MANAGING PERSONAL FINANCE

• Personal financial planning is the process of managing your money to achieve personal economic

  satisfaction. This planning process allows you to control your financial situation.

  A comprehensive financial plan can enhance the quality of life and increase satisfaction by reducing

  uncertainty about future needs and resources. Specific advantages of personal finance planning
• financial planning process is a logical, six-step process:

  1. Determine current financial situation

  2. Develop financial goals

  3. Identify alternative courses of action

  4. Evaluate alternatives

  5. Create and implement the financial action plan

  6. 6. Re evaluate and revise the plan
• Determine current financial situation – In the first step, the individual must determine his/her

  financial situation regarding income, savings, living expenses, and debts. Preparing a list of

  current balances and amounts spent for various items gives a foundation for financial planning

  activities.
• Develop financial goals – Individuals should periodically analyze their financial values and

  attitudes towards money. Values are the ideas and principles that a person considers correct,

  desirable, and important. For example, an individual may believe that it is wrong to borrow money

  when purchasing consumer goods, such as expensive clothes. Because of this, the individual will

  only shop for clothes once s/he has saved the money. Analyzing the financial values and goals

  also helps the individual differentiate needs from wants.
• Identify alternative courses of action – Developing alternatives is crucial when making

  decisions. Possible courses of action usually fall under these categories:

  • Continue the same course of action

  • Expand the current situation

  • Change the current situation

  • Take a new course of action
• Evaluate alternatives – The individual then needs to evaluate the possible courses of action,

  considering his/her current situation, personal values, and current economic conditions. Each

  decision closes off alternatives. For example, expanding savings may mean that the individual

  cannot take a vacation. Opportunity cost is what you give up by making a choice. This cost, also

  known as trade-off cost, cannot always be measured in terms of money. Uncertainty and risk are

  also parts of every decision
• Create and implement the financial action plan – This step of the financial planning process

  involves developing an action plan that identifies ways to achieve the individual’s goals. To

  implement the financial plan, assistance from others may be needed. Examples of financial

  planning sources are:
• Re evaluate and revise the plan – Financial planning is a dynamic process that does not end

  when the individual takes a particular action. S/he needs to assess financial decisions regularly.

  It is recommended to have a complete review of your finances at least once a year.
• Factors influencing financial goals:

  1. Timing of the goals
  2. Goals for different financial needs
• Life situation and personal values – People in their 20s spend money differently than those in

  their 50s. Personal factors such as age, income, household size, and personal beliefs influence spending and saving patterns.
• o Early years (18 – 35) – The focus is on creating an emergency fund, saving for a down

  payment on a house or condo, and, if necessary, purchasing life insurance. This is also the

  ideal time to think about starting a retirement fund because the earlier one starts, the less

  money should be saved later to catch up.
• Middle years (36 – 55) – The focus is to start building wealth by paying down the mortgage

  and increasing savings and investments.
• Middle age (50 – 65) – The focus is to provide an adequate retirement fund during this age.
• Retirement years – After retirement, the focus is on managing previously managed wealth

  effectively.
• Economic forces – Personal financial decisions are heavily influenced by:

  1. Consumer prices
  2. Consumer spending
  3. Interest rates
• Consumer prices – Inflation is the rise in the general level of prices. In times of inflation, the

  peso's purchasing power (the amount of goods and services money can buy) decreases. The

  main cause of inflation is an increase in demand without a comparable increase in supply. For

  example, if people have more money to spend because of a salary increase but cannot find

  the products they want to buy, the demand for those products may cause prices to increase.
• Consumer spending – The total demand for goods and services in the economy influences employment opportunities and the potential for income. As consumer spending increases, the financial resources of businesses also increase. This situation improves the financial

  condition of many households.
• Interest rates represent the cost of money. When consumer savings and investment increase the supply of money, interest rates tend to decrease. However, as consumers, businesses, government, and foreign borrowing increase the demand for money,

  interest rates tend to rise.