Personal finance

History

Personal financial planning process

1. Assessment: 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, along with personal liabilities. A personal income statement lists personal income and expenses.
2. Goal setting: Having multiple goals is common, including a mix of short- and long-term goals. For example, a long-term goal would be to "retire at age 65 with a personal net worth of $1,000,000," while a short-term goal would be to "save up for a new computer in the next month." Setting financial goals helps to direct financial planning. Goal setting is done with an objective to meet specific financial requirements.
3. Plan creation: 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.
4. Execution: Execution of a financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
5. Monitoring and reassessment: As time passes, the financial plan is monitored for possible adjustments or reassessments.

• Several employment opportunities are shifting from countries with higher labor costs to countries with lower labor costs keeping margins low for companies.
• In economies with a considerably large younger population entering the workforce who are more equipped with latest technologies, several employees in the middle management who have not up-skilled are easily replaceable with new and fresh talent that are cheaper and more valuable to the organizations.
• Cyclical nature of several industries like automobile, chemicals, construction; consumption and demand is driven by the health of the countries' economy. It has been observed that when economies stagnate, are in recession, in war - certain industries suffer more compared to others. This results in companies rationalizing their workforce. An individual can lose his/her job easily and remain unemployed for a considerable time. All these reasons bring to the realization that the legal employable age of 60 is slowly and gradually becoming shorter.

• In developed markets like the US, insurance coverage is provided by either the employers, private insurers or through federal government. However, with the rising US fiscal deficit and large proportion of geriatric population it needs to be seen the extent of the Medicare program being sustainable in the long run, therapy exclusions in the coverage, co-pay, deductibles - there are several cost elements that are to be borne by individuals on a continual basis.
• In other developed markets like the EU, most the medical care is nationally reimbursed. This leads to the national healthcare budgets being very tightly controlled. Many newer therapies that are expensive, many a times are excluded from the national formularies. This means that patients may not have access through the government policy and would have to pay out of pocket to avail these medicines
• In developing countries like India, China, most of the expenses are out of pocket as there is no overarching government social security system covering medical expenses.

Personal finance principles

• Pay off your credit card balance every month, in full
• Save 20% of your income
• Maximize contributions to tax-advantaged funds such as a 401 retirement funds, individual retirement accounts, and 529 education savings plans
• When investing savings:
• * Don't attempt to trade individual securities
• * Avoid high-fee and actively managed funds
• * Look for low-cost, diversified mutual funds that balance risk vs. reward appropriately to your target retirement year
• If using a financial advisor, require them to commit to a fiduciary duty to act in your best interest

Areas of focus

1. Financial position: is concerned with understanding the personal resources available by examining net worth and household cash flow. 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.
2. Adequate protection: or insurance, the analysis of how to protect a household from unforeseen risks. 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. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.
3. Tax planning: typically, the income tax is the single largest expense in a household. 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.
4. Investment and accumulation goals: planning how to accumulate enough money for large purchases and life events is what most people consider to be financial planning. Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement.
5. : 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.
6. :Depreciating Assets- One thing to consider with personal finance and net worth goals is depreciating assets. 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 They add value to 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 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.
7. 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: individual structures, or employer sponsored retirement plans.
8. 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.
9. Delayed gratification: Delayed gratification, or deferred gratification is the ability to resist the temptation for an immediate reward and wait for a later reward. This is thought to be an important consideration in the creation of personal wealth.''
10. Cash Management: It is the soul of your financial planning, whether you are an employee or planning your retirement. It is a must for every financial planner to know how much he/she spends prior to his/her retirement so that he/she can save a significant amount. This analysis is a wake-up call as many of us are aware of our income but very few actually track their expenses.
11. 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.
12. Education Planning: With the growing interests on students’ loan, having a proper financial plan in place is crucial. 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.

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