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What value do you see in understanding personal financial management

Ten reasons why financial planning is important

History[ edit ] Before a specialty in personal finance was developed, various disciplines which are closely related to it, such as family economicsand consumer economics were taught in various colleges as part of home economics for over 100 years. The earliest known research in personal finance was done in 1920 by Hazel Kyrk. Her dissertation at University of Chicago laid the foundation of consumer economics and family economics.

Simona Nobel laureate, suggested that a decision maker did not always make the best financial decision because of limited educational resources and personal inclinations. Before 1990, mainstream economists and business faculty paid little attention to personal finance.

However, several American universities such as Brigham Young UniversityIowa State Universityand San Francisco State University have started to offer financial educational programmes in both undergraduate and graduate programmes in the last 30 years.

These institutions have published several works in journals such as The Journal of Financial Counseling and Planning and the Journal of Personal Finance. Research into personal finance is based on several theories such as social exchange theory and andragogy adult learning theory. Professional bodies such as American Association of Family and Consumer Sciences and American Council on Consumer Interests started to play an important role in the development of this field from the 1950s to 1970s.

Attendances of the two societies mainly come from faculty and graduates from business and home economics colleges.

The educational programmes are frequently known as " financial literacy ". However, there was no standardised curriculum for personal finance education until after the 2008 financial crisis.

It also stressed the importance of developing a standard in the field of financial education. In general, it involves five steps: A person's financial situation is assessed by compiling simplified versions of financial statements including balance sheets and income statements.

A personal balance sheet lists the values of personal assets e. A personal income statement lists personal income and expenses.

Personal finance. How to manage your money

Having multiple goals is common, including a mix of short- and long-term goals. Goal setting is done with an objective to meet specific financial requirements. The financial plan details how to accomplish the goals. It could include, for example, reducing unnecessary expenses, increasing the employment income, or investing in the stock market. Execution of a financial plan often requires discipline and perseverance.

The Value of Learning about Personal Finance

Many people obtain assistance from professionals such as accountantsfinancial plannersinvestment advisersand lawyers. As time passes, the financial plan is monitored for possible adjustments or reassessments. Tax and finance laws also differ from country to country, and market conditions vary geographically and over time. This means that advice appropriate for one person might not be appropriate for another. A financial advisor can offer personalized advice in complicated situations and for high-wealth individuals, but University of Chicago professor Harold Pollack and personal finance writer Helaine Olen argue that in the United States good personal finance advice boils down to a few simple points: Don't attempt to trade individual securities Avoid high-fee and actively managed funds Look for low-cost, highly diversified mutual funds that balance risk vs.

Personal finance

Areas of focus[ edit ] Key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are: Net worth is a person's balance sheet, calculated by adding up all assets under that person's control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year.

From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished. These risks can be divided into liability, property, death, disability, health and long-term care. Some of these risks may be self-insurable while most will require the purchase of an insurance contract.

Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.

Managing taxes is not a question whether or not taxes will be paid, but when and how much. The government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as one's income grows, a higher marginal rate of tax must be paid. Understanding how to take advantage of the myriad tax breaks when planning one's personal finances can make a significant impact.

Investment and accumulation goals: Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement. Achieving these goals requires projecting what they will cost, and when one needs to withdraw funds. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savings to be invested in a variety of investments.

In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity.

This asset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash and alternative investments. The allocation should also take into consideration the personal risk profile of every investor, since risk attitudes vary from person to person. Retirement planning is the process of understanding how much it costs to live at retirement, and coming up with a plan to distribute assets to meet any income shortfall.

Methods for retirement plan include taking advantage of government allowed structures to manage tax liability including: Estate planning involves planning for the disposition of one's assets after death. Typically, there is a tax due to the state or federal government when one dies. Avoiding these taxes means that more of one's assets will be distributed to their heirs.

One can leave their assets to family, friends or charitable groups. Delayed gratification, or deferred gratification is the ability to resist the temptation for an immediate reward and wait for a later reward. For creation of personal wealth this is one of the key. It is the soul of your financial planning, whether you are an employee or planning your retirement. This analysis is a wake-up call as many of us are aware of our income but very few actually track their expenses.

Revisiting Written Financial Plan Regularly: Make it a habit to monitor your financial plan regularly. An annual review of your financial planning with a professional keeps you well-positioned, and informed about the required changes, if any, in your needs or life circumstances. You should be well- prepared for all sudden curve balls that life inevitably throws in your way.

Parents often want to save for their kids but end up taking the wrong decisions, which affect the savings adversely. We often observe that, many parents give their kids expensive gifts, or unintentionally endanger the opportunity to obtain the much-needed grant. Instead, one should make their kids prepare for the future and support them financially in their education. Education and tools[ edit ] Main article: As of 2015, 17 out of 50 states in the United States requires high school students to study personal finance before graduation.

For example, a study done by Bell, Gorin and Hogarth 2009 stated that those who undergo financial education were more likely to use a formal spending plan. Financially educated high school students are more likely to have a savings account with regular savings, fewer overdrafts and more likely to pay off their credit card balances.

However, another study was done by Cole and Shastry Harvard Business School2009 found that what value do you see in understanding personal financial management were no differences in saving behaviours of people in American states with financial literacy mandate enforced and the states without a literacy mandate. A depreciating asset is an asset that loses value over time or with use. A few examples would be the vehicle that a person owns, boats, and capitalized expenses.

They add value what value do you see in understanding personal financial management a person's life but unlike other assets they do not make money and should be a class of their own. In the business world, for tax and bookkeeping purposes, these are depreciated over time due to the fact that their useful life runs out.

This is known as accumulated depreciation and the asset will eventually need to be replaced.

50 Personal Finance Habits Everyone Should Follow