Personal Finance Advisor

 Personal Finance Advisor

Personal Finance is a way to plan, manage and achieve personal financial goals. It encompasses your financial activities such as your income, spendings, savings, and investments. In this article, we will discuss

Understanding of Personal Finance

                    AND

How to plan Personal Finance

Understanding of Personal Finance?

Let's discuss in detail the most important issues under personal finance. Explore each one by one as a Personal Finance Advisor to have a comprehensive understanding of the subject. 

The main areas of your Finance are 

1- your earnings or income

2- your expenses or spendings

3- your nest eggs or savings

4- your equity or investments

5- your insurance or financial protection

1- Earnings or Income

All kinds of regular or irregular cash inflows you receive from one or different sources to support you and your family's spendings. If you have no income or earnings, there will be no question of personal Finance. Your earnings may be business profit, salaries, overtime income, part-time income, bonuses, dividends, and pensions. 

You are free to use your income in three different ways, these are spendings, savings, and investing. Personal Finance Advisory in the best understanding of maximum utilizing of your each earned penny.

2- Expenses or spendings

All consumable cash outflows are the expenses or spendings. Buy goods and services for you and your family all are spendings. Mainly you spend cash in hand on your spendings but oftentimes you borrow money from some lender to spend on unpredictable expenses. 

More than 50% of your income is spent on expenditures, the major spendings are resident or commercial rents, kitchen, food, education, medical, traveling, taxes, debt, and credit card payments. If your expenses are on a higher level then you have less money to save or invest. And if your expenses are more than your income then you are in a very dangerous situation. But you can learn good spendings habits easily because you have more control over your spendings than your income. 

3- Savings 

Savings are the surplus amount you have left from your income after spendings. You can either invest your savings. According to many personal financial advisors,  you should have minimum Savings equal to your three months of spending known as an emergency fund.

The most common of savings are cash in hand, money in saving bank accounts, bonds, or securities. Some people use their Savings to manage their unpredictable expenses. 

But it is least recommended to have high Savings because these have no returns like investments rather these can bear an impact of inflation. 

 

4- Equity or investments

Allocation of money or resources with the expectations of future returns is an investment. You purchase assets to have more than you spend over time. Investments carry both positive returns and risks, so you have to be very careful while investing. People mostly need extensive professional assistance while investing. 

Common investments are Real estate, commodities, investment Bonds, Mutual funds, stock exchange shares, and capital investment in businesses. 

5- insurance or financial protection

It refers to protection from unforeseen negative financial impacts. A wide range of numerous protection plan available in the market to guard these adverse impact, like health insurance, life insurance, loan security, and car insurance, etc

You have to do a deep analysis with typical professional assistance to understand your required financial protection plans.

We have briefly discussed the major areas of personal finance. But the real task is to achieve your financial goals. Good planning is not a habit but an attitude you must adopt. 

Let's have a deep dive into the process of personal finance planning. 

The Personal Finance Planning 

Personal Finance can be planned while considering all of the above areas. Usually, the bankers or personal finance advisors prepare these plans for their clients to figure out their current financial needs as well as the future goals and propose the right course of action. 

The basic steps in the financial planning process are 

1- Analysis of  Current Financial Position

2- Set Personal Financial Goals

3- Derive the Plan and implementation

4- Monitor and Review

Analysis of Current Financial Position

It is also referred to as Financial Health, it is as important as your physical health is important. 

The simple method to check the financial health is to calculate the worth of all your assets ( cash, savings, investments, stocks, home, etc) and subtract the value or amount of liabilities ( loans, debt, car loans, etc) from the worth of assets. Suppose you own a house of Rs 50,00,000 and have to pay a bank loan of RS 10,00,000. So your net worth would be RS 40,00,000. 

The second important factor in your financial position is to measure the debt to income ratio.

It is calculated by dividing your monthly or yearly debt payment by your income for the same period. If your income is Rs 100000 per month and your monthly loan payments are Rs 15000. Then debt to income ratio is 15%. 

The third important factor in the assessment of your current financial position is to track your spendings. You should be aware of how much you spend on which category i.e medical, education, kitchen, repair maintenance, childcare, entertainment, etc. 

Set Personal Financial Goals

These goals vary from person to person depending mostly on the age and class of person, one's goal may be to have his own house or set a business, on the other hand at a later age after the 50s one might have a goal to design a retirement plan. Personal Financial advisors are advised to identify what you want to achieve in the short term ( plan a vacation, buying a car ) as well as long term ( own a house, insurance plan).

If you list down these goals you will have a better chance to achieve the goals. These are short-term, mid-term, and long-term goals. 

Short-term goals are setting up a budget, paying off debts, planning a vacation, or creating emergency funds.

Mid-term goals are to have an insurance plan, payoff long term loans, plan to buy a car, own a home, renovation of home and mortgage, etc

Long-term goals are social security, retirement plan, and pension schemes.

The simple key is to set your financial goals that must be S.M.A.R.T as 

Specific. Measurable. Attainable. Relevant. Time-bound

You should carefully set your personal financial goals depending upon your financial position and future requirements. 

Derive the Plan and implementation

Financial planning refers to designing a roadmap to reach your financial goals while taking into account your financial position and future goals. You derive a strategy about your financial decisions like spendings and savings etc. In other words, a financial plan gives you control of your money. It mostly includes, where you can cut down your spendings? And what options enable you to have more savings? 

 If you have a financial plan as early as possible, you will be able to achieve your financial goals. Doesn't matter from where you start, and at what age you decide to start. But the important thing is how ambitious you are to improve your financial stability. 

Monitor and Review

Change is the only constant in this universe.  You may have some health issues, a new baby, a job shift, or a business crisis in the future. Your needs and goals may evolve as time passes. 

Some changes are so considerable and have a dramatic impact on your financial situation that you need to monitor or review your financial goals. It is important to communicate these changes to some financial consultants to review your financial goals. 

 

Conclusion

Personal finance is your skills to manage your money effectively to achieve your financial goals. You need to plan your financial life, track your spendings strictly such as when and what to spend, optimize the best use of every penny you earn by adequately monitoring your investments, and be critical in the selection of protection plans. Success only belongs to good planning and discipline. Furthermore, the right strategy only derives from the right information and analysis. This is how you can achieve your financial goals.