All You Need to Know About Personal Financial Management

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One of the primary causes that makes an individual financially insecure is that they are unaware of their monetary situation and make whimsical financial decisions. Therefore, it is important to identify the key components which you should consider while forming a plan for better financial well-being.

A sound personal financial planning and analysis will help you determine your monetary status through which you can make a structured plan to achieve your targeted goal in the future.

Personal Financial Management (PFM) system refers to specialised software enabling users to track their monetary involvements. Often, PFM helps users to arrange transactions and add accounts from several institutions into one particular place and have an overview of it instantly. Furthermore, PFM comprises data visualisations like net-worth, budgets, spending trends, and so on.

While managing finances in a properly organised way, you can get a better overview of where and how you are spending your money. Doing so may assist you in staying within your budget boundary and escalate the amount of savings. Conducting proper personal financial planning and analysis will help you to manage your money in a systematic way and accomplish your targeted monetary goals.

Personal finance management can be clarified by using five key aspects on which personal financial management is centred. These aspects trigger efficient personal financial management. Mentioned below are the vital aspects of personal financial management one should consider:

• Income: Personal Financial Management is based on your income, which comprises both direct and indirect sources of income. Direct income comprises profits or salaries earned through business or profession, respectively. On the other hand, indirect income has some additional earning sources like interest from banks, fixed deposits, dividends, rental income, etc. Indirect earning is also known as passive income. The total earnings received from these sources are combined to get total spending power and help create an effective budgetary plan.
• Savings: Savings refer to the surplus money that remains after allocating funds or necessary expenses.  It is an essential part of financial management which acts as a major source of income. You need to save some funds from your monthly income, irrespective of how small it is. By doing so, you will be able to save substantial money and increase your savings to meet long-term expenditures. Sooner or later, this will help you build a financially healthy future.
• Expenditure: Another important factor of personal financial management is your expenses. When it comes to household expenditures, we generally think of everyday expenditures. However, having effective personal financial management also enables you to cope up with unpredictable expenditures effectively. As a result, you will not get burdened or face fund shortages during an emergency.
• Investments: Another noteworthy aspect of personal financial management is an investment. You can utilise your savings in the best possible way while investing them in favourable assets and investment options. By doing so, you will be able to boost your savings at a quicker rate. There are several investment opportunities that provide investors with substantial returns including fixed deposits (FD) mutual funds, government bonds, stocks, and so on. You can even take the assistance of a professional in order to create an ideal investment portfolio for maximising returns on your investments.
• Insurance: Insurance is another vital aspect of personal financial management which is sometimes ignored. Most individuals do not possess a basic term insurance plan or health insurance plan even in today’s times. Insurance is a vital financial tool that helps in safeguarding the survival of a family in case of an unfortunate incident takes place.

For instance, if you are the only earning member in your family, you should opt for a life insurance policy. This will ensure that if anything tragic happens to you, the insurance company will compensate the entire sum assured to your nominee. This way, your dependents and loved ones can maintain a normal life even in your absence.

As its name suggests, personal financial planning and analysis is an organised method wherein a person enhances their present monetary resources via proper management of finances in order to achieve future goals. Take a look at the following to understand the importance of personal financial planning:

• Determining  Financial Goals: Once you visit a financial planner, they will start the discussion about your monetary plan by questioning you regarding your targeted financial goals. Most individuals spend a lot of time planning their future goals in the short-term and long-term. Short-term goals comprise reduction of debt, creating a budget, saving for emergencies, etc., whereas long-term goals include elimination of debt, saving for retirement, saving for a child's education, etc. You have to consider your financial situation and decide your goals in view of that.
• Income Management: You can manage your income more comprehensively with the help of a defined plan. You can simply create a budget and ensure peace of mind regarding fund availability. In simpler terms, a good budget plan helps you effectively identify areas of wasteful spending, prioritise where expenditure is necessary, and adjust quickly whenever your financial situation takes a turn. This way, proper financial planning helps you achieve your goals comfortably.
• Financial Understanding: With a proper personal financial plan, you will be in a better situation for understanding your finances through pre-determined monetary goals. In general, sound monetary planning can bestow you with a comprehensive approach to managing your funds so that you can gain control over your financial lifestyle.
• Assessing Progress on Goals: Making a financial plan and implementing the same is not an easy task. You have to monitor your plan periodically to ensure that everything is on the right track. Here you have to check the progress of your measurable goals, like contributing a particular amount of funds in savings or repayment of debt over a specified period. With a successful personal financial plan, you can upkeep discipline in managing your savings and thus achieve your goals.
• Assets and Liabilities Management: Often, individuals face problems to determine their goals and the ways to accomplish them. Precisely, while you have an asset in one hand, your other hand shows liabilities. As a result, it becomes vital to figure out the real value of that asset. With a financial plan, you will be able to determine and settle the obligations accurately and own the assets which will not turn into a burden in the future.
• Emergencies: Having substantial savings act as a shield to protect you in the event of a rainy day since there is no telling when a financial crisis will arise. During sudden financial fluctuations or natural disasters, job loss, etc., you can get off track if your savings are inadequate. Thus, it is essential to hold sufficient emergency funds so that you can utilise them during any crisis.

From the above discussions, you have an insight into the importance of personal financial planning and analysis and how it will help you make your monetary decisions with ease. However, keep in mind that the entire procedure of a financial plan is quite challenging if you do it single-handedly. Thus, you can take the help of a proficient financial advisor and proceed towards your future goal.