Personal Finance- Need of the Hour!
The creation of a personal financial plan and doing your own personal financial planning is very difficult. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and saving account, credit cards and consumer loans, investments in the stock market, social security benefit , insurance policies, and income tax management.
A key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and reevaluation. In general, it fit in to 4 pillars:-
Risk - It is basically a threat of losing money, if an investor is ready to take higher risk like investing in stock market you get higher return or vice versa and if investor is not ready to take risk then they go for bank account, PPF, debt market, etc.
Return - Most interesting part of an investment is how much you get on it. Risk and return are directly related. If investor is ready to take higher risk like investing in stock they get higher return of around 20- 25% or vice versa if you invest in bank or in any govt security then you get return of around 7-8%. Higher the risk higher the returns you get, lower the risk lower the returns you gets.
Age - Sometimes our age also matters, like youth mostly prefer higher risk and mid age group people like to invest in which has lower risk. It shows the ability to take risk.
Time - Time is most important aspect to look for an investor should know the right to enter in market and when to exit from market like current scenario US debt crises the market fell down actually it’s a right time to enter in market.
One should look for..
Financial Position: This area 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.
Adequate Protection: 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.
Tax Planning: Typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. 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 your income grows, you pay a higher marginal rate of tax. Understanding how to take advantage of the myriad tax breaks when planning your personal finances can make a significant impact upon your success.
Investment and Accumulation Goals: Planning how to accumulate enough money to acquire items with a high price is what most people consider to be financial planning. The major reasons to accumulate assets is for the following: a - purchasing a house b - purchasing a car c - starting a business d - paying for education expenses e - accumulating money for retirement, to generate a stream of income to cover lifestyle expenses.
Achieving these goals requires projecting what they will cost, and when you need 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.
This article has been written by Arti Wadhwa.
Fpguru.com in its efforts to spread financial enlightenment organizes financial planning article-writing competitions in colleges. Arti of Second Year Bachelor of Financial Markets, was the Second prize winner in the competition held in HR College of Commerce & Economics, Mumbai. We thank the Management & Principal of H.R. College of Commerce & Economics for their support.
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