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FINANCIAL LITERACY: Personal Finance Planning

The ways and manner we handle our financial resources play a significant role in our behaviour towards money, which can in turn strain and create tension in our lives. The inability to meet financial obligations as and when due can lead to liquidity problems and financial pressure. A comprehensive financial plan with clearly stated objectives should be your first step in planning your financial future.

Personal Financial Planning

Personal Financial planning is the process of planning and managing personal finance activities such as income generation, spending, saving, investing, and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan. It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. Financial literacy is the key to making the most out of your income and savings, it is important to become financially literate, so you can distinguish between good and bad advice and make smart money decisions.

A financial Plan is used as a benchmark to measure the progress you are making and update it as your goals and time frame change. With financial planning, you are looking toward the future, specifically at building the kind of financial security and financial freedom to achieve.

personal financial planning concept on a grunge wooden table

The first step towards well-planned personal finance is to provide candid answers to these questions

  • What are your financial goals?
  • How much finance will be required to achieve the goal?
  • Where will this finance be acquired or sourced from?
  • How will the funds be utilised in achieving the set goals?

Personal Financial Planning Process

  • Have a desire and discipline to begin
  • Gather and analyze information about your income, expenses, asset, and liabilities.
  • Set Financial Goals – short, medium, and long-term goals
  • Start a savings plan
  • Implement your plan: Make changes and make it happen
  • Record all your daily expenses in a book.
  • Monitor your expenses
  • Invest money wisely.
  • Have periodic reviews]

Benefits of Personal Financial Planning

  • Efficient and effective utilization of financial resources.
  • It assists to achieve financial security and financial freedom.
  • It enables you to put the money saved to work.
  • It helps to see opportunity and not constrain
  • It helps you to know your current financial worth.
  • It identifies financial goals and develops strategies to meet them.
  • Enables you to have peace of mind and thereby are more productive.
  • Enables you to live a happy life.

Sources of Income

  1. Active Income: It is the income earned from a part-time or full-time job or from performing a time-consuming task or service. Here, the individual receives a fixed hourly wage or salary. It also involves earning money by running a business or opting for self-employment. The amount earned and saved this way forms the basis for investing in passive sources of income. Having an active source of income mandates an individual’s physical presence and material participation. If there is no active engagement, there will be no income in this arrangement. It is both quicker and more consistent than passive income. Some of the active income examples include:
  • Salary
  • Hourly wages
financial income tax calculation concepts and financial monitoring concepts.
  1. Passive Income: Passive sources of income may include money generated from interest and dividends on investments, limited partnerships, and rental property. Likewise, salary, hourly wages, commissions, and tips are examples of active sources of revenue. One can have one of these income sources or both of them to enjoy financial freedom and lead a desired lifestyle. Passive earning is a better choice than active one in terms of practicality, but one must have a regular source of money to earn passively. Some passive income examples include:
  • Interest income on savings, bonds, and guaranteed investment contracts
  • Stock dividends
  • Real estate investments or rental income

TIPS FOR FINANCIAL PLANNING

  • Income/Cash Flows Management: When you have a financial plan in place, it is possible to manage income more effectively.
  • Management of Debt Efficiently: Financial Plan helps to manage borrowed funds efficiently. Loan can be a debt trap.
  • Set SMART Financial Goals: All goals must have specific deadlines attached to them.
  • Invest in the Right Financial Products: Invest in what you understand, what know and confirmed to be good.
  • Developing a Regular Savings Habit: To create wealth in the long-term, investing with discipline and determination is the key.
  • Prepare a Blueprint to Your Long-Term Goals: You must have a prudently drawn financial plan which serves as a blueprint to meet all your financial goals.