Personal Finance PDF

Personal Finance - The activity of managing your own Financial goal money. - Results that an individual wants to - The process of determining a attain. person's financial needs or goals for - Examples in...

Personal Finance - The activity of managing your own Financial goal money. - Results that an individual wants to - The process of determining a attain. person's financial needs or goals for - Examples include buying a home, the future and how to achieve them building a college fund, or achieving - It encompasses all aspects of financial independence. managing your own money - It’s impossible to effectively manage your financial resources without The best way to achieve financial objectives financial goals. is through personal financial planning. The Role of Money What is PERSONAL FINANCIAL - About 80% of Americans believe PLANNING? that money is power, and about 75% - Planning which helps us define our say that it is freedom financial goals and develop - Money is the medium of exchange appropriate strategies to reach them. used to measure value in financial transactions. We cannot depend on employee or government benefits— such as steady Money and relationships salary increases or adequate funding from - The average couple spends employer-paid pensions or Social between 250 to 700 hours planning Security— to retire comfortably. their wedding, - Spend an average of about $20,000 Creating flexible plans and regularly revising (about 1,000,000) on the big day) them is the key to building a sound financial future. Marriage killing money issues - If you’re committed to a relationship, Successful financial planning also brings you and your partner owe each other rewards that include greater flexibility, a calm, honest conversation about an improved standard of living, each other’s finances, habits, goals, wise spending habits, and and anxieties. increased wealth - This where the ego, anxieties about control, and notions of marital roles Of course, planning alone does not will have to be checked. guarantee success; but having an effective - When working together, couples can consistent plan can help you use your achieve more than singles. resources wisely - If debt is an issue, couples can employ various tools and strategies Careful financial planning increases the to start paying off debt and get on a chance that your financial goals will be better financial footing. achieved and that you will have sufficient - Having kids changes everything; flexibility to handle such contingencies as ideally, couples should communicate illness, job loss, and even financial crises. their expectations and ideas about  how to raise and pay for them well lifestyle preferences, and personal before they’re born. values. - Couples who have trouble talking about money can seek out the help Career of a financial adviser or planner who - A job for which you are trained and can offer unbiased advice. in which it is possible to advance during your working life, so that you Goal dates get greater responsibility and earn - Target dates in the future when more money: certain financial objectives are - Through careful career planning, you expected to be completed. can improve your work situation to gain greater personal and Long-Term Goals professional satisfaction. - Long-term financial goals covering about 6 years out to the next 30 or Some of the steps are similar to the 40 years. financial planning process described earlier. - Although it’s difficult to pinpoint exactly what you will want 30 years 1. Identify your interests, skills, needs, and from now, it’s useful to establish values. some tentative long-term financial 2. Set specific long and short-term career goals. goals. 3. Develop and use an action plan to Short-Term Goals achieve those goals. - Are set each year and cover a 4. Review and revise your career plans as 12-month period. your situation changes. Intermediate Goals Be SMART in planning your financial goals - Are set for 2-5 years. Specific: What do I want to achieve? What They include making substantial, regular is required of me and what are my contributions to savings or investments in constraints? order to accumulate your desired net worth. Measurable: How much money is needed? Intermediate goals bridge the gap between How will I know if I am succeeding? short- and long-term goals, and both Attainable: How can I do this? Is this intermediate and short-term goals should be consistent with my other financial goals? consistent with those long-term goals. Realistic: Am I willing and able to do this? Timely: What is my target date? What Your Career short-term goals must be achieved along - A critical determinant of your lifetime the way to achieve my longer term goals? earnings is your career. - The career you choose is closely related to your level of education and your particular skills, interests, Basic Accounting concepts 2. Classifying Define Accounting - Means the sorting of - A system that identifies, records, business transactions to their and communicates relevant specific accounts. economic events to interested users. - This is the phase where - Is the process of recording, items are sorted and classifying, and summarizing, in a grouped. significant manner and in terms of - Similar items are being money transactions, and events, classified under the same which are part, at least of a financial name. in character and interpreting the results thereof. Why is it important to classify accounts? - The reason for classifying accounts Accounting is for easy summarizing. - Is a service activity. - It functions to provide quantitative 3. Summarizing information, primarily financial in - After each accounting period, nature, about economic entities that data recorded are are intended to be useful in making summarized through financial economic decisions with reasoned statements. choices among alternative courses - These Financial statements of action. are: 1) Income Statement Economic events 2) Balance Sheet - Measurable in terms of money. 3) Statement of Retained Earnings Four phases of accounting 4) Statement of cash flows 1. Recording Why is it important to interpret? - This is technically called - They should also be interpreted so bookkeeping. they can be used appropriately in - A systematic and the decision-making process. chronological recording of business transactions, 4. Interpreting observing therein the - These are the accountant’s fundamental principles of interpretation of the Financial accounting. statement. Chronological - This is called an Analysis - transactions should be recorded in Report that must be accordance with the date of the submitted together with the business transactions, from the first Financial reports. day of the month to the last day of the month. What is the role of Financial statements in financial planning Example - Financial goals describe your - Courtney has total liabilities of destination, and financial statements ₱150,000 and a net worth of and budgets are the tools that help ₱75,000. you determine exactly where you are - How much are her total assets? in the journey. Answer: She has total assets of - Financial plans are the road maps ₱225,000 (total liabilities of that show you the way, whereas ₱150,000 + net worth of ₱75,000 = personal financial statements let you ₱225,000 in total assets). know where you stand. Assets Personal Financial statements - In accounting, these are defined as anything that has current or future These are planning tools that: economic value to a business. - provide an up-to-date evaluation of - In simpler terms, these are the your financial well-being; items that you own. - help you identify potential financial problems, and; Assets can be grouped into four categories: - help you make better-informed 1. Liquid Assets financial decisions. - These are assets that are held in the form of cash or that can readily be 4 Key Personal Financial converted to cash with little or no Statements/Reports loss in value. Balance Sheet - Examples: cash on hand, savings Income Statement account, money market deposit Expense Statement accounts, money market mutual Budgets funds 2. Investments Balance Sheet - These are assets that are acquired - Also called the Statement of to earn a return rather than provide a Financial Position. service. These are mostly intangible - Summary statement of your financial assets and are typically acquired to position at a given point in time. achieve long-term financial goals. - The statement balances your assets - Examples: stocks, life (what you hold) against your insurances/pensions, mutual funds financing, which can be either debts 3. Real Properties (what you owe) or net worth (your - These are tangible assets that are general level of wealth). immovable. - This also helps you track the - Examples: land, and anything fixed progress you’re making in building to it, house up your assets and reducing your 4. Personal Properties debt.  - These are tangible assets that are movable and used in everyday life. - Examples: automobiles, furniture PREPARING THE BALANCE SHEET and fixtures, jewelries, home 1. List your assets at their fair market value electronics/appliances as of the date you are preparing the balance sheet. Liabilities 2. List all current and long-term liabilities. - In accounting, these are defined as 3. Calculate net worth. financial obligations of a company that results in the company's future Income statement sacrifices of economic benefits to - Income and expense statements are other entities or businesses. also called the Statement of - In simpler terms, these represent an Financial Position. individual’s or family’s debts. - Income: cash in. - Common sources of income include Liabilities can be grouped according to earnings received as wages, maturity: salaries, self-employment income, 1. Current or Short-term Liabilities bonuses, and commissions; interest - Any debt currently owed and due and dividends received from savings within 1 year of the date of the and investments; and proceeds from balance sheet. the sale of assets such as stocks - Examples: charges for consumable and bonds or an auto. goods, utility bills, rent, taxes 2. Long-term Liabilities Expense statement - Debt due 1 year or more from the - Income and expense statements are date of the balance sheet. also called the Statement of - Examples: real estate mortgages, Financial Position. education loans, installment loans - Expense: cash out. These are money spent on living costs and to Equity pay taxes, purchase assets, or repay - In accounting, these values are debt. attributable to a business. - In simpler terms, this is your net Expenses can be classified as follows: worth, or your actual wealth after 1. Fixed Expenses subtracting your total liabilities (what - contractual, predetermined, and you owe) from your total assets involving equal payments each (what you own). period (typically each month) - e.g. mortgage, installment loan The level of net worth is important in the payments, monthly savings long-term financial planning process. Once 2. Variable Expenses you have established a goal of - expenses involving payment accumulating a certain level and type of amounts that change from one time wealth, you can track progress toward that period to the next goal by monitoring net worth. - e.g. food, clothing, utilities Your own expenses will vary according to your age, lifestyle, and where you live. Net Income or Loss A component of the income and expense statement. It shows the net result of the period’s financial activities. Also called a cash surplus or deficit. - Net Income or Cash Surplus is a positive figure that indicates that expenses were less than income. - Net Loss or Cash Deficit is a negative figure that indicates that expenses exceed income. - The net result of your financial activities for the period is included as a component of your Balance Sheet’s equity section. PREPARING THE INCOME AND EXPENSE STATEMENT 1. Record your income from all sources for the chosen period. 2. Establish meaningful expense categories. 3. Subtract total expenses from total income to get the cash surplus (a positive number) or deficit (a negative number).