concern of the Some savings are investments (assets purchased individual, or the family, or the business with the goal of providing additional income from company. the asset itself.) By saving and investing, people THE BUILDING BLOCKS TO ACHIEVING are much more likely to have funds available for PERSONAL FINANCIAL SUCCESS future consumption. If you save for tomorrow, you will be happier today. Today’s marketplace provides a constant barrage of messages suggesting that you can spend and Saving for future consumption represents a good borrow your way to financial success, security, illustration of the human desire to achieve a and wealth. certain standard of living. This standard is what an individual or group earnestly desires and These messages are very enticing for those seeks to attain, to maintain if attained, to starting out in their financial lives. In truth, preserve if threatened, and to regain if lost. At overspending and overuse of consumer credit any particular time, individuals actually actually impede financial success. experience their level of living. In essence, your standard of living is where you would like to be, Many people think that being wealthy is a and your level of living is where you actually are. function of how much you earn or inherit. In reality, it is much more closely related to your TONGOL | MAR245 1  Topic 2: Introduction to Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE 1ST TERM Joseph Joekaven L. Ramizares FINANCIAL SUCCESS AND HAPPINESS Financial success is the achievement of financial aspirations that are desired, planets, or attempted. Success is defined by the person that seeks it. Some define financial success as being able to actually live according to one’s standard of living. Many seek financial security, which provides the comfortable feeling that your financial resources will be adequate to fulfill any needs you have as well as most of your wants. Others want to be wealthy and have an Figure 1.1 shows how the building blocks of a abundance of money, property, investments, and financially successful life fit together. Financial other resources. A fundamental truth of personal success and happiness come from using the finance is that you cannot build financial security building blocks of personal finance, such as or wealth unless you spend less than you earn. having a foundation of regular income to As a result, you cannot reach your standard of provide basic lifestyle and savings and living without somewhat restricting your level of establishing a financial base using employee living as you save and invest. That's the benefits blocks including setting financial trade-offs. goals, controlling expenditures, managing income taxes, handling credit cards, and Financial happiness encompasses a lot more investing in mutual funds and retirement than just making money. It is the experience you plans. have when you are satisfied with your money matters. People who are happy about their finances are likely to be spending within a budget and taking steps to achieve their goals, and this happiness spills over in a positive way to feelings about their overall enjoyment of life. Financial happiness is in part a result of practicing good financial behaviors. Examples of such behaviors include paying bills on time, spending less than you earn, knowing where your money goes, and investing some money for the future. The more good financial behavior you practice, the greater your financial happiness. In fact, simply setting financial goals contributes to financial happiness. USING THE BUILDING BLOCKS Bridging the gap between one’s level of living and one’s desired standard of living involves learning about how to achieve financial success. TONGOL | MAR245 2  Topic 2: Introduction to Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE 1ST TERM Joseph Joekaven L. Ramizares to financial difficulties. By learning to prioritize and to distinguish between what is truly PERSONAL FINANCE necessary and what is just a want, people can make money decisions that are both It is the process of planning and managing conscientious and sustainable in the long personal financial activities such as income term. generation, spending, saving, investing, and protection. The process of managing one’s 5. Economic Stability - They also help to create personal finances can be summarized in a a strong and stable economy by making good budget or financial plan. financial choices. This can have a positive impact on both an individual and society, It encompassess the whole universe of managing leading to a more productive economy and a individual and family finances, taking community that works together more responsibility for your current and future financial effectively. situation, and setting financial goals. It also includes handling individual financial tasks and 6. Long-Term Financial Well-Being - Managing saving for emergencies. your money wisely is like a map to success in the future. It is important to create a financial It is about meeting your financial goals and plan and to consider major life events to make understanding all the routes to do this, from a secure future. saving and investing, and keeping debt under control, to buying a home to planning for 7. Reducing Stress - By having a solid plan in retirement — and coming up with a plan to place, people will be able to understand their accomplish these goals. financial challenges and act accordingly. A IMPORTANCE OF PERSONAL FINANCE financial roadmap helps individuals to handle uncertain situations with more resilience. 1. Financial Security - Personal finances is like having a guardrail that keeps you from falling 8. Financial Freedom - I think that money off a cliff, even when regrettable events occur, management is really important because it you don’t lose all financial stability. By helps us to become financially independent constructing an emergency fund and taking and achieve our goals care of our debt, we become more financially secure. FIVE AREAS OF PERSONAL FINANCE 1. Income - Income refers to the source of cash 2. Budgeting and Discipline - By creating a inflow that an individual receives and then plan, students can easily stick to spending the uses to support themselves and their family. It money they earned and save up for important is the starting point for our financial planning goals. By making people think twice before process they spend, it helps them avoid going into - Salaries unnecessary debt and cultivate better - Bonuses spending habits. - Hourly wages - Pensions 3. Informed Decision-Making - By educating - Dividends yourself about personal finance, you can These sources of income all generate cash make better decisions about your that an individual can use to either spend, investments, retirement planning, and wealth save, or invest. In this sense, income can be creation. It is necessary to know how to thought of as the first step in our personal manage your finances effectively if you want finance roadmap. to live a comfortable life in the future. 2. Spending - Includes all types of expenses an 4. Wise Spending Habits - It’s really important individual incurs related to buying goods and to be able to control your spending and not services or anything that is consumable (i.e., spend more than you earn because it can lead TONGOL | MAR245 3  Topic 2: Introduction to Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE 1ST TERM Joseph Joekaven L. Ramizares not an investment). All spending falls into two - Commodities categories: Cash (paid for with cash in hand) - Art and Credit (paid for by borrowing money). Most of the people's income is allocated to Investing is the most complicated area of spending. personal finance and is one of the areas where people get the most professional The expenses listed above all reduce the advice. There are vast differences in risk and amount of cash an individual has available for reward between different investments, and saving and investing. If expenses are greater most people seek help with this area of their than income, the individual has a deficit. financial plan. Managing expenses is just as important as generating income, and typically people have 5. Protection - Personal protection refers to a more control over their discretionary expenses wide range of products that can be used to than their income. Good spending habits are guard against an unforeseen and adverse critical for good personal finance event. management. Common protection products include: 3. Saving - It refers to excess cash that is - Life insurance retained for future investing or spending. If - Health insurance there is a surplus between what a person - Estate planning earns as income and what they spend, the difference can be directed towards savings or This is another area of personal finance where investments. Managing savings is a critical people typically seek professional advice and area of personal finance. which can become quite complicated. There is a whole series of analysis that needs to be Common forms of savings include: done to properly assess an individual’s - Physical cash insurance and estate planning needs. - Savings bank account - Checking bank account 10% RULE IN PERSONAL FINANCE - Money market securities Most people keep at least some savings to manage their cash flow and the short-term difference between their income and Savings - It’s recommended to save at least 10% expenses. Having too much savings, however, of your income. This involves creating a money to can be viewed as a bad thing since it earns reserve to handle unexpected costs or help you little to not return compared to investments. make your financial needs easier for about 3 to 6 months 4. Investing - Relates to the purchase of assets Investments - The rule that says you should save that are expected to generate a rate of return, 10% of your gross income also motivates people to with the hope that over time the individual will think about investing. receive back more money that they originally Consistency - Consistency is the key to following invested. Investing carries risk, and not all the 10% rule. Regularly saving 10% of your income can create financial growth in the long term. assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return. Common form of investing include: While the 10% rule is a common one, it is - Stocks important to remember that personal financial - Bonds situations vary, so it cannot always be strictly - Mutual funds followed. Well, if someone has high expenses - Real estate or debt obligations, or if they have short-term - Private companies TONGOL | MAR245 4  Topic 2: Introduction to Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE 1ST TERM Joseph Joekaven L. Ramizares financial goals, then they might need to tweak non-essential expenses, and savings. the percentage. The non-essential expenses category will help you identify areas where you This rule can evere as initial guidance for can make cutbacks to funnel more people who want to develop a savings and money into savings. ​ investments regime, but it can be changed ​ according to one’s particular conditions and - Generally, you should aim to allocate aims. In simpler terms, the 10% rule is an 50% of your income to essential easy way to remember to save and invest a lot expenses, 30% to non-essential of money in your overall financial plan. expenses, and save 20%. This allocation depends on your financial THE PERSONAL FINANCE PLANNING PROCESS goals, however, so how you allocate your income may vary. Sometimes ❖ Step 1: Set Financial Goals individuals can get carried away and - Whether it’s buying a house, funding make too many cuts in non-essential your child’s education, or planning for expenses. While you can do this, you retirement, clarity on financial goals is have to be careful because making the first step towards success. Set too many cuts means your lifestyle SMART financial goals as they are will suffer, and ultimately you will lose essential for an effective financial the motivation to stick to your budget. plan. SMART means specific, While creating a budget is a crucial measurable, attainable, relevant, and component of the financial planning time-bound. Define your short and process, sticking to it is equally long-term financial goals while important so be realistic. ​ keeping these five points in mind. ❖ Step 2: Assess Current Financial Situation ❖ Step 4: Emergency Fund Planning - This means taking stock of your - An emergency fund refers to a reserve current income, expenses, assets, of cash that you set aside to and liabilities. How much money are specifically use for unexpected you making after taxes? How much expenses or situations. It provides you money is spent? How much is saved? with a safety net and prevents you How much goes to repaying debts? from going into debt when faced with How much are your investments and unexpected events, such as medical properties worth? With these you will emergencies, car repairs, or job loss. ​ be able to calculate your net worth, ​ just subtract your total liabilities from - The Emergency Fund Planning your total assets. Knowing your net process involves how much money worth can be advantageous as you you need to save and where. can track it over time to measure your Generally, experts recommend saving progress. An honest assessment of three to six months’ worth of living your current financial situation will expenses in an emergency fund, but also help you set SMART goals. this amount can vary based on your circumstances, such as the stability of ❖ Step 3: Create a Budget your job, your lifestyle, or your - Budget is how you manage your monthly expenses. This cash should finances daily, and ultimately it is what be easily accessible, as emergencies helps you achieve your short and demand quick action. You can save it long-term financial goals. It details in a high-interest savings account so it how your income will be spent, and can be quickly tapped into when makes sure you live within your needed. means. Categorize your expenses in three parts: essential expenses, TONGOL | MAR245 5  Topic 2: Introduction to Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE 1ST TERM Joseph Joekaven L. Ramizares ❖ Step 5: Debt Management ❖ Step 7: Retirement Planning - Debt can be a major cause of anxiety, - When you are young, retirement may so if you have any debts, prioritize seem a lifetime away, but it is vital to paying them off as quickly as you can start planning for it as early as you to secure your financial freedom. can. The sooner you start, the more Explore different strategies such as time your investments have to grow debt consolidation or creating a through the power of compounding structured repayment plan to interest. Time is a big factor in effectively manage and eliminate your building a decent retirement nest egg, debts. If you pay off high-interest and starting early provides a massive debts first, you will save a lot of advantage. It also enables you to take money in the long run. On the other more risk, as you have plenty of time hand, by starting with the smallest to make back any losses incurred. debt, you will gain confidence and momentum to quickly clear your liabilities. ​ ❖ Step 8: Insurance Coverage - Explore different strategies that suit - As said before, ensuring the safety of you to manage debt. Even if you your loved ones, your assets, and don’t have any debt, avoid taking yourself is a major part of financial debts you can’t easily repay. An planning. Having adequate insurance important thing to note here is your coverage becomes especially credit score. It reflects how well important when you have old parents you’ve managed your debts and or other dependents and when you determines how easily and quickly are the main earner of your family. Life you will get loans should you need is unpredictable and you never know them. On top of that, people who what it will throw your way, so it helps have a good credit score get lower to be prepared. An important thing to interest rates and higher credit limits, keep in mind about insurance is that it so work on improving your credit gets expensive the older you get, so score. You can do this by paying off again, get insured as soon as you can. your debt on time, maintaining a healthy credit utilization ratio, and not ❖ Step 9: Tax Planning having too many debts active at the - For those who want to keep as much same time. of their hard-earned money as possible, Tax Planning plays a crucial ❖ Step 6: Investment Planning role in personal financial planning. - Investment planning involves careful Through tax planning, you can legally assessment of your financial goals, reduce your tax liabilities by taking risk tolerance, and time horizon so advantage of the various benefits in you can find the most suitable tax law. financial products for your investment. It helps you grow your wealth, gives ❖ Step 10: Regular Monitoring and you security, and improves your Adjustments overall financial well-being. Those - Managing personal finances is a who are new to investing can get continuous process. It doesn’t end easily overwhelmed, so inexperienced after you have made your financial individuals should focus on improving plan. Monitoring and readjusting your their financial literacy through financial plan is the essential final step educational videos, podcasts, or to ensure its effectiveness and articles. adaptability to changing circumstances. Regularly review your TONGOL | MAR245 6 Topic 2: Introduction to Personal Finance BBPERFIX SY 2024 BBPERFIX : PERSONAL FINANCE 1ST TERM Joseph Joekaven L. Ramizares budget, portfolio, debt, and financial goals. Life is dynamic, your financial situation will change, your goals will evolve, you might add new members to your family, you might have to deal with unexpected expenses, there might be new international and domestic developments, or changes in the market, and so much more. Many factors will affect you and your finances, so make sure your financial plan reflects the changes, and readjust as needed.​ TONGOL | MAR245 7