Personal Finance PDF

P sonal Finance W1L1 – AREAS AND PRINCIPLES OF PERSONAL FINANCE o Dividend PERSONAL FINANCE o Rental...

P sonal Finance W1L1 – AREAS AND PRINCIPLES OF PERSONAL FINANCE o Dividend PERSONAL FINANCE o Rental income is the process of planning and managing personal  Retirement financial activities such as income generation, o Pension spending, saving, investing, and protection. ` AREA OF PERSONAL FINANCE kunwari sa household, income ng isa, income ng As shown below, the main areas of personal finance lahat are income, spending, saving, investing, and active income - working for the monney. ung salary protection. na na-earn mo passive income - meron kang cash in-flow kahit hindi ka actively na nagwowork. chill chill ka lang kasi money works for u Having multiple sources of income can facilitate savings and long-term financial goals, improve wages, and speed up the acquisition of wealth. It also increases financial independence and flexibility, enabling individuals to make decisions based on personal tastes. This flexibility can enhance work-life balance, lower financial stress, and allow individuals to pursue their hobbies or interests INCOME Income refers to a source of cash inflow that people and households receives to fund their lifestyles, save for the future and reach their financial objectives. It is the starting point of the financial planning process. Income may be derived from a variety of sources. These sources of income all generate cash that an individual can use to either spend, save, or invest. In this sense, income can be thought of as the first step in personal finance roadmap.  Employment o Regular pay o Overtime pays Diversifying sources of income o Commissions Diversifying sources is essential for risk management o Bonuses/Tips and efficient financial planning. It also aids in financial  Operating a company (active income) freedom, stability, higher earnings, risk o Business profit diversification, flexibility, and independence. People  Investments (passive income tho hindi siya with only one source of income are more susceptible sureball pero at least lumalaban pera mo) to financial instability since it can result in job losses o Interest or downturns in the economy. Diversifying sources of  P sonal Finance income helps create a more stable financial portfolio advisors or professionals to make informed by reducing the danger of depending entirely on one investment decisions regarding the same. source of income. Considering passive income opportunities like rental properties or investing in high-quality dividend-paying stocks can also help.  Monetizing expertise or knowledge: Offering consulting services or becoming a subject matter expert in their industry can create additional sources of income. Developing online courses or educational materials to share knowledge is one option for developing online income sources. Individuals can also consider writing a book or an e-book or creating digital products related to their expertise.  Exploring rental income: Individuals can consider renting out extra space through platforms like Airbnb to make passive income.  Skills and interests: Assessing one’s skills, They can also evaluate the potential for long-term knowledge, and expertise in various areas and rental income by investing in properties in monetizing them can open the door to additional happening places. income sources. It includes exploring hobbies, interests, and passions that can be monetized  Leveraging the power of the Internet: Individuals can utilize online platforms and  Exploring freelancing and side gigs: marketplaces to sell products or services to earn Individuals can determine if they can offer through online income sources. Social media services or expertise on a freelance basis for platforms are great for spreading such ideas. money through the exploration of talents within them. It involves seeking opportunities to provide freelance work or take on side gigs in their field of expertise or interest as others. Utilizing online SPENDING platforms and marketplaces to connect with Spending includes all types of expenses an individual potential clients or customers can help. incurs related to buying goods and services or anything that is consumable (i.e., not an investment).  Starting a small business: Individuals can All spending falls into two categories: fixed explore viable business ideas based on market expenses and variable expenses demand and skills for others. They can develop a business plan outlining goals, target market, and Fixed Expenses financial projections for the same. Considering e- Fixed expenses are those that remain constant, commerce options to reach a broader customer although they may change occasionally. For base and securing necessary licenses, permits, example, you may switch to a new cell phone service and registrations are all part of this process. provider, or your landlord may raise your rent. Fixed expenses are paid at regular intervals and may vary  Investing in income-generating assets: slightly, change significantly or stay the same, Researching in depth about investment options depending on the type of expense. Monthly fixed such as real estate, stocks, bonds, or mutual expenses are common, although fixed expenses may funds. Individuals can consult with financial also occur weekly, quarterly, twice a year and yearly  P sonal Finance have more control over their discretionary expenses Examples of fixed expenses include: than their income. Good spending habits are critical  Rent or mortgage payments for good personal finance management  Car payment  Other loan payments  Insurance premiums SAVING  Property taxes Saving refers to excess cash that is retained for future  Phone and utility bills investing or spending. If there is a surplus between  Child care costs what a person earns as income and what they spend,  Tuition fees the difference can be directed towards savings or  Gym memberships investments. Managing savings is a critical area of personal finance. Fixed expenses can take more time to adjust, though it’s still possible to cut costs. Rent, for example, can Common forms of savings include: be reduced by finding a cheaper home or apartment,  Physical cash but you may have to wait until the lease expires to  Savings bank account avoid losing a security deposit or paying a fee.  Checking bank account  Money market securities Variable Expenses Variable expenses change regularly and may be Most people keep at least some savings to manage directly influenced by the choices you make day to their cash flow and the short-term difference between day. Unlike fixed expenses, variable expenses can be their income and expenses. Having too much less predictable and more volatile. savings, however, can actually be viewed as a bad thing since it earns little to no return compared to Common variable expenses include: investments.  Groceries and dining out  Clothing  Personal care INVESTING  Entertainment Investing relates to the purchase of assets that are  Gasoline expected to generate a rate of return, with the hope  Home and car repairs that over time the individual will receive back more  Medical bills money than they originally invested. Investing carries risk, and not all assets actually end up producing a Some variable expenses are much easier to adjust in positive rate of return. This is where we see the a pinch. If an emergency expense comes up and relationship between risk and return. leaves you short on cash for the month, it can be difficult to reduce fixed expenses like car or rent Common forms of investing include: payments to make ends meet. Bringing down  Stocks variable expenses, however, is usually possible. For  Bonds example, you can trim your grocery bill and avoid  Mutual funds dining out or purchasing nonessential items  Real estate  Commodities The expenses listed above all reduce the amount of  art cash an individual has available for saving and investing. If expenses are greater than income, the Investing is the most complicated area of personal individual has a deficit. Managing expenses is just as finance and is one of the areas where people get the important as generating income, and typically people most professional advice. There are vast differences  P sonal Finance in risk and reward between different investments, and It enables one to plan for investments most people seek help with this area of their financial When one consciously keeps track of his/her plan. finances, it becomes easier to plan for investments. With clear goals in sight – both for the long term and PROTECTION the short term – one can invest smartly. Protection Personal protection refers to a wide range of products that can be used to guard against an It keeps one from taking on unmanageable debts unforeseen and adverse event. When one takes charge of his/her finances, he/she can steer clear of debts that he/she knows he/she Common protection products include: won’t be able to repay. This is one of the big upsides  Life insurance of making financial plans and tracking personal  Health insurance finances.  Estate planning It allows money and assets to grow This is another area of personal finance where Personal finance takes someone one step further people typically seek professional advice and which than merely saving up for needs. It helps the money can become quite complicated. There is a whole multiply by allowing him/her to choose the right series of analysis that needs to be done to properly investment options. In other words, personal finance assess an individual’s insurance and estate planning is essential because it helps in creating wealth for a needs. financially secured future. With the right kind of financial plans one can retire comfortably and fulfil his/her dreams and goals for the future. IMPORTANCE OF PERSONAL FINANCE The need for personal finance is multifaceted. Depending on each individual’s case, personal PERSONAL FINANCE PRINCIPLES finance can offer a variety of benefits. For some people, it makes money management easier. For PRIORITIZATION others, it streamlines their investments and financial One needs to prioritize the areas that bring in the plans. Let’s take a look at the broad reasons behind money, and ensure that income streams are why personal finance is so important sustained It helps to understand finances better ASSESSMENT Taking charge of money issues begins when one One needs to constantly and periodically assess understands his/her finances better. One needs to his/her earning and spending habits, so that the get some basic questions sorted. income streams are optimized and expenses are  What’s your monthly budget like? minimized.  How much of your money do you spend on luxury products and services? RESTRAINT  How much is spent on the things you really Restraint ensures that one doesn’t spend more than need? he/she makes. In this age, when credit is so easily  What are your future requirements like? available, restraint is of utmost importance And by doing this, one gets a better idea of how much was earned, spent and saved. This lays the foundation for any and all financial plans that will be made in the future.  P sonal Finance Spend less than you earn "Spend less than you earn" means: live within your means, don't overspend, don't get yourself into debt and start saving Setting up a budget and checking in with your spending on a regular cadence is key Make the Money You Have Work for You To obtain real wealth, you need to redeploy your money and that means investment Prepare for the Unexpected The best laid financial plan can be quickly ruined by a streak of misfortune: job loss, fire, theft, or health problems (Emergency Fund – insurance)  P sonal Finance W2L2 – PERSONAL FINANCIAL PLANNING A comprehensive financial plan can enhance the quality of life and increase satisfaction by reducing “So it was mentioned that it is not about how much uncertainty about future needs and resources. money you make, but what you do with what you've got. So proper money management does not involve a magic formula to find more money. So most people want to handle their finances so that they get full ADVANTAGES OF PERSONAL FINANCIAL satisfaction from each available peso. So typical PLANNING financial goals include such things as a new car, a larger home, advanced career, training, extended  Increased effectiveness in obtaining, using, and travel, and self-sufficiency during working and protecting financial resources throughout lifetime. retirement years.”  Increased control of financial affairs by avoiding excessive debt, bankruptcy, and dependence on others for economic security. THE LIFE CYCLE OF FINANCIAL PLANNING  Improved personal relationships resulting from well-planned and effectively communicated financial decisions. * when you have your families. One of the factors kung bat nagkakagulo ay ang financial problems.  A sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving your personal economic goals PERSONAL FINANCIAL PLANNING THE PERSONAL FINANCIAL PLANNING is the process of managing money to achieve PROCESS personal economic satisfaction. It is a process of managing one’s financial resources accompanied by The personal financial planning process is a logical, strategies for accumulating, protecting, allocating, six-step procedure: and distributing financial resources in accordance with your financial goals. It is also defined as the development and implementation of total coordinated plans for achieving one’s overall financial objectives This planning process allows the control of financial situation. Every person, family, or household has a unique financial position, and any financial activity therefore must also be carefully planned to meet specific needs and goals.  P sonal Finance 1. DETERMINE CURRENT FINANCIAL SITUATION 2. DEVELOP FINANCIAL GOALS 3. IDENTIFY ALTERNATIVE COURSE OF ACTION 4. EVALUATE ALTERNATIVES 5. CREATE AND IMPLEMENT FINANCIAL ACTION PLAN 6. REVIEW AND REVISE THE FINANCIAL PLAN ** STEP 1: DETERMINE/ASSES CURRENT FINANCIAL SITUATION In this first step of the financial planning process, one needs to know where his is financially. He needs to know and establish his financial reference point by computing his current financial net worth. Financial net worth is another term to describe how much Don’t be afraid to have a negative net worth. You are wealth one has. It is the difference between what he worse off if you have a negative net worth, didn’t owns, and what he owes know about it, and you are not doing anything about it. STEP 2: DEVELOP FINANCIAL GOALS Financial Goal – Objective or target, usually driven by specific future financial needs. Some common financial goals for an individual are:  saving for a comfortable retirement  saving to send children to college * You need to know where you are now financially  managing finances to enable a home purchase kasi diba you want to achieve something or may  start a business destination ka same sa first step ng financial planning u have to know where u r right now. Example: Steps in Creating Financial Goals 1. Identify the goal  P sonal Finance 2. Set a deadline for achieving the goal and be as specific as possible Developing alternatives is crucial for making good 3. Estimate the cost of the goal, either in terms of time decisions. Although many factors will influence the and/or money available alternatives, possible courses of action 4. Break down the total cost into monthly amounts usually fall into these categories: required  Continue the same course of action. 5. Identify the specific actions or tasks to take to  Expand the current situation. reach the goal  Change the current situation. 6. Track progress  Take a new course of action. Not all of these categories will apply to every decision Goal Worksheet – highlights all of the important situation; however, they do represent possible information required for each goal and allows one to courses of action. Creativity in decision making is get a nice visual picture of what he wants to vital to effective choices. Considering all of the accomplish and how to go about it possible alternatives will help in making more effective and satisfying decisions. STEP 4: EVALUATE ALTERNATIVES *the goal, which must be specific and then the term kung anong deadline ang ise-set mo. Kailan dapat or kailan dapat mo i-meet. total cost kung magkano ba ang involve and how much of your monthly commitment. So for you to compute for this monthly commitment, total cost divide the term. And then ang crucial ay ang ways to reach – ano ung mga actions na gagawin mo para maicommit mo ito. (kunwari may Evaluate possible courses of action, taking into 5k kang monthly commitment, ang tanong saan yun consideration life situation, personal values, and mangagaling) current economic conditions. Consequences of Choices (pag pinili mo ung isa, igigive up mo ung ibang alternatives) STEP 3: IDENTIFY ALTERNATIVE COURSE OF ACTION Every decision closes off alternatives. For example, a decision to invest in stock may mean not taking a vacation. A decision to go to school full time may mean not working full time. Opportunity cost is what one gives up by making a choice. This cost, commonly referred to as the trade-off of a decision, cannot always be measured in monetary amount. Decision making will be an ongoing part of personal and financial situation. Thus, one needs to consider  P sonal Finance the lost opportunities that will result from these Nag-iinvest sila sa asset na tinawatag na inflation decisions. hedges, meaning ung prices nila tumataas together with inflation, para pag nagkaroon ng inflation hindi Evaluating Risk (inflation risk, interest rate risk, income sila ganoon ka-affected kasi ung halaga din ng risk, liquidity risk) investments ay tumaas. Uncertainty is a part of every decision. Other decisions involve a very low degree of risk, such as putting money in a savings account or purchasing items that cost only a few pesos. The chances of - LIQUIDITY RISK losing something of great value are low in these Some savings and investments have potential of situations. higher earnings. However, they may be more difficult to convert to cash or to sell without significant loss in In many financial decisions, identifying and value evaluating risk is difficult. The best way to consider risk is to gather information based on one’s *hindi advisable na lahat ng savings mo nasa experience and the experiences of others and to use bangko. kapag real property it is difficult to convert financial planning information sources. into cash kasi mahirap magbenta kapag mahal. Financial Planning Information Sources - INCOME RISK The loss of a job could be the result of such things as Relevant information is required at each stage of the changes in consumer spending decision-making process. Changing personal, social, and economic conditions will require continually Individuals who face the risk of unemployment need supplementing and updating knowledge. to save while employed or acquire skills they can use to obtain a different type of work - INTEREST RATE RISK Changing interest rates affect your costs (when you borrow) and your benefits (when you save or invest) Borrowing at a low interest rate when interest rates are rising can be to your advantage. But if you save when interest rates are dropping, you will earn a lower return STEP 5: CREATE AND IMPLEMENT FINANCIAL ACTION PLAN In this step of the financial planning process, one develops an action plan. This requires choosing ways - INFLATION RISK to achieve goals. As one achieves his immediate or Rising prices cause lost purchasing power short-term goals, the goals next in priority will come Decide whether to buy something now or later. If you into focus. buy later, you may have to pay more To implement financial action plan, one needs *for ex: may want bumili ng bahay. Ayaw niyang assistance from others. For example, he may use the umutang so pinag-ipunan niya ang ending nagmahal services of an insurance agent to purchase property ung bahay. Kaya nga ung iba nagdedecide na bilhin insurance or the services of an investment broker to ang property through loan para mas mura. purchase stocks, bonds, or mutual funds.  P sonal Finance - Term: 24 months - Monthly commitment: P4,166 per month - Total Cost: P100,000 - Action to take: reduce the phone bill, cable bill, etc. STEP 6: REVIEW AND REVISE PLAN Financial planning is a dynamic process that does not end when one takes a particular action. He needs to regularly assess his financial decisions. Changing Financial planning action plan includes all of the tasks personal, social, and economic factors may require that you will need to accomplish, in order to achieve more frequent assessments financial goals When life events affect financial needs, this financial A financial action plan can be as simple as listing planning process will provide a vehicle for adapting to each goal and then listing a means of achieving each those changes. Regularly reviewing this decision- one making process will help in making priority adjustments that will bring financial goals and To implement your financial action plan, you may activities in line with current life situation. need assistance from others. Setting goals Write down the things you want to achieve Developing the plan Set a simple task list Carrying out the plan Do the tasks and mark them as done when they are done. Monitoring the plan Set a reminder on a calendar or an app to see how doing Example: STEPS TO OVERCOME FINANCIAL PROBLEMS AND DIFFICULTIES 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 be able to find the way out himself, or he may - Specific objective: create an emergency fund of need someone else's perspective to help in finding a P100,000 solution  P sonal Finance Below are ways how one can overcome financial 2. Create a budget - spend money in a way that problems and difficulties and ease his stress. But, helps solve the problem one size does not fit all. One of the best weapons for combating financial problems is a budget. Creating a budget is like turning 1. Identify the underlying problem that's causing the lights on to find way around a dark room. There is the difficulties no need to wander in the dark; banging shins, tripping The first step to overcoming financial problems is to over the furniture, and stepping on the dog. Instead, identify the underlying issue that’s causing the with the lights on, one can see what’s going on and financial difficulties. Financial problems are usually a prevent problems before they happen. A budget symptom of a bigger issue. To come up with solutions works much the same way; it guides spending that work in the long run, take the time to identify the decisions so that one is spending money on what's real source of financial troubles. Here are some really important to him. In this case, money is spent common things to think about: in a way that helps solve financial problem. Source of Reason Why Solution Financial Difficulties Often Problem Occur 3. Determine financial priorities to guide Unemployment or Using credit for living Re-evaluate lifestyle, create lower than usual expenses on reduced a budget and follow it. If spending choices income income employed, see if you can get To overcome financial problems and solve difficulties a 2nd job or more overtime Unexpected illness Increased medical Simplify lifestyle. Get all the for good, one needs to determine what his priorities or accident expenses and low/ no help you can. Make sure are. Some might be clear-cut financial priorities, e.g. income you're getting everything you're entitled to to pay off credit cards. Others might be lifestyle-goals, Moving out on your Used to a high standard Adjust expectations and based on values, e.g. save up for house repairs so own of living that took your learn to live on what you earn parents decades to rather than what you're used that the family has a nice place to call home. achieve to; use cash, not credit First baby is born Parents didn't budget Adjust your budget and your for the increased lifestyle to fit the reduced Setting clear priorities makes it easier to make tough expenses and the drop income and increased in income during expenses financial decisions. Turning priorities into actionable maternity leave and achievable goals will help solve money troubles Separation Got the house but can't Sell the house and downsize afford the ongoing to something you can afford and get back on track. For instance, one of short-term expenses on only one or generate revenue with the goals may be to reduce expenses and pay off income; left over bills house Retirement You are now asset rich Sell the house, move into smallest credit card balance. A medium-term goal and cash poor. You can something you can afford, could be to pay off credit card debt no longer afford to live invest extra proceeds from life plus pay the house the sale, and enjoy life more upkeep on your reduced income Emotional You are not willing to Set emotions aside and look 4. Identify small steps to take to address the attachment something to part with something you can no longer afford: at the situation from a financial perspective; picture problem & achieve goals could be a home, life 5 years from now & what The solution to financial problems is often to reduce business, vehicle or toy bills will be then An addiction Spending more than Get professional counseling expenses, increase income, or do some combination you earn trying to satisfy to deal with the addiction. If of both. This might not be something one wants to do, the addiction you don't, you'll never overcome your financial and he’s not alone. Most people don’t want to make problems changes to their lifestyle, but faced with the choice of ongoing money troubles, or making several small The concept of identifying a specific problem is changes to ease up on the financial stress - most important because it is more likely to result in a lasting people are game to try. solution. Just like with a leaky faucet; placing a bucket below is temporary. Fix the tap and the leak will stop. Big changes are always much harder than small Focus on solving the problem that’s causing money changes so to accomplish goals, identify small steps troubles, rather than dwelling on stress. to take to achieve them.  P sonal Finance your garage, or can you take in a student for For example, if one keeps running into money some extra income? problems because he’s P3,000 short every month, then maybe one of the first short term goals could be If debt is causing you financial problems, here are a to pay off a small credit card balance that requires a lot of ways to reduce your debt or here are a dozen P3,000 minimum payment each month. Get the card of the most effective ways to get out of debt. paid off, and then permanently have P3,000 extra to  Do you have any assets or toys you can sell to use in his budget every month. However, if by the pay off debt? time he reaches this goal, he learned to get by without  Can you take on a side job or create another this P3,000, then he can use it to accelerate the source of income with something you know how payment of another debt each month, and get all of to do well? his debts paid off more quickly. There is actually a  Look outside the box, ask yourself tough name for this, it is called the “snowball effect” - questions, invite a trusted friend to have a look at maintaining minimum payments on all debts but your budget and make suggestions, or sit down putting all extra money towards one debt to get it paid with a Credit Counselor and get their suggestions. off faster. Once that one debt is paid off, one can put  Research viable options that will move you all of the extra funds towards eliminating the next towards your goals. A consolidation loan, debt. It’s one powerful method of paying debts off speaking with a Credit Counselor, a Debt faster. Management Program, or some other option may be a possibility. Look for things to do, even temporarily, to improve situation. Here are more ideas or steps one can While doing any of these can be an unappealing consider taking to improve financial situation and thought, don’t just dismiss them because they’ll move alleviate difficulties: you out of your comfort zone. Keep thinking about them and give them some consideration. Come back to these ideas from time to time to see if you can Learn more about separating needs from wants. come up with a new angle on decreasing your As you look through your budget, ask yourself: expenses or increasing your income that might just  Do I want this or do I need it? work for you. Remember, you’re trying to get through  Will spending this money get me closer to my a tough a time; you don’t need to do this forever, just financial goals or further away? to get back on track. If you’re really struggling, an  Can I live without it? experienced Credit Counselor can be a great, free source of suggestions. Learn how to reduce or change impulsive spending habits. Do you use credit cards for impulse purchases? This 5. Develop plan to overcome financial problems can contribute to a cycle of ongoing financial difficulty for good and add as much as 50% to everything you purchase. Once one comes up with some ideas for how to begin tackling his financial problems and difficulties, he can Ask yourself if you can downsize anything in your put together a realistic plan to accomplish his goals. budget or switch to a less expensive option. Some goals will have a timeline of a few months;  If vehicle costs are straining your budget, can you others will need a longer timeline, like 24 - 36 months. downsize your vehicle, get rid of one vehicle, take Write goals down, but also write down where one is transit, or car pool? at now in relation to each goal. For example, if one of  If your rent, mortgage, or home upkeep is the goals is to pay off a P10,000 debt, make sure to bleeding you dry, can you downsize to something write down the current debt balance and the future more affordable, rent out your basement, rent a goal of paying this down to P0. Include in the plan the room in your house, rent out the storage space in  P sonal Finance amount of money to pay on this debt every month so that it can be paid off within the desired time frame. 6. Review how things are going Every once-in-a-while, take a few minutes to review how things are going.  Is the plan working towards the goals? If not, take a closer look to figure out why not and adjust the plan. The plan needs to be realistic, or it’s not going to work. It should also contain some things not done before putting the plan in place.  Keep doing what were done before, will get the same result as before – problems. Do something different to get a different outcome. Be open to the possibility of fine-tuning the plan. Improve the plan to accomplish the goals more quickly as long as the budget can afford the changes and everyone who relies on the budget are okay with the more aggressive approach. Unexpected financial challenges are bound to arise in the future - major life events will arise that will challenge prior financial plans. The key to tackling these challenges is to be flexible. Review the budget occasionally and make necessary changes. Build up savings to handle unanticipated expenses without going into debt and be in a difficult situation. Overcoming financial problems and difficulties isn’t easy, but by setting some clear priorities, identifying ways to achieve these goals, and persevering with the plan, one can overcome the challenges and at the same time, put an end to the financial stress.