What Is Personal Finance?
Personal finance is basically the financial management that an individual or a family unit does to invest, save, and budget money over time, especially taking into consideration various future life events and financial risks. In fact, personal finance is usually also referred to as financial planning.
The main purpose of personal finance is to ensure that the individual is able to make financially sound decisions in terms of investment, saving, and spending. The primary aim of personal finance planning is to enable people to live their lives the way they want to live and as much as possible, to avoid incurring too much debt, to live within their means, and to have as little debt as possible.
Financial planning is not just about money, though; it includes the planning of all aspects of an individual’s life including the choice of career, education, entertainment, family, friends and other such things. All these are related to an individual’s finances and these should be taken into account in order to have a secure financial future. This is what personal finance planning is all about and what separates it from personal finance management.
The financial planner is someone who is responsible for the overall planning of the individual’s finances and the planning involves taking into consideration the individual’s income and his or her spending habits. The planner’s job is to ensure that the individual takes proper and timely measures to keep his or her debts under control.
In addition to this, personal finance management should also include the assessment of the individual’s credit score and credit report. These reports contain information on the individual’s past financial transactions and these reports are then used by lenders, creditors, banks, insurance companies and even other individuals in order to determine the risk of lending money to an individual. They also determine the individual’s credit worthiness and whether he or she has enough capacity to repay the loan.
The personal finance manager also has to take into consideration the individual’s credit status, especially if he or she wants to borrow a large amount of money for an investment. Lenders are generally more cautious with credit-worthy individuals than those who are not creditworthy. They are more likely to approve an investment if the applicant is proven to be an intelligent investor. They also are likely to lend money to the credit worthy ones and if they find it difficult to obtain a borrower’s approval, they will consider other alternatives in order to fulfill their needs.
Personal finance planning also involves determining the level of an individual’s income as well as its growth rate. If the income is high but its growth rate is not so high, the individual may not be able to manage the repayment of his or her loans. For example, the interest rate on a home loan or a car loan may be very high for the low paying borrower and the high paying borrower may be able to pay off the loan in a shorter period of time.
Another aspect that the personal finance manager must consider in his or her plans is that of the person’s spending habits. The more a person spends but does not make any profit, the more debt that is incurred in the form of credit card bills, loans, mortgages and other financial obligations. In this case, the planning team would probably focus more on the person’s spending habits than the earning potential of the individual. The planning team also has to focus more on the person’s educational qualifications, employment and any other factors that may affect the ability to save.