Posted by Shivali Anand
February 8, 2022 | 3-minute read (461 words)
Personal finance planning entails using a budget to manage your income. But it’s not just about paying bills; it’s also about attaining your financial objectives. Your goals may be having enough liquidity to fulfill short-term financial demands, saving for a child's college education and budgeting for retirement. At its core, personal financial planning and management should help you lay the groundwork for a secure financial future.
Finance experts advise that individual finance planning should be guided by three principles: prioritizing, appraisal and restraint. Understanding these concepts is the key to putting your personal finances on track.
The prioritization principle refers to the fact that when examining your personal finances, you should recognize what keeps the money flowing in and stay focused on those activities.
The assessment principle refers the ability to not spread yourself too thin. People with ambition tends to have many ideas about making it big. But running your personal finances like a business requires stepping back and assessing the potential benefits and costs of a new venture.
The restraint principle refers to the ability to spend judiciously. Earning $500,000 a year will not help those much if they spend US$ 550,000 per year. Learning to wait until you have completed your debt reduction objectives and fulfilled your monthly savings goals before spending on items that do not produce wealth is vital to your personal finance plan.
What, exactly, is a personal finance plan?
Below are six phases in the financial planning and management process.
Step 1: Gather facts to clarify your current situation –
To create an effective financial plan, the first step is to collect all necessary personal and financial data, such as tax returns, pension plans, insurance policies, asset and liability lists, securities transaction records, wills and trusts and so on.
Step 2: Plan your financial future –
This phase necessitates the identification of both financial and personal goals and aspirations for oneself and family members. Supporting elderly parents, investing for a child's college education or minimizing current financial stresses are all examples of family financial planning.
Step 3: Identify financial obstacles –
Before remedies can be implemented, the next step is to give potential pain points a name. Inadequate cash flow, a significant tax burden, too little or too much insurance, existing investments suffering from inflation and so on are examples of such obstacles.
Step 4: Document a financial plan –
The length of your financial plan document is determined by the intricacy of a person's unique situation.
Step 5: Carry out the plan's steps –
A personal financial plan will only be effective if the recommendations are followed.
Step 6: Review and adjust the financial strategy regularly –
A financial plan must be reviewed and revised regularly to account for changes in personal and economic circ*mstances.
FAQs
Finance experts advise that individual finance planning should be guided by three principles: prioritizing, appraisal and restraint. Understanding these concepts is the key to putting your personal finances on track.
What are the 3 steps in creating financial plan? ›
From beginning to end, a certified financial planner professional guides you through the financial planning process - keeping in view your current financial situation and economic background.
- 1) Identify your Financial Situation. ...
- 2) Determine Financial Goals. ...
- 3) Identify Alternatives for Investment.
Three main types of financial plans are cash flow plan, investment plan and insurance plan.
What are the three stages of the personal financial planning process? ›
Understand the client's personal and financial circ*mstances. Identify and select goals. Analyze the client's current course of action.
What is the principle of personal finance? ›
Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and much more. Being disciplined is important, but it's also good to know when you shouldn't adhere to the guidelines.
What are the 3 rules of financial planning? ›
Finance experts advise that individual finance planning should be guided by three principles: prioritizing, appraisal and restraint. Understanding these concepts is the key to putting your personal finances on track.
What are the 3 S's for financial planning? ›
The Three S's
- Saving. The methods for teaching money lessons have certainly changed. ...
- Spending. A budget is an important financial tool that can teach children how to manage money responsibly. ...
- Sharing.
Financial planning is nothing but the process of: Determining your future needs in terms of investment, resources, funds. Determining the sources of funds. Managing or utilizing these funds efficiently.
What is step 3 in the financial planning process? ›
Step 3. Analyzing Your Current Financial Situation. With your financial information meticulously gathered, it's time to delve into a comprehensive analysis of your current financial commitments. Scrutinize your income, expenses, assets, debts, investments, and other financial commitments.
What are the three 3 elements of financial management? ›
Financial management provides the framework within which these decisions are taken. There are mainly three types of decision-making which are investment decisions, financing decisions, and dividend decisions.
Step 3 of the planning process typically involves the development of a detailed implementation plan. This includes assigning specific tasks, responsibilities, and deadlines to team members or stakeholders to ensure that the overall plan is executed effectively.
What are the three parts of a financial plan? ›
The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.
What are 3 steps to financial success? ›
Get started on path to financial success with these three steps: determining budgets, tracking spending, and creating realistic savings goals.
What are the principles of financial planning? ›
Information gathering (such as life goals, assets, liabilities, cash inflows and outflows, investment preferences) and analysis. Plan development (aligning resources to short- and long-term goals) Plan implementation. Plan monitoring, periodic review, and adjustment.
Which of the following are the three basic finance principles? ›
3 Financial Principles All Professionals Should Know
- Cash Flow. Cash flow—the broad term for the net balance of money moving into and out of a business at a specific point in time—is a key financial principle to understand. ...
- Time Value of Money. ...
- Risk and Return.
A: The five major principles of finance are time value of money, risk and return, diversification, capital budgeting, and cost of capital. Understanding these principles is crucial for anyone working in finance or aspiring to do so.
What is the step 3 of financial planning? ›
3. Have a savings strategy. Once you have set your financial goals and organized your, you need to make sure you are planning your savings. It helps to prioritise your savings according to needs.
What are the 3 basic steps in money management? ›
Understanding how to create a realistic budget, track your spending, and set attainable savings goals are essential steps in the process. It can be overwhelming to take on all these tasks at once, but when broken down into smaller steps, money management success is achievable.
