Week 1 - Understanding Personal Finance-3.pdf

Personal Finance BBPERFIX Ramon Jr., America - https://www.youtube.com/watch?v=UcAY6qRHlw0  Getting started with Personal Finance Personal Finance is the management of one’s finances through planning, spending, saving, and investing. is the management of all areas of you and your family...

Personal Finance BBPERFIX Ramon Jr., America - https://www.youtube.com/watch?v=UcAY6qRHlw0  Getting started with Personal Finance Personal Finance is the management of one’s finances through planning, spending, saving, and investing. is the management of all areas of you and your family’s finances both short term and long term. may refer to an entire business committed to services and products meant to assist you in managing your finances and taking advantage of investment possibilities. 5 Areas of Personal Finance › Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their family. › Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (i.e., not an investment). › Saving refers to excess cash that is retained for future investing or spending. › Investing relates to the 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. › Personal protection refers to a wide range of products that can be used to guard against an unforeseen and adverse event.  Top Personal Financial Habits and Tips › Set specific financial goals › Begin budgeting › Establish an Emergency fund › Reduce Debt › Investing › Use Credit Card with caution › Think about your family › Take some time off  Knowing and Avoiding Common Money Mistakes › Not planning › Overspending › Buying too much using credit › Delaying saving for your retirement › Falling prey to financial sales pitches › Not doing your homework › Making decisions based on your emotions › Not separating the wheat from the chaff › Focusing too much on money How a solid budget can boost your financial independence Spend your money more responsibly — By creating and following a budget, you can decide how to spend your money each month based on what’s most important. Improve your debt repayment strategy — If you’re working to pay off student loans, credit cards or some other type of debt, having a budget can help you stretch your cash further. Increase your savings goals — A budget can help you determine how much to set aside to reach your financial goals, whether saving more for retirement, building your emergency fund or planning your next vacation. 5 Budgeting Methods to Consider  5 Budgeting Methods to Consider 1. The zero-based budget › The concept of a zero-based budgeting method is simple: Income minus expenses equals zero. › This budgeting method is best for people who have a set income each month or can reasonably estimate their monthly income. After calculating your monthly income, subtract all your monthly expenses and savings, making sure the final result is zero.’ › Try to list all your expenses as accurately as possible. If you spend more in one category, you can move cash from another to compensate for it. Forgetting a large expense could throw off your whole budget.  5 Budgeting Methods to Consider 2. The pay-yourself-first budget › The pay-yourself-first budget is another simple budgeting method focusing primarily on savings and debt repayment. With this method, you set aside a specific amount from each paycheck for savings and debt payments, spending the rest as you see fit. 3. The envelope system budget › This budgeting method is similar to the zero-based budget but with one big difference: You do it all with cash. With the envelope budgeting system, you plan how to spend your money each month and fill an envelope with the allocated cash for each category.  5 Budgeting Methods to Consider 4. The 50/30/20 budget › The 50/30/20 budgeting method requires less work than the zero-based and envelope budgets. The idea is to break down your expenses into three categories: 1.Necessary expenses (50%) 2.Discretionary expenses (30%) 3.Savings and debt payments (20%) You can customize the 50/30/20 budget (or any budget) to fit your specific needs.  5 Budgeting Methods to Consider › 5. The no-budget budget › As the name suggests, this flexible budgeting method is simple: Focus on spending within your means. › Here’s how it works… Keep an eye on your checking account balance. Use a budgeting app or your bank’s online banking or mobile app to track your daily cash flow. Know when recurring bills hit your account. Keep a detailed list in a spreadsheet, on your phone’s notepad or set to repeat on your online calendar. Set aside cash for savings and extra debt payments. Use automatic transfers from checking to savings and increase your automatic monthly debt payments. Spend what’s left over without overdrawing your account. Keeping an eye on your account balance helps you track how much money is available after core expenses.  Financial Planning Process The financial planning process is a systematic approach to managing one's finances. It involves evaluating an individual's or family's current financial situation, identifying financial goals, creating a plan to achieve those goals, implementing the plan, and regularly monitoring and adjusting the plan as needed. Establishing Goals Short-Term Goals Short-term goals typically range from three months to three years. Examples include building an emergency fund, paying off credit card debt, and saving for a vacation. Medium-Term Goals Medium-term goals have a time horizon of three to ten years. Examples include saving for a down payment on a house, funding a child's education, or starting a business. Long-Term Goals Long-term goals have a time horizon of more than ten years. Examples include saving for retirement, paying off a mortgage, or leaving a legacy. Gathering Financial Data Personal Information Collect relevant personal information, such as age, marital status, number of dependents, and employment status. Financial Assets and Liabilities Compile a list of all financial assets (e.g., savings, investments, real estate) and liabilities (e.g., loans, credit card debt). Income and Expenses Record all sources of income and monthly expenses to understand your cash flow. Developing a Financial Plan Budgeting and Cash Flow Management Create a budget to manage income, expenses, and savings effectively. Investment Strategies Develop an investment strategy that aligns with your risk tolerance and financial goals. Tax Planning Implement strategies to minimize tax liabilities and maximize tax-advantaged opportunities. Developing a Financial Plan Risk Management and Insurance Evaluate and obtain appropriate insurance coverage to protect against potential financial losses. Retirement Planning Create a retirement plan that meets your desired lifestyle and financial needs in retirement. Estate Planning Develop an estate plan that ensures the efficient transfer of assets to beneficiaries and minimizes potential tax liabilities. Analyzing Financial Data Net Worth Calculation Calculate net worth by subtracting total liabilities from total assets. Cash Flow Analysis Analyze income and expenses to identify patterns, potential savings, and areas for improvement. Debt-To-Income Ratio Calculate the debt-to-income ratio by dividing total monthly debt payments by gross monthly income. This ratio helps assess overall financial health. Risk Tolerance Assessment Evaluate your risk tolerance based on factors such as age, investment horizon, and financial goals. Implementing Financial Plan Prioritizing Actions Determine which financial goals and strategies are most important and should be addressed first. Allocating Resources Allocate financial resources (e.g., savings, investments) to achieve your financial goals effectively. Seeking Professional Advice Consult financial professionals, such as financial planners or investment advisors, to ensure a well-informed financial plan. Monitoring and Adjusting the Financial Plan Periodic Reviews Conduct regular reviews of your financial plan to track progress and make adjustments as needed. Adapting to Life Changes and External Factors Update your financial plan to account for changes in personal circumstances or external factors, such as job loss, marriage, or economic conditions. Updating Goals and Strategies Revise financial goals and strategies to align with your evolving financial situation and priorities. References: www.corporatefinanceinstitute.com www.financestrategists.com www.lendingtree.com