How to Make a Game Plan for Your Personal Finances

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‘Personal Finance’ highlights the most notorious problem, getting that little cash. It entails understanding how to manage your income and assets. And hence, quench your desires in life or even make more out of it. 

It aims at maximizing your future benefits and minimizing your future costs. For example, storing your wealth, increasing your income, protecting your existing assets, and decreasing the expenditures.

Income is the fruits of your hard work and labour. There are several terms of income from different sources of income. These include; the self-employment wages or the salary, employment, account deposits such as the savings account, interest earned from lending money. Furthermore, income can come from earnings of partnerships and corporations.

There are two fundamental ways of earning income in today’s market-based economy. Either by selling labour or selling your investment capital. With selling labour, it implies you are working, either for yourself or for someone else. The income may come in the form of a pay check or solid money. The overall compensation may come in for of other benefits such as retirement contributions, your health insurance, or life insurance. Labour is provided for in the labour market. 

All the financial plans always have a process in which they undergo before implementation. It involves determining the following statements; where you would like to be, where you are, and how you would get from here to there.

Understanding where you are and your current situation and the various choices you are presented with. Despite there being several choices for you, you will want to identify those that will be of most value to you in achieving your financial goals.

Your current financial situation assessment is a matter of categorically putting in place personal financial information into different summaries. These summaries highlight the important aspects of your financial life; that is your assets, debts, personal financing, incomes and expenses.

Here is where this information can be represented as your financial statements (i.e. income statements, balance sheet and money flow statements). Now determining how you get from here to there, requires a process of identifying the immediate choices and long-term strategies of future choices.

To do this, you have to clearly evaluate your current situation to determine the possible choices that the current ones may create in future. Keeping in mind that current situations such as family compilation, career choice, age, health concerning your economic environment shall define the value of your choices in future.

The next step, after selecting your alternatives, evaluation of each one of them is required, basing them on maximizing your benefits and minimizing your costs. Other factors to consider are; the risks- how it will affect you and the decision of your next choices in the future.

At each point, your choices have to be numerous and well-diversified in terms of your financial planning alternatives. You will, therefore, be in a position to predict how your choices will affect your future financial choices. You will at the end, be gaining more and more experience in making well-thought decisions about your financial life.

Introduction 

What is personal finance?

It is known as all the financial decisions and activities of an individual or someone’s household, these financial decisions include;

Budgeting 

Mortgages (debt instruments)

Savings 

Retirement planning 

It refers to the income you obtain from your work, either as an employed person, a business partner or a business person in your own business. The money you get needs a special kind of treatment for you to feel the labours of work have yielded you good fruits. 

When looking at personal finance, there are key issues you need to consider. Given managing and developing your financial status, you will need to address these issues. They include;

Financial security

Financial savings

Financial usage

Financial investments 

You would want to make sure you earn, spend money comfortably, invest your money and achieve your long-term goals. All these are possible if you have the basic understandings of how to manage your finances.

Be it you are a student, social worker, government official, a freelancer, you name them, it is imperative you understand methods or techniques that will assist you in managing your incomes. If not, the expenditures needs that will arise when you receive your incomes will disappear before you even take them home.

Income may come from different sources depending on the nature of the work. Each of these incomes regardless of their sources must be calculated and declared to the organization involved with their employment.

Some of the most used income declaration reports include;

Schedule B– this entails the interest and dividend income of an individual. For instance, the interests earned by your deposit accounts, savings account, and bonds become your income.

Schedule C– here the income is earned through self-employment or business ventures. This type of income is usually referred to as a business income.

Rentals or royalty incomes (E)-here the incomes are generated either from renting an asset or a real estate property, or it could be from creative works 

Personal Financing – such as book writing and art. Partners could also be involved as in the case of law firms, family businesses or medical practices, to form alternative business structures for a business with more than one owner.

Farm income– this is commonly seen in the case of farmers who earn their income from growing food, livestock or livestock products.

Capital investments gain or lose- they are derived from changes in asset value during and after ownership. If you sell an asset less the amount you bought it with, you have made a loss and the vice versa is true. Recurring gains and loses from your initial capital investments are all from the returns on financial instruments.

To save those few coins from your pockets, there are questions you will need to ask yourself.

How do you achieve your financial security?

Your financial security is the certainty your income assures you it is enough for all your expenditures. This is achieved when you have enough money saved not only in case of emergencies but also for future financial use and goals.

How should you spend your money? (Your Budget)

Here you need to judge what is necessary and what is unnecessary at the moment. This will help you avoid losing your money fast. Instead the unnecessary spending should be converted to savings. The budget is an important asset in managing your finances. It will assist you in keeping track of your expenditures and plan the way forward in spending your income. 

Before preparing a budget, it is important to use the following variables;

Data collection and goals definitions

Predictions formulation and data, goals reconciliation

Budget formulation 

Analysing variables involved and recording actual outcomes

Adjustments on goals, budget and predictions

Redefine your financial goals 

However, for you to achieve this, you will have to make decisions based on your total monthly income. Then create a list either in the form of graphs or tables about your expenditures either monthly or when you get your incomes. With this information, you can then choose where to spend a little extra cash and where to save.

Inaccurate predictions or change in the factors that assist in budget formulation, may, however, cause a budget variance. The result is, the actual results of your financial activity, completely differ with your predicted budget.

What is a financial investment?… and what should you invest in?

Your income will determine what kind of savings you will need to do, investments, use of your own money comfortably without straining with the much you have. 

For savings, it does not matter whether you are in your late 40s or early 20s, one thing is recommended, you should be saving for the future. With the savings, you can establish an emergency savings account to cover any financial hardships and a retirement savings plan to assist you in the future.

This brings in another important aspect you should be keen on; Insurance

What is insurance? – this refers to a contract policy draft in which an individual or an object, receives protection or reimbursements against loses or damages from the company within which the individual is employed.

Acquiring insurance is another method of managing your personal finances. Some of insurance include; health, life, car and house insurance. 

A prudent way of monitoring your finances is by the use of financial statements relationships from when you get your income, how you budget for it, to how you spend, and finally the results you get at the end. These statements will assist you in personal financing and evaluating alternatives for your financial decisions. This brings us to future predictions concerning your personal finance.

Evaluating Choices Time, Risk, and Value of Your Personal Finances

Making future financial decisions involves making speculations on either the kind of result you will get or the value of it. Understanding the involved risks that time presents, the opportunities, and the opportunity costs that time creates are part of the method in the evaluation process.

Time value 

Time plays a critical role in assessing the benefits and costs, by predicting the possible outcomes or probabilities of their occurrence in the future. And that’s not all, their values too can be predicted. The value of an asset today will not be the same after n number of years. This clearly shows that in evaluating the value of your assets time is a key factor. The relationship; as time passes, the liquidity of money is affected and thus its’ value applies.

Risk evaluation

A risk will affect the future of your financial decisions. This can be brought about by events which are either independent or dependent on other factors.

Risks are brought about because of independent events which are normally uncertainties. These independent events can be measured based on their frequencies in the past. Thus, the probability can be used to predict its’ reoccurrence in the future. Therefore, proper evaluations can be done on your future choices. 

Opportunity cost

Opportunity comes once. This much is known. If an opportunity passes without you risking in it and investing in it, you lose the alternative. But, the loss of other alternatives when one of them is chosen, becomes your opportunity cost. This is also determined by time. 

Tax Payments

Taxes that are charged by the government, on various products and tax returns should also be included in calculations of your income and expenditures. Tax obligations are mandatory for every citizen working in any nation. As per regulations, most income taxes from wages are usually collected through withholding as earned.

Record Keeping

Each individual is required to collect filed reports and information on tax forms and schedules. This has been overseen by the tax regulation organizations for most countries. Different forms are required to be filled and submitted at the end of every financial year detailing the total wages earned, taxes and contributions withheld.

Any income that is taxed or is at a lower rate is extremely valuable than an income that is not taxed or it is at a higher rate than usual. The tax obligation consequences should not obscure the benefits of enjoying income and the costs of having unwelcomed expenses.

Financial Management

There is a need to manage the financing of both your consumption and investment of your income. Depending on how many sources of income you have, be it one or two, you need to decide when to use the money and most importantly how efficiently as possible. This will assist you in maximizing benefit and minimizing cost of your investment and consumption.

Your ability to save cash will vary over time as your lifetime, age, career choice and health will change. These factors determine your income and expenses and hence enable you to formulate a budget program and your financing.  

Thoughts

These insights will help you achieve successful personal finance management. With the understandings of the various planning and skills set to use, you can comfortably enjoy the fruits of your labour.

Make the right decision today and live a comfortable life.