Personal financial planning
A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:
- Assessment: One's personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal cash flow statement lists personal income and expenses.
- Setting goals: Setting financial goals helps direct financial planning. Examples of financial goals are: "To retire at age 50 with a personal net worth of £800,000", or "To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income". It is not uncommon to have several goals, some short term, and some long term.
- Creating a plan: The financial plan details how to accomplish your goals. It could include for example, reducing unnecessary expenses, increasing your employment income, or investing in the stock market.
- Execution: Execution of one's personal financial plan often requires discipline and perseverance, and many people obtain assistance from professionals such as accountants, financial planners, investment advisors, and lawyers.
- Monitoring and reassessment: As time passes, one's personal financial plan must be monitored for possible adjustments or reassessments.
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