It doesn’t matter whether you’re a billionaire living in the Swiss Alps or a grocer living in the Bronx, everybody everywhere needs to be aware of and take an active role in their own money management. One day, you could gain or lose it all, and unless you’re properly prepared, you could lose it all again. Personal finance looks at how individuals and families acquire, budget, save and spend their money over time. Personal finance planning is the regular monitoring and evaluating of that process to make sure you and your loved ones are staying on track.
There are typically five steps in this management process. The first is assessment, which is often the most difficult part for some people since it requires taking an honest look and where they stand. Balance sheets and income statements should be drawn up to help determine all of your family’s assets, everything from your car to your house to any stocks you own, to all of your liabilities, including things like your mortgage, credit card debt, and any other loans you have out. Next, create a cash flow statement to figure out how much money is coming in and how much is going out. It may not be a pretty picture, but it’s one you definitely need to get a handle on.
The second step involves creating goals for yourself – financial goals, that is. When do you want to retire and how much money do you want to have acquired at that point? When do you want to be able to buy a house and how soon can you pay off the mortgage? Do you want to be able to send your children to private school, or pay for their university education? Whether short term or long term goals, you need to have a clear picture of where you want to be before you can ever hope of figuring out how to get there.
Next, personal finance planning requires – as the name suggests – creating a clear plan to help you achieve your goals. What concrete steps are you going to take to save that money for your kids’ education, or to be able to retire in that Italian villa you always wanted? Can you spend less money on going out? Are your savings as well invested as they could be? Is it time to switch to a job that earns more money?
The fourth step in the process to creating financial security involves actually taking the steps you outline in your plan. Besides starting the process, this can be one of the hardest stages for some people. Following your plan can require restraint and determination since it typically requires a change in habits. Seek help wherever you need to, be it from lawyers, accountants, or investment brokers, but don’t give up.
You might think that the final step in the process is actually enjoying the fruits of your labour, but no, it’s not. In fact, the process is never complete. The fifth stage is to monitor and evaluate how your financial plan is working out. Is it putting you on track to achieving your goals or are there things you need to change?
Personal finance planning is no easy task, but well worth it in the end.
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