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 Mastering Personal Finance: Your comprehensive guide to managing your money

 Mastering Personal Finance: Your comprehensive guide to managing your money

In the process of creating a detailed financial plan, there are a few goals to be achieved. An immediate goal may be to satisfy a current financial obligation. In the long run, the goal may be to secure financial security for the family unit during a retrenchment or a medical emergency. Another goal may be to save for a home or further education or for leisure activities such as travel or to retire.

An often-overlooked goal is ensuring that the family unit does not become a financial burden on others. Unfortunately, many fail to plan effectively for the future. The key to successful financial planning is creating a strategy that is realistic in achieving these goals because failure to meet goals will have a negative impact on one's financial situation. 

In addition, financial plans will monitor and change to fit in with any significant unpredictable changes in life or the external environment. The Federal Reserve reported that 47% of Americans are not equipped to cover a $400 emergency expense. This shows how important and crucial effective financial planning is.

Personal finance entails the application of financial principles to the financial decisions made by a family unit or an individual. It addresses many facets of financial issues such as creating a budget, how to save, financial risks and how to assess them, how to invest in a major decision and life event, the numerous events that require borrowing funds and managing debts, and not forgetting estate planning. 

The concepts typically are a piece of life's plan, and financial planning helps to achieve long-term and short-term goals with a method of systematically organizing and utilizing money resources to achieve the goals. 

A major area of personal finances is financial planning that is a pragmatic and dynamic process that operates on a feedback loop in the form of repeated monitoring and revision. For me, it's a step-by-step program, which starts with the formation of a comprehensive financial plan and culminating with my dreams. 

Such planning can be achieved with the use of the wide range of instruments, for instance, investment planning, retirement planning, tax planning, estate planning, and retirement benefits planning.

Setting Financial Goals

Now, you are most likely to be in either one of two different financial situations. You are either in a positive cash flow situation where you are comfortable with your income levels, and you have little financial difficulty in funding the lifestyle that you are living. If you are in this situation, it is important for you to realize that you do not want to change your situation for the worse. 

Too often, people increase their earning and spend more money. This does not progress you financially. It is especially important for these people to increase their savings and investments. This situation will require different goals compared to a person in a negative cash flow situation. 

This is where you are spending more money than you are earning. This will be because you are eating into your savings or building up more and more debt. A clear sign of this is if you must borrow money to pay off bills or you are using credit cards to finance your lifestyle. If you are in this situation, you generally want to have goals to get yourself out of debt and increase your wealth to a state where you have financial ease. This is a change situation for the better.

Definitely having a plan in place and setting goals is the key to a well-organized financial life. In your mind, you must have a structured picture of the summary of final goals you have. With this, you can begin removing the useless things that doesn't have anything to do with your future and initially aids you in the achievement of your goals. 

When you can see the link between your current situation and your future, you are in the position to start planning to achieve your goals. A goal can be defined as a dream with a deadline. To succeed in your goals, they need to be achievable and attainable. Start making a list of what you want to achieve in the short term and long term. 

An example of a short-term goal would be 'I want to pay off my credit card debt' and a long-term goal could be 'I want to save at least $100,000 to make a deposit on a house in 5 years' time'.

Assessing Your Current Financial Situation

If your net worth is currently low or negative, you may simply want to consider setting a goal to increase your net worth. This financial goal is quite common and very much in line with building wealth.

If your net worth is a negative number, then you have more debts than assets. This would be a sign that you need to address the financial goals that led to this situation. If your net worth is a positive number, then you are heading in the right direction and have a good foundation for building financial security.

Add the total value of all your assets and record it. Next, make a list of all your liabilities. This would include all your current debts such as mortgage balances, vehicle loans, credit card debt, and any other liabilities. Total your liabilities and subtract this value from the total value of your assets. The result is your net worth (Total assets - Total liabilities = Net worth).

To figure out your net worth, you will need to make a list of all your current assets and their value. This would include, but is not limited to, any vehicles (the resale value, not the purchase price), real estate, stocks, bonds, and savings. 

Do not include possessions such as jewelry, electronic equipment, or furniture unless you feel they are extremely valuable. To value your possessions, you can use the classified section of your local newspaper or possibly inquire with a dealer in that field. You do not need to list exact values for everything, a rough estimate will do.

To goal set for finance, don’t forget the first step is to recognize your finance knowledge. You are simply stating that you should know the financial status you are in and not just wake up one day and not know how it has all gotten there. 

And it is only with this that you will finally definitively know your net worth. Now you have an idea how much you're worth you will be able to make a plan on your financial position.

 Mastering Personal Finance: Your comprehensive guide to managing your money

Defining Short-term and Long-term Goals

The next step is to identify the obstacles in personal financial planning, which will be explained in the next article. At the end of this step, you must have a clear picture of your goal and have already ensured the time and the steps to reach this goal.

Set the Priority of The Goal and Allocation of Time: - High priority and realize in 2 years Time = (2 - Good condition now) = 2 - Middle priority and realize in 6 years Time = (6 - Good condition now) = 6 - Low priority and realize in 5 years Time = (7 - Good condition now) = 5

A short-term goal is a goal with a realization time under 5 years. Usually, we make this goal with our ideal condition. The easiest example is public people in Indonesia wanting a new motorcycle with the reason of efficient time to work. This can happen if he buys a motorcycle with credit in 1 or 2 years of his salary. And also, a long-term goal is a goal with a realization time above 5 years. This can be explained more deeply with the same example.

If that person wants to send their child to university while also aiming for a private vehicle, in this case, he must save to make that child successful in university and buy a private vehicle when his child succeeds. This can happen 7 or 10 years later after the child graduates from senior high school. Then, the current condition is still comparing the ability to make ends meet.

As we mentioned in the previous article, the basic step of personal financial planning is to list your goals. The difference is, this step is a priority, both short and long term. Priority here means the importance level of a goal. Some people are not successful in financial planning because they do not know the importance of saving money. 

They are still healthy and have a good job, so they think that saving is not important. But they are forgetting that one day they will be too old to work or retire, and they will still need money to fulfill their daily needs. So, determining the priority of a goal is really important. Usually, we categorize priority into three classes: high, middle, and low. Then, the allocation of time for a priority can use the formula t = r (s), which means Time = (Realization - Current Condition).

Creating a Realistic Budget

What are typical budget categories? The first step in creating a budget is to determine the amount of money you spend. A good way to do this is to track your spending for a month. You can use a notebook and just write everything down or you can use one of the many software programs or apps that track your spending for you. 

This will give you a clear picture of where your money is going. Once you have this picture, you can work on cutting unnecessary expenses and work on areas where you can cut back. Answer the following questions: Do I have debts or expenses that should be paid off within a certain amount of time? If so, set a goal to pay off the debt and decide on how much you would like to spend towards this debt every month. 

What are typical values for monthly utilities and groceries for my family? These costs are usually consistent and can help you determine if you are setting a realistic budget. How much do I spend on more variable expenses like entertainment or eating out? This area is often where many people who are trying to get on track financially decide to cut back on.

Saving and Investing

Saving and investing is the lifeblood of personal finance. It is the best way to build wealth and achieve financial security. For this purpose, saving is directed towards the immediate financial needs while investment is for the long-term and often for retirement. 

The money that you save is often in the form of cash in a bank and would be used to service any future financial commitments such as paying off credit card debts, personal loans, or buying a car. Saving is also used in the event of an emergency when money is needed immediately, for example, if your car breaks down and needs repairing. 

A good deal of this is generated through a budget designed to create a surplus of cash. The money saved from the budget can be kept in a normal bank account, but a higher interest rate can be obtained with a term deposit that "locks" the money away for a nominated period of time. 

It is important to keep in mind that the interest earned from saving is generally classified as income and should be included as such in any personal taxation calculations. Step one of tax-effective investment is to minimize taxation on investment income. This can often be achieved by investing in managed funds or superannuation, which usually have a lower rate of tax than income tax. This is because superannuation and some investment income are only taxed at 15%.

Building an Emergency Fund

Emergency funds provide a safety net for unplanned expenses such as car repairs, a medical bill, or job loss. Large, unexpected expenses can cause temporary financial hardship. Without an emergency fund, you may need to use credit to pay for these expenses, which can make your financial situation worse. 

To prevent this from happening, it is important to save at least three to six months' expenses in an easily accessible, high-interest account. This may seem like a large sum; however, it can be achieved by regularly contributing a fixed amount to your emergency fund each week. 

Set up an automatic transfer into your high-interest savings account to coincide with your payday. It is essential that your fund be easily accessible when it is needed. If you are relying on releasing term deposits or selling shares, the value of these investments may have decreased or there may be penalties involved with accessing the cash.

Exploring Different Investment Options

Considering long-term investment goals is what separates various different investment options. The money you set aside for emergencies and contingencies should not be invested in stocks, as you will want this money to be secure and easily accessible. Instead, you should look into investing in bonds and/or bond mutual funds. 

When investing for retirement or education, you will want to take on more risk to earn a higher return. Stock investments are usually best for these long-term goals. It is important to remember not to mix your long-term investment money with money that is earmarked for short-term investment goals.

Another very important aspect to consider when examining different investment options is the tax effect. The general rule is that you do not want to invest money into anything that will be taxed at a higher rate than your current income. It is also wise to not dismiss an investment option due to a high tax rate without first examining the after-tax return.

Once you have saved a decent amount of money (it is recommended to have at least 3 months of living expenses, while the more cautious experts suggest 8 months worth), it is time to start putting your money to work for you. The first step when considering different investment options is looking at what sort of return you expect on your investment. 

If your investment goal is to earn a safe, consistent annual return, you should consider bonds. If your goal is to save your money for a future expense and earn a high return on your initial investment, you might consider stocks. People wishing to save for a home or education are well suited with the traditional savings option. It is important to do solid research on each investment option and what these options entail before investing.

Diversifying Your Portfolio

The most effective way of diversifying a stock/bond portfolio is to increase the number of asset categories as risk in the investment strategy is depressed. This has led to the growth in popularity of investing in an international equity allocation with views that it is unhedged cash flow providing a similar risk/return profile to that of foreign equity. 

Simulation studies suggest that a portfolio with international equity and global bonds has a similar return but lower risk than one that is entirely composed of domestic equity and US bonds, with the added incentives of increased expected capital growth in the foreign asset and reduced pressure on domestic bonds. 

As a good diversification strategy can add between 50-100 basis points to real return per annum, such an increase in global investment must eventually lead to the movement of assets to the more aggressive investment strategy. With this scenario in mind, it is essential for every UK investor to understand the implications of EU legislation surrounding the single currency.

The traditional argument that portfolio diversification in the form of owning multiple stocks can reduce unsystematic risk holds little weight if using equity to also hedge long-term liabilities. This is because all industry sectors tend to move in the same direction and to a greater or lesser extent, even in unsystematic risk.

Balancing expected return against risk is always the ultimate concern, but diversification still provides the foundation for selecting levels and types of risk.

1. Understand the tax and cost implications of the portfolio choices.
2. Understand the risk associated with the respective asset categories , usually by understanding the historical real returns and the correlation between categories of assets. This determines the probability of a specific range of returns.
3. Understand your investment strategy in terms of time horizon and expected return. Allocation is primarily a function of expectations in these two areas. 

The more aggressive the objective, the more heavily weighted equity, and the longer the time horizon, the higher the expected return from both asset categories.

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Understanding Risk and Return

When investing, the level of return we can expect and the level of risk we must accept are interrelated. Generally, the more uncertain an investment, the greater the likelihood of a higher return or loss. Different investments involve different types of risk. 

For example, putting money into a high-interest savings account is generally far less risky and hence offers a lower rate of return than investing in shares. The younger you are, the more risk you can afford to take. This is because you have more time to recover from a loss and because you will have a higher earning capacity, enabling you to offset any financial setbacks. 

As you get older, your capacity to take risk will lessen, and therefore your choice of investments should be less risky. When you are investing money that you are saving for a short-term goal, such as a holiday, you need to ensure that you do not put this money into a high-risk investment, as you may not have time to recover any losses. 

High-risk investments tend to involve speculation. Speculation is similar to investment, but the decisions to buy or sell are based on hope, fear, and greed and involve an element of taking on higher than normal risk. It is generally wise to avoid speculating with your money, as the increased risk of loss is often unjustified.

See also→ How to save money and build a prosperous financial future?

Managing Debt

Once you have evaluated what type of debt you have, it is important to prioritize paying off consumer debt and possibly consolidate the other forms of debt into a lower interest loan. This will prevent any high-interest debts from increasing and being out of control. 

A very effective way to repay debt is to build a debt repayment strategy. This serves as motivation and reassurance that it is possible to get out of debt and it will prevent any missed or late payments, which will further doom the individual into more debt. Often it is a good idea to set financial goals to assess the current situation and monitor progress. 

One should consider creating short-term goals for 6-12 months, medium-term goals for 1-5 years, and long-term goals for 5+ years. Set specific and realistic timeframes and review/revise the goals as they are achieved. This will give a clearer understanding of how long it will take to be debt-free and it will help maintain focus on the end result. Another strategy may be to use payment contracts. 

This involves contacting the creditor to negotiate a realistic debt payment and then prepaying a lump sum of the agreed payments for the creditor to lower the principle. Finally, avoid creating any more debts. It is important to change any spendthrift habits and start budgeting.

Debt is a far-reaching issue that can affect anyone. Some debt is manageable, while other forms of debt may be discouraging. The starting point to settling all your debts, regardless of the amount, is to evaluate the type of debt you have accrued. 

Consumer debt consists of funds borrowed to purchase goods and services. This includes credit card debt, loans, and payday advances. This type of debt is often considered the most oppressive as it usually charges a high-interest rate. Investment debt is another form of debt that may not be a burden on the individual. It is often tax-deductible and is used to leverage investments. 

Student loan and home mortgage debt are considered investments because they are leveraging an investment in human capital and a home. The last form of debt is business debt. This is often looked down on, but surprisingly it is not a bad thing if kept under control. It is a type of risk that can help advance the person's career and, in the long run, business debt is often tax-deductible as well.

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Evaluating Different Types of Debt

Unsecured debts have no collateral attached. This results in higher risk for creditors, which is usually compensated by higher interest rates. The most common type of unsecured debt is credit card debt. 

Due to the higher risk and interest rates, in recent years there has been an increase in the use of debt recovery services for unsecured debts. This is a significant issue, more on this can be found in the section entitled "negotiating with creditors".

There are two major types of debt. These are secured debt and unsecured debt. Each has different consequences if you fail to make payments. Secured debt usually grants creditors the rights on specified assets (collateral) if you don't make your payments, in some cases they legally own the collateral (this is common with cars). 

If you default on a loan for a car, the creditor may take the car back, sell it, and keep the money from the sale as full payment for the debt. If the sale of the car does not cover the value of the debt, in many states they can still take you to court for the remainder! Usually, they cannot take any other assets in this instance, as the debt was "fully secured". 

The only way to repossess and sell the car is the way to recover the money. If they win the court case, and the car was not sufficient to cover the debt, they may be able to take other assets out of this.

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Developing a Debt Repayment Strategy

The debt snowball method is a simple and effective debt reduction strategy where one pays off the smallest debt first, and then applies the previous payment to the next bigger debt. To get rid of debt quickly, you will also want to reduce the interest rate paid. 

If you are currently paying high interest on any debts, it is usually worth consolidating the debt into a low-interest loan. If your debts are simply on credit cards, then a credit card balance transfer to a new card with a low interest rate or 0% for an introductory period can be an effective way to pay your debt off sooner. 

But be aware that after doing this, many people simply run up the balance on the old card as well as the new one, so cut up the old card to avoid this happening to you! With any consolidation, ensure that you are actually reducing the total interest paid, as it is possible to consolidate debts and end up paying more. 

In Australia, a tax-deductible investment loan can also be a tax-effective way to consolidate and reduce non-tax-deductible debt. Always seek quality independent advice and be careful with secured loans, as failure to pay can put your primary residence at risk. 

Step through each of these simple actions, compare the amount of time it will take to pay off your debt, and how much interest you will pay using loan calculators available on financial websites. This can be an eye-opening exercise which serves as great motivation to clean up the debt! At this stage, you may also want to speak with a financial adviser for a professional opinion on the most effective way to clear your debt.

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Negotiating with Creditors

When negotiating, it is often best to simply be honest and explain the situation you are in, what has prevented you from repaying your debts, and what you are now capable of repaying. If you speak to the right person this may be enough. 

Other times you may need to elaborate and provide evidence to prove the situation you are explaining. An example of this may be if your income has changed and you can no longer afford your current debt. 

In this case, you may need to show evidence of your income and suggest to you and your creditor ways in which you could alter the debt to make it more manageable for you, without defaulting on payments. 

This is a very effective tactic when negotiating payment plans and settlement offers. Assuming both you and your creditor can come to an agreement that you are capable of doing, it is important to get the terms you discussed in writing, so as to avoid any future discrepancies.

Another important aspect of debt negotiation to keep in mind is that creditors would rather deal with you directly as opposed to paying a third-party collector to track you down and collect. This is an important aspect to realize, and you should use it as motivation to take the initiative and not wait for creditors to come to you. 

This is because the longer you put off repayment and avoid your creditors, the less likely they are going to be open to negotiation. If you show effort and motivation, creditors will see that you are serious and on top of your debts, which makes them more willing to work with you in terms of repaying what you owe.

The first thing to know about negotiating with creditors is that it is a valid and ethical way to handle debt. Creditors would rather get some of their money that you owe, as opposed to you filing bankruptcy and them getting nothing. For this reason, most creditors are open to some form of negotiation when it comes to repaying debt.

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Conclusion

In conclusion, personal financial planning is an ongoing journey and not a final destination. It is a journey that requires awareness, learning and adaptation to changing circumstances. By understanding the principles of personal finance, setting financial goals, managing debt wisely, and investing smartly, we can achieve financial stability and reach our financial goals, whether short-term or long-term.

Remember, the path to financial success begins with one step. Start today by assessing your financial situation, develop a clear plan, and take concrete actions to achieve your goals.