Tips to Manage Personal Finance PDF

LESSON 1: AREAS OF PERSONAL entirely on one source of FINANCE income AREAS OF PERSONAL FINANCE  Importance of Income Sources - Income - Spending - Savings - Investing - Protection INCOME  Source of cash inflow t...

LESSON 1: AREAS OF PERSONAL entirely on one source of FINANCE income AREAS OF PERSONAL FINANCE  Importance of Income Sources - Income - Spending - Savings - Investing - Protection INCOME  Source of cash inflow that people and households receive to fund their lifestyles, save for the future and reach their financial objectives  Methods To Create Income  sources all generate cash that Sources can use to either spend, save,  Monetizing Skills and Interest or invest  Assess skills, knowledge,  income can be thought as expertise in various areas the first step in personal that can be monetized finance roadmap  Monetizing them can open door to additional income  Sources of Income sources  Employment  Regular pay  Exploring freelancing and side  Overtime gigs  Commissions  Exploring talents can  Bonuses/Tips determine if they can offer  Operating a Company services/expertise for money  Business Profit  Seeking opportunities to  Investments provide freelance work/side  Interest gigs  Dividend  Utilizing online  Rental Income platforms/marketplaces to  Retirement connect with potential  Pension clients/customers can help  Diversifying Sources of Income  Starting a small business  Essential for risk management  Can explore based on and efficient financial planning market demand and skills for  Aids in financial freedom, others stability, higher earnings, risk  Develop a business plan diversification, flexibility, and outlining goals, target independence market, and financial  Helps create a more stable projections financial portfolio by reducing  Consider e-commerce the danger of depending options to reach a broader  customer base and secure  Passive/Active Income necessary documents  Active  Earned from specific  Investing in income-generating duties/services rendered assets according to an agreed  Research about investment task, within a specified time options (real estate, stocks, frame bonds, mutual funds)  Active income are salaries,  Can consult with financial tips, fees, commissions, and advisors/professionals to allowances from the make informed investment companies you provide decisions services  Consider passive income  Working for a person or a opportunities (rental company, be it manual properties, investing high- labor, office work, or quality dividend-paying home-based service stocks)  Can also be working for yourself (self-employed)  Monetizing expertise or  Earners are also either full- knowledge time, part-time, freelancing,  Offer consulting services or or contractual workers; most become subject matter common types expert  Payment happens every  Develop online courses or two weeks (kinsenas), but educational materials to some got paid daily, weekly, share knowledge once every month, or paid  Consider writing a book/e- per project book or creating digital products Advantage: o more predictable and  Exploring rental income secure if budgeting (passive) monthly expenses  Consider renting out extra o comes at expected space through Airbnb periods so it is easier to  Evaluate the potential long- save and plan term rental income by investing in properties Disadvantage: o might not be enough to  Leveraging the power of the cover your living Internet expenses  Utilize online o could also be too platforms/marketplaces meager for you to build (such as social media an emergency fund platforms) to sell products/services to earn  Passive through online income  “making money work for sources you”   money from activities where you have no active or direct Disadvantage: involvement o Have little control over  investments you have made earnings where you earn money or o Stock prices rise and fall work you have done in the (lose money) past that continues to pay o Investing in corporate dividends even in the bonds also presents the present risk of companies  One common way is “closing down” and through opportunities and being unable to pay you activities where you can back turn money into assets  Buying and selling real SPENDING estate  includes all types of expenses  Investing in ownerships of an individual incurs related to public companies buying goods and services or through stock market anything that is consumable  Investing in government (i.e., not an investment) bonds  All spending falls into two  Setting aside money in categories: time deposits  Fixed expenses  Royalties from a book  Variable expenses written  Good spending habits are  Online course created critical for good personal  Rent received from real finance management estate properties  No longer dependent on  Fixed Expenses your active income  Expenses are those that remain  Have profit whether constant, although they may employed or not change occasionally  Types can be:  Paid at regular intervals and  Lucrative – renting out may vary slightly, change properties where tenants significantly or stay the same, are required to pay depending on the type of monthly expense  Steady stream –  Monthly fixed expenses are dividends from stocks common, although fixed are scheduled expenses may also occur quarterly/semi-annually weekly, quarterly, twice a year  takes years to build a sizable and yearly passive income  Can take more time to adjust,  need some short of initial though it’s still possible to cut investment costs Advantage:  Variable Expenses o Flexibility - main benefit is the biggest downside   change regularly and may be help with this area of their financial directly influenced by the plan choices you make day to day  less predictable and more PROTECTION volatile  Refers to a wide range of products  much easier than fixed that can be used to guard against expenses an unforeseen and adverse event  Common products: SAVINGS  Life Insurance, Health  Excess cash that is retained for Insurance, Estate Planning future investing or spending  Another area of personal  If there is a surplus between what a finance where people typically person earns as income and what seek professional advice, and they spend, the difference can be which can become quite directed towards savings or complicated investments  There is a whole series of  Managing savings is a critical area analysis that needs to be done of personal finance to properly assess an  Most people keep at least some individual’s insurance and savings to manage their cash flow estate planning needs. and the short-term difference between their income and expenses.  Having too much savings, however, can actually be viewed as a bad thing since it earns little to no return compared to investments. INVESTING  Purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back more money than they originally invested  Carries risk, and not all assets actually end up producing a positive rate of return  relationship between risk and return  Most complicated area of personal finance and is one of the areas where people get the most professional advice  There are vast differences in risk and reward between different investments, and most people seek IMPORTANCE OF PERSONAL FINANCE  It helps to understand finances better  It enables one to plan for investments  It keeps one from taking on unmanageable debts  It allows money and assets to grow PERSONAL FINANCE PRINCIPLES  Prioritization  Prioritize the areas that bring in the money, and ensure that income streams are sustained  Assessment  Constantly and periodically assess his/her earning and spending habits, so that the income streams are optimized and expenses are minimized  Restraint  Ensures that one doesn’t spend more than he/she makes  In this age, when credit is so easily available, restraint is of utmost importance LESSON 2: PERSONAL FINANCIAL  Second home (other properties, PLANNING real estate) for passive income “It is not about how much money you generation make, but what you do with what  Need to accumulate assets you’ve got.” which will generate passive income LIFE CYCLE OF FINANCIAL PLANNING  Acquisition of property for inheritance  Retirement; 60+ years  Focus on health  Legacy-planning before death PERSONAL FINANCIAL PLANNING  Process of managing money to achieve economic satisfaction  Should manage our finances/money efficiently and effectively to satisfy our  Early Life Up to 25 years economic needs and  Savings are going to bank achieve financial accounts independence  Credit cards are being offered,  Process of managing one’s self-application or service from financial resources banks accompanied by strategies for  Starting to become accumulating, protecting, independent, both inflow and allocating, and distributing outflow of income financial resources in accordance with your financial  Working Life; 25-45 years goals  Peak of working years  Also defined as the  If employed, stability-wise, development and promotion to a certain position, implementation of total which means income increase coordinated plans for  Start with own investments achieving one’s overall  Start with own family, which financial objectives means first own home  Allows the control of financial  There will be dependents situation (children)  Every person, family, or  Consideration of protection household has a unique by insurance financial position, and any financial activity therefore  Accumulation Stage; 45-65 years must also be carefully  Preparation for retirement planned to meet specific  Shift of expenses (addition to needs and goals new accumulated assets,  A comprehensive financial plan investments) can enhance the quality of life  and increase satisfaction by reducing uncertainty about future needs and resources  Advantages of Personal Financial Planning  Increased effectiveness in obtaining, using, and protecting financial resources throughout lifetime  Increased control of financial affairs by avoiding excessive debt, bankruptcy, and dependence on others for economic security  Improved personal relationships resulting from well-planned and effectively communicated financial decisions  A sense of freedom from financial worries obtained by  Step 2: Develop Financial Goals looking to the future,  Objective or target anticipating expenses, and  Usually driven by specific future achieving your personal financial needs economic goals  Some common financial goals:  Saving for a comfortable PERSONAL FINANCIAL PLANNING retirement PROCESS (Logical)  Saving to send children to college  Step 1: Determine Current Financial  Managing finances to Situation enable a home purchase  Need to know where he is  Start a business financially  Sort out what’s within reach,  Need to know and establish his what will take a bit of time, and financial reference point by which must be part of a long- computing his current financial term strategy net worth  Must be SMART  Financial net worth – how  Specific, measurable, much wealth one has action-oriented, realistic,  Difference between what time bound he owns, and what he owes (E = A – L) Steps in Creating Financial Goals Note: Don’t be afraid to have a negative net  Identify the goal worth. You are worse off if you have a negative  Set a deadline for achieving the net worth, didn’t know about it, and you are goal and be as specific as not doing anything about it. possible  Estimate the cost of the goal, either in terms of time and/or money   Break down the total cost into personal values, and current monthly amounts required economic conditions  Identify the specific actions or tasks to take to reach the goal Consequences of Choices  Track progress  Every decision closes off alternatives Goal Worksheet Examples:  Highlights all of the important  Decision to invest in stock information required for each may mean not taking a goal and allows one to get a vacation nice visual picture of what he  Decision to go to school full wants to accomplish and how time may mean not working to go about it full time  Opportunity cost is what one gives up by making a choice  Cost – commonly referred to as the trade-off of a decision, cannot always be measured in monetary amount  Decision making will be an  Step 3: Identify Alternative Course ongoing part of personal and of Action financial situation  Developing alternatives is  One needs to consider the lost crucial for making good opportunities that will result from decisions these decisions  Possible courses of action  Evaluate possible courses of usually fall into these action, taking into categories: consideration life situation,  Continue the same course personal values, and current of action economic conditions  Expand the current situation  Choosing involves more than  Change the current knowing what you might give situation up; also knowing what you  Take a new course of action would gain  Creativity in decision-making is vital to effective choices Evaluating Risk  Consider all of the possible  Uncertainty is part of every alternatives will help in making decision more effective and satisfying  When you make a decision, you decisions also accept risks  Changing personal, social, and Note: Not all of these categories will apply to economic conditions will every decision; however, they do represent require that you continually possible courses of action. supplement and update your  Step 4: Evaluate Alternatives knowledge  Evaluate possible courses of  Other decisions involve a very action, taking into low degree of risk, such as consideration life situation,  putting money in a savings o Savings – considered a account or purchasing items very liquid asset, that only a few pesos madaling i-convert sa  Chances of losing cash something of great value  Interest Rate Risk are low in these situations o Changing interest rates  In many financial decisions, affect your costs (when identifying and evaluating risk is you borrow) and your difficult benefits (when you save  Best way to consider risk is to or invest) gather information based on o Borrowing at a low one’s experience and the interest rate when experiences of others and to interest rates are rising use financial planning can be to you information sources advantage  Different type of risks: o But if you save when  Inflation Risk interest rates are o Rising prices cause lost dropping, you will earn a purchasing power lower return o Decide whether to buy something now or later; if Financial Planning Information Sources you buy later, you may  Relevant information is required have to pay more at each stage of the decision- o Inflation hedges – prices making process are increasing together  Changing personal, social, and with inflation economic conditions will  Income Risk require continually o The lost of job could be supplementing and updating the result of such things knowledge as changes in consumer spending  Step 5: Create and Implement o Individuals who face the Financial Action Plan risk of unemployment  One develops an action plan need to save while  Requires choosing ways to employed or acquire achieve goals skills they can use to  Can be as simple as listing each obtain a different type of goal and then listing a means of work achieving each one  Liquidity Risk  As one achieves his immediate o Some savings and or short-term goals, the goals investments have next in priority will come into potential of higher focus earnings  To implement financial action o But, may be more plan, one needs assistance difficult to convert to from others cash or to sell without Example: significant loss in value  May use the services of an insurance agent to  purchase property insurance or the services of an investment broker to purchase stocks, bonds, or mutual funds STEPS TO OVERCOME FINANCIAL PROBLEMS AND DIFFICULTS  Financial problems and challenges happen to everyone at some point, and the stress and worry can get to him  However, realizing that there is almost always a way out can help one not feel so depressed  He may able to find the way out himself;  He may need someone else’s perspective to help in finding a solution  Step 6: Review and Revise Plan  Financial planning is a dynamic  Identify the underlying problem process that does not end that’s causing the difficulties when one takes a particular  First step action  Financial problems are usually a  One needs to regularly assess symptom of a bigger issue his financial decisions  To come up with solutions that  Changing personal, social, and work in the long run, take the economic factors may require time to identify the real source more frequent assessment of financial troubles  When life events affect  The concept of identifying a financial needs, this financial specific problem is important as planning process will provide a it is more likely to result in lasting vehicle for adopting to those solutions changes  Just like with a leaky faucet;  Regularly reviewing this placing a bucket below is decision-making process will temporary help in making priority  Fix the tap and leak will stop adjustments that will bring  Focus on solving the problem financial goals and activities in that’s causing money troubles, line with current life situation rather than dwelling on stress  Source of Reason Why Solution An addiction Spending more - Get Financial Difficulties than you earn professional Problem Often Occur trying to satisfy counseling Unemployment Using credit for - Re-evaluate the addiction or lower than living expenses lifestyle, create usual income on reduced a budget and income follow it  Create a Budget – spend money in a way that helps solve the problem - If employed,  Budget – weapon for see if you can get 2nd combating financial problems job/overtime  Creating a budget is like turning Unexpected Increased - Simplify lifestyle illness or medical - Get all the the lights on to find way around accident expenses and help you can a dark room low/no income - Make sure  One can see what’s going on you’re getting everything and prevent problems before you’re entitle they happen to  Budget guides spending Moving out on Used to a high - Adjust your own standard of expectations decisions so that one is living that took and learn to spending money on what’s your parents live on what decades to you earn really important to him achieve rather than you’re used to  Determine financial priorities to - Use cash, not credit guide spending choices First baby is Parents didn’t - Adjust your  Setting clear priorities make it born budget for the budget and easier to make tough financial increased your lifestyle to expenses and fit the reduced decisions the drop in income and  Turning priorities into actionable income during increase and achievable goals will help maternity leave expenses Separation Got the house - Sell the house solve money troubles and get but can’t afford and downsize back on track the ongoing to something expenses on you can afford only one - Generate  Identify small steps to take to income and left revenue with address the problem & achieve over bills the house Retirement - You are now - Sell the house goals asset rich - Move into  Solution to financial problems is and cash something you often to reduce expenses, poor can afford - You ca no - Invest extra increase income, or do some longer afford proceeds from combination of both to live life plus the sale  Most people don’t want to to pay the - Enjoy life more house make changes to their lifestyle, upkeep on but faces with the choice of your reduced income ongoing money troubles, or making several small changes Emotional You are not - Set emotions to ease up on the financial attachment to willing to part aside something with something - Look at the stress– most people are game you can no situation from to try. longer afford a financial  Snowball effect – (home, perspective: 5 businesses, years from maintaining minimum vehicle, toy) now, what will payments on all debts but be bills will be then putting all extra money  towards one debt to get it If debt is causing you financial paid off faster; once that problems: one debt is paid off, one  Do you have any assets or toys can put all of the extra funds you can sell to pay off debt? towards eliminating the next  Can you take on a side job or debt; one of the powerful create another source of method of paying debts off income with something you faster know how to do well?  Look for things to do, even  Look outside the box, ask temporarily, to improve yourself tough questions, invite situation a trusted friend to have a look at your budget and make Learn more about separating needs suggestions, or sit down with a from wants Credit Counselor and get their  Do I want this or do I need it? suggestions.  Will spending this money get  Research viable options that will me closer to my financial goals move you towards your goals. A or further away? consolidation loan, speaking  Can I live without it? with a Credit Counselor, a Debt Management Program, or Learn how to reduce or change some other option may be a impulsive spending habits possibility  Do you use credit cards for impulsive purchases?  Develop plan to overcome  can contribute to a cycle of financial problems for good ongoing financial difficulty  After coming up with ideas for and add as much as 50% to how to being tackling financial everything you purchase problems, one can put together a realistic plan Ask yourself if you can downsize  Some goals will have a lifetime anything in your budget or switch to a of a few months, others will less expensive option need a longer timeline, like 24-  If vehicle costs are straining your 36 months budget, can you down size your vehicle, get rid of one vehicle,  Review how things are going take transit, or car pool? Every once-in-a-while, review how  If your rent, mortgage, or home things are going: upkeep is bleeding you dry,  Is the plan working towards the can you downsize to something goals? more affordable, rent out your  If not, figure out why not and basement, rent a room in your adjust house, rent out the storage  Plan needs to be realistic space in your garage, or can  Plan should contain some you take in a student for some things not done before extra income? putting the plan in a place  Do something different to get a different outcome.   Keep doing what were *Additional Reading Materials done before, will get the FINANCIAL PLANNING same result as before–  Comprehensive evaluation of problems. an individual’s (or household’s)  Be open to the possibility of fine- current and future financial tuning the plan state to predict and manage  Improve the plan to accomplish future cash flows, expenditures, the goals more quickly as long and asset values as the budget can afford the changes and everyone who  Why make a financial plan? relies on the budget are okay  Control over spending with the aggressive approach  Security from risk  Review the budget  Freedom from worry occasionally and make  Sustainable lifestyle necessary changes.  Freedom from debt  Build up savings to handle  Realizing goals unanticipated expenses without going into debt and be  Financial Planning Cycle in a difficult situation.  What is my Financial State?  Overcoming financial problems  What do I want to achieve? and difficulties isn’t easy, but by  What must I do to achieve it? setting some clear priorities,  Am I doing it? identifying ways to achieve  What changes do I need to these goals, and persevering make it? with the plan, one can overcome the challenges and  Remember: at the same time, put an end to  Parents, your children are not the financial stress. your RETIREMENT PLAN.  Children, your parents are not your EMERGENCY FUND.  Do financial planning today.  Ponder:  Your current financial state is the sum total of all your past financial choices?  Why make a Financial Plan?  Control – a financial plan lets you know your financial situation and enables you to control your spending  Security – financial plan enables you to build-up your emergency fund to cope with unforeseen expenses such as sickness or sudden job loss   Freedom from worry – you get a  Research different modes of sense of financial certainty saving or investing to because you are preparing for safekeep or grow your the future money  Sustainability – financial plan  Save for planned expenses allows you to prepare for  Set aside an emergency retirement; retirement fund will fund for unplanned help you live comfortable even expenses when you no longer earn income  Execute the plan  Freedom from debt – financial  What should you do to plan will enable you to avoid achieve your financial unnecessary debt due to goals? unnecessary wants  Adjust your lifestyle when  Realizing dreams – financial needed plan motivates you to save a  Prioritize spending on needs portion of your income to help and important expenses achieve your life goals  Delay spending on your wants  Financial Planning Cycle  Save early  Know your situation  Save regularly  Who are you and what do  Invest wisely you have?  Discipline is key  Assess your current financial situation  Review, monitor, and reassess  List your sources of income,  Are you executing your plan assets owned, expenses, or on time? borrowings and any  Periodically review and personal circumstances that revise your financial plan may affect your financial based on your current position situation  Increase your goals as  Set your financial goals needed, revise your saving  What do you want to and investing strategies to achieve? When do you meet your increased want to achieve it? How financial goals much do you need?  Set your financial goals  Tips to Save Successfully  Be realistic, specific, and  Create and follow a timebound reasonable budget  List expenses  Create a financial plan  Allocate a reasonable  How do you achieve your budget for each financial goals?  Use it to guide your  Determine how much spending money you can save each  Save first month your build your financial goal   Set aside portion of your income in a savings account  Spend the remainder on your needs  Spend less than what you earn  Live below your means  Prioritize needs  Cut down on wants