essay about personal finance

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Personal Finance, Essay Example

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One’s financial plan is an essential component for any prospective notions of personal wealth and readiness for retirement.  In a distinct set of areas, these personal goals in my plan of action are realized for financial independence.  In the matters of my personal budget, investments, and way of life these factors come together to create a harmonious financial plan for realizing my financial goals.  It is extremely important to examine one’s budget to gauge one’s financial abilities and leverage.  This will dictate the amount of money for investments, in accordance with one’s financial goals.  Finally, cutting down expenses and making other decisions about one’s way of life can provide additional financial relief.  These steps are important in being able to realize personal wealth and readiness for retirement. There are a number of things to consider from a personal standpoint in regards to one’s finances.  Planning for the future and for my retirement is something that requires a plan, along with establishing a plan to attain wealth.  There are a number of things that need to be in consideration in order to obtain wealth and plan for the future.

Before personally identifying numbers from which to work, my personal budget needs to be take in consideration.  One must work within his or her means, and this is of course true in my case as well.  My financial plan must take into consideration where I am right now in regards to my financial goals and in these dynamics.

The first step is identifying my expenses.  This is a process that will allow myself to examine whether my expenses are reasonable.  Furthermore, I will be better able to reduce my expenses after examining them in detail.

Cutting down on my expenses will do two things immediately.  Firstly, the immediate impact to my budget and financial comfort will be improved.  I will be better able to control how much money is spent in various areas, which will put me at better ease financially.  Secondly, there are important benefits in the long term for such efforts.  By cutting down on unnecessary expenses, I will be able to realize this lost money and invest it in my future, or at least a place that will benefit me financially.

Retirement Account

Once the expenses are identified in my budget, my retirement account should take on a high priority.  Even if I am unable to make the maximum allowed contributions to my retirement account, it is important that I establish a place for my retirement account in my budget.  If I keep these consistent payments going into my retirement account, I will put myself in a better financial stance for the future.

With regard to my budget, examining my income and expenses will allow me to decide how much I can afford to contribute to my retirement account.  This process will help me identify the level of financial flexibility I have.  Obviously, I will have to take other investments into account as well, in addition to my retirement account.

After identifying the constraints of my budget, I should make a plan in accordance with my retirement.  By identifying an amount to target for my retirement, I will be able to project interest for a certain number of years, in order to gauge how much I will need to contribute on a monthly basis.  Of course such calculations will not be exact, but by doing this I will be able to adjust my calculations based on differences in my contributions, or interest levels in my investments.

Another valuable aspect of my finances are other types of investments.  Investments are a great way to establish personal financial growth.  Identifying investments, such as CDs, stocks, and other types of investments will allow be to better realize personal wealth and growth in my financial goals.

Devoting part of my budget to investments is another important part of my financial plan.  I have identified a number of investment options that will work with the limitations and opportunities in my budget.  Separating short-term from long-term investments, I have allocated an amount to realize investments as part of my overall financial plan.  For me my budget, encompassing all aspects of future financial growth is important, from short, long, and retirement-based investment plans.  In my every person should allocate funds to each, regardless of the budgetary demands of one’s finances.

The Way of Life

Managing one’s finances is more of a way of life than anything, at least according to my perspective.  When all of these factors are considered, it is important to stay focused on one’s financial goals.  Even for someone who does not have many financial resources, it is important to have a plan of action and to stay committed on executing that financial plan to realize these financial goals.

Cutting down on expenses is a matter that is very important to one’s financial goals.  To a certain extent this becomes a way of life.  For instance, some households easily spend a hundred dollars a month on unnecessary groceries, such as expensive snacks and drinks.  However, if lower-cost replacements could be utilized, the savings and the potential investment return on such savings would be impressive.

Thus one should approach one’s budget with a positive approach.  One can easily cut down on expenses in many different ways, from eating out and buying cheaper groceries, to limiting one’s entertainment budget.  If these expenses can be cut on a regular basis, budgets would be much more easy to handle, and much more conducive to realizing the financial goals of many.

In identifying my plan of action, this is an approach that I am taking.  Even if I don’t have as much money to allocate to investments and a retirement account, it does not mean that I can’t cut spending.  Then, once I cut my spending, I can potentially see valuable returns in investments over time.  These potential returns will be able to go a long way to my financial goals, retirement-related goals, and my plan for obtaining personal wealth and financial freedom in both the short-term and long-term.

One important aspect that cannot be overstated is commitment.  In my opinion, if one is committed to his or her finances, he or she will be able to cut spending and obtain financial freedom.  Similar to my situation, even if one doesn’t fell as if though many financial assets can be allocated to investments, respectable returns can be seen on money saved through other means.  One doesn’t always have to have a large income to be financially successful.  It can easily be obtained with smart spending and planning as well.

My plan for realizing my financial goals starts with my budget.  Examining one’s budget is arguably the first crucial step for obtaining a plan of action in the face of financial goals.  By identifying both the income and expenses of one’s budget, one is able to gain awareness of the flexibility or lack thereof in one’s finances.

Allocating amounts of money to investments is a primary course of action in my financial goals.  In order to realize a level of personal wealth and readiness for retirement, investments must be a part of my financial plan of action.  This remains an important part of my budgetary considerations for realizing my financial goals.

In my plan for financial success from the short to long term, I have realized that much of this revolves around one’s commitment.  Even if one is unable to allocate even the smallest amount to an investment account, one could do so if he or she cuts down on unnecessary expenses.  With these goals in mind, anyone can realize financial independence and wealth with these basic steps.

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What Is Personal Finance?

The importance of personal finance, areas of personal finance, personal finance services, personal finance strategies, personal finance skills, personal finance education.

• What Classes Can't Teach

Breaking Personal Finance Rules

Frequently asked questions, the bottom line.

• Personal Finance

What Is Personal Finance, and Why Is It Important?

Investopedia / Sydney Saporito

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning. The term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.

Individual goals and desires—and a plan to fulfill those needs within your financial constraints—also impact how you approach the above items. To make the most of your income and savings, it’s essential to become financially savvy—it will help you distinguish between good and bad advice and make intelligent financial decisions.

Key Takeaways

• Few schools have courses on managing your money, so it is important to learn how through free online articles, courses, blogs, podcasts, or books.
• The core areas of managing personal finance include income, spending, savings, investments, and protection.
• 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.

Personal finance is about meeting your personal financial goals. These goals could be anything—having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It depends on your income, spending, saving, investing, and personal protection (insurance and estate planning).

Not understanding how to manage finances or be financially disciplined has led Americans to accumulate enormous debt. In February 2024, the Federal Reserve Bank reported household debt had increased by $3.4 trillion since December 2019, prior to the recession. In addition, the following balances increased from the third quarter of 2023 to the fourth:

• Credit card balances : Up by $50 billion
• Auto loans : Up by $12 billion
• Consumer loans and store cards : Up by $25 billion
• Total non-housing : Up by $89 billion
• Mortgages : Up by $112 billion

Student loans remained unchanged, at about $1.6 trillion.

Americans are taking on an ever-increasing amount of debt to finance purchases, making managing personal finances more critical than ever, especially when inflation is eating away at purchasing power and prices are rising.

The five areas of personal finance are income, saving, spending, investing, and protection.

Income is the starting point of personal finance. It is the entire amount of cash inflow that you receive and can allocate to expenses, savings, investments, and protection. Income is all the money you bring in. This includes salaries, wages, dividends, and other sources of cash inflow.

Spending is an outflow of cash and typically where the bulk of income goes. Spending is whatever an individual uses their income to buy. This includes rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel, and entertainment.

Being able to manage spending is a critical aspect of personal finance. Individuals must ensure their spending is less than their income; otherwise, they won't have enough money to cover their expenses or will fall into debt. Debt can be devastating financially, particularly with the high-interest rates credit cards charge.

Savings is the income left over after spending. Everyone should aim to have savings to cover large expenses or emergencies. However, this means not using all your income, which can be difficult. Regardless of the difficulty, everyone should strive to have at least a portion of savings to meet any fluctuations in income and spending—somewhere between three and 12 months of expenses.

Beyond that, cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time. Instead, cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow, such as investments.

Investing involves purchasing assets, usually stocks and bonds, to earn a return on the money invested. Investing aims to increase an individual's wealth beyond the amount they invested. Investing does come with risks, as not all assets appreciate and can incur a loss.

Investing can be difficult for those unfamiliar with it—it helps to dedicate some time to gain an understanding through readings and studying. If you don't have time, you might benefit from hiring a professional to help you invest your money.

Protection refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health insurance and estate and retirement planning.

Several financial planning services fall under one or more of the five areas. You're likely to find many businesses that provide these services to clients to help them plan and manage their finances. These services include:

• Wealth Management
• Loans and Debt
• Risk Management
• Estate Planning
• Investments
• Credit Cards
• Home and Mortgage

The sooner you start financial planning , the better, but it’s never too late to create financial goals to give yourself and your family financial security and freedom. Here are the best practices and tips for personal finance.

The 2022 Investopedia Financial Literacy Survey surveyed 4,000 adults and found that most Americans are concerned about personal finance basics, retirement funding, and investing in crypto.

1. Know Your income

It's all for nothing if you don't know how much you bring home after taxes and withholding. So before deciding anything, ensure you know exactly how much take-home pay you receive.

2. Devise a Budget

A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 budgeting method offers a great framework. It breaks down like this:

• Fifty percent of your take-home pay or net income (after taxes) goes toward living essentials, such as rent, utilities , groceries, and transport.
• Thirty percent is allocated to discretionary expenses, such as dining out and shopping for clothes. Giving to charity can go here as well.
• Twenty percent goes toward the future—paying down debt and saving for retirement and emergencies.

It’s never been easier to manage money, thanks to a growing number of smartphone personal budgeting apps that put day-to-day finances in the palm of your hand. Here are just two examples:

• YNAB (an acronym for You Need a Budget) helps you track and adjust your spending to control every dollar you spend.
• Mint streamlines cash flow, budgets, credit cards, bills, and investment tracking from one place. It automatically updates and categorizes your financial data as information comes in, so you always know where you stand financially. The app will even dish out custom tips and advice.

3. Pay Yourself First

It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses, such as medical bills, a significant car repair, day-to-day expenses if you get laid off, and more. The ideal safety net is three to 12 months of living expenses.

Financial experts generally recommend putting away 20% of each paycheck every month. Once you’ve filled up your emergency fund , don’t stop. Continue funneling the monthly 20% toward other financial goals, such as a retirement fund or a down payment on a home .

4. Limit and Reduce Debt

It sounds simple enough: Don't spend more than you earn to keep debt from getting out of hand. But, of course, most people have to borrow from time to time, and sometimes going into debt can be advantageous—for example, if it leads to acquiring an asset . Taking out a mortgage to buy a house might be one such case. Still, leasing sometimes can be more economical than buying outright, whether renting a property, leasing a car, or even getting a subscription to computer software.

On the other hand, minimizing repayments (to interest only, for instance) can free up income to invest elsewhere or put into retirement savings while you’re young when your nest egg gets the maximum benefit from compounding interest . Some private and federal student loans are even eligible for a rate reduction if the borrower enrolls in auto pay.

Student loans account for $1.59 trillion of consumer debt—if you have an outstanding student loan, you should prioritize it. There are myriad loan repayment plans and payment reduction strategies available. If you’re stuck with a high interest rate, paying off the principal faster can make sense.

Flexible federal repayment programs worth checking out include:

• Graduated repayment—progressively increases the monthly payment over 10 years
• Extended repayment—stretches out the loan over a period that can be as long as 25 years
• Income-driven repayment—limits payments to 10% to 15% of your income (based on your income and family size)

5. Only Borrow What You Can Repay

Credit cards can be major debt traps, but it’s unrealistic not to own any in the contemporary world. Furthermore, they have applications beyond buying things. They are crucial to establishing your credit rating and a great way to track spending, which can be a considerable budgeting aid.

Credit needs to be managed correctly , meaning you should pay off your entire balance every month or keep your credit utilization ratio at a minimum (that is, keep your account balances below 30% of your total available credit).

Given the extraordinary reward and incentives offered these days (such as cashback), it makes sense to charge as many purchases as possible—if you can pay your bills in full.

Avoid maxing out credit cards at all costs, and always pay bills on time. One of the fastest ways to ruin your credit score is to constantly pay bills late—or even worse, miss payments.

Using a debit card , which takes money directly from your bank account, is another way to ensure that you will not be paying for accumulated small purchases over an extended period with interest.

6. Monitor Your Credit Score

Credit cards are the primary vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you’ll need a solid credit report . There are a variety of credit scores available, but the most popular one is the FICO score .

Factors that determine your FICO score include:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

FICO scores are calculated from 300 to 850. Here’s how your credit is rated:

• Exceptional: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 579 and below

To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. In addition, you can detect and address mistakes or fraudulent activity by monitoring your credit report. Federal law allows you to obtain free credit reports once a year from the “Big Three” major credit bureaus : Equifax, Experian, and TransUnion.

Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport.com, a federally authorized site sponsored by the Big Three.

Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, but it may not be your FICO score. Instead, Capital One's CreditWise program offers your VantageScore .

Due to the COVID-19 pandemic, the three major credit bureaus are providing free credit reports weekly. The program was extended twice in 2022 and it is now permanent.

7. Plan for Your Future

To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts . You also should look into insurance and find ways to reduce your premiums, if possible: auto , home , life , disability , and long-term care (LTC) . Periodically review your policy to ensure it meets your family’s needs through life’s major milestones.

Other critical documents include a living will and a healthcare power of attorney . While not all of these documents directly affect you, all of them can save your next of kin considerable time and expense when you fall ill or become otherwise incapacitated.

Retirement may seem like a lifetime away, but it arrives much sooner than expected. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors call the magic of compounding interest—how small amounts grow over time.

Setting aside money now for your retirement not only allows it to grow over the long term but also can reduce your current income taxes if funds are placed in a tax-advantaged plan, such as an individual retirement account (IRA) , a 401(k) , or a 403(b) .

While your children are young, take the time to teach them about the value of money and how to save, invest, and spend wisely.

If your employer offers a 401(k) or 403(b) plan , start paying into it immediately, especially if your employer matches your contribution. By not doing so, you’re giving up free money. Take time to learn the difference between a Roth 401(k) and a traditional 401(k) if your company offers both.

Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people) and converting a term life insurance policy to permanent life .

8. Buy Insurance

As you age, it's natural for you to accumulate many of the same things your parents did—a family, home or apartment, belongings, and health issues. Insurance can be expensive if you wait too long to get it. Health care, long-term care insurance, life insurance; it all increases in cost the older you get. Additionally, you never know what life will send your way. If you're the sole breadwinner for the family, or you and your partner both work to make ends meet, a lot depends on your ability to work.

Insurance can cover most of the hospital bills as you age, leaving your hard-earned savings in your family's hands; medical expenses are one of the leading reasons for debt. If something happens to you, life insurance can give those you leave behind a buffer zone to deal with the loss and get back on their feet financially.

9. Maximize Tax Breaks

Due to an overly complex tax code , many people leave hundreds or even thousands of dollars sitting on the table every year. By maximizing your tax savings, you’ll free up money that can be invested in your reduction of past debts, enjoyment of the present, and plans for the future.

You should start saving receipts and tracking expenditures for all possible tax deductions and tax credits . Many office supply stores sell helpful “tax organizers” that have the main categories already labeled.

After you’re organized, you’ll want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income on which you are taxed, whereas a tax credit reduces the amount of tax that you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.

10. Give Yourself a Break

Budgeting and planning can seem full of deprivations. Make sure you reward yourself now and then. Whether it’s a vacation, a purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.

Last but not least, don’t forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn’t mean you should. Setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant (CPA) or a financial planner —at least once—might be a good way to jump-start your planning.

The key to getting your finances on the right track is using skills you likely already have. It’s also about understanding that the principles that contribute to success in business and your career work just as well in personal money management. Three key skills are finance prioritization, assessing the costs and benefits, and restraining your spending.

• Finance Prioritization : This means that you can look at your finances, discern what keeps the money flowing in, and make sure that you stay focused on those efforts.
• Assessing the Costs and Benefits : This key skill keeps professionals from spreading themselves too thin. Ambitious individuals always have a list of ideas about other ways that they can hit it big, whether it is a side business or an investment idea. While there is a place and time for taking a flier, running your finances like a business means stepping back and honestly assessing the potential costs and benefits of any new venture.
• Restraining Your Spending : This is the final big-picture skill of successful business management that must be applied to personal finances. Time and again, financial planners sit down with successful people who still manage to spend more than they make. Earning $250,000 a year won’t do you much good if you spend $275,000 annually. Learning to restrain spending on non-wealth-building assets until after you’ve met your monthly savings or debt reduction goals is crucial in building net worth .

Personal money management isn't one of the most popular topics in educational systems. Many college degrees require some financial education, but it isn't geared toward individuals, which means that most of us will need to get our personal finance education from our parents (if we’re lucky) or learn it ourselves.

Fortunately, you don’t have to spend much money to find out how to manage it better. You can learn everything you need to know for free online and in library books. Almost all media publications regularly dole out personal finance advice, too.

Online Blogs

Reading personal finance blogs is a great way to start learning about personal finance. Instead of the general advice you’ll get in personal finance articles, you’ll learn exactly which challenges real people face and how they address them.

Mr. Money Mustache has hundreds of posts full of insights on escaping the rat race and retiring early by making unconventional lifestyle choices. CentSai helps you navigate myriad financial decisions via first-person accounts. Million Mile Secrets and The Points Guy each teach you how to travel for a fraction of the retail price using credit card rewards. These sites often link to other blogs, so you’ll discover more sites as you read.

Of course, we can’t help tooting our own horn in this category. Investopedia offers a wealth of free personal finance education. You might start with our special sections on budgeting , buying a home , and planning for retirement —or the thousands of other articles in our personal finance section.

At the Library

You may need to visit your library in person to get a library card if you don’t already have one, but after that, you can check out personal finance audiobooks and e-books online without leaving home. Some of the following best sellers may be available from your local library: I Will Teach You to Be Rich , The Millionaire Next Door, Your Money or Your Life , and Rich Dad Poor Dad . Personal finance classics such as Personal Finance for Dummies , The Total Money Makeover , The Little Book of Common Sense Investing , and Think and Grow Rich are also available as audiobooks.

Free Online Classes

If you enjoy the structure of lessons and quizzes, try one of these free digital personal finance courses:

• Morningstar Investing Classroom offers a place for beginning and experienced investors alike to learn about stocks, funds, bonds, and portfolios. Some of the courses you’ll find include “Stocks Versus Other Investments,” “Methods for Investing in Mutual Funds,” “Determining Your Asset Mix,” and “Introduction to Government Bonds.” Each course takes about 10 minutes and is followed by a quiz to help you make sure that you understood the lesson.
• EdX is an online learning platform created by Harvard University and the Massachusetts Institute of Technology. It offers at least three courses that cover personal finance: 'Personal Finance, Part 1: Investing in Yourself" from Wellesley College, “Personal Finance” from Purdue University, and “Finance for Everyone: Smart Tools for Decision-Making” from the University of Michigan. These courses will teach you how credit works, which types of insurance you might want to carry, how to maximize your retirement savings, how to read your credit report, and what the time value of money is.
• “Planning for a Secure Retirement” is an online course from Purdue University. It’s broken up into 10 main modules, and each has four to six sub-modules on topics such as Social Security, 401(k) and 403(b) plans, and IRAs. You’ll learn about your risk tolerance , think about what kind of retirement lifestyle you want, and estimate your retirement expenses.

Personal finance podcasts are a great way to learn how to manage your money if you’re short on free time. While you’re getting ready in the morning, exercising, driving to work, running errands, or preparing for bed, you can listen to expert advice on becoming more financially secure. In addition to “The Investopedia Express with Caleb Silver,” you may find these valuable:

• Freakonomics Radio and NPR’s Planet Money both make economics enjoyable by using it to explain real-world phenomena such as “how we got from mealy, nasty apples to apples that actually taste delicious,” the Wells Fargo fake-accounts scandal, and whether we should still be using cash.
• American Public Media’s Marketplace helps make sense of what’s happening in the business world and the economy.
• So Money with Farnoosh Torabi combines interviews with successful business people, expert advice, and listeners’ personal finance questions.

The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If one blog, book, course, or podcast is dull or difficult to understand, keep trying until you find something that clicks.

Education shouldn’t stop once you learn the basics. The economy changes, and new financial tools like the budgeting apps mentioned earlier are always being developed. Find resources you enjoy and trust, and keep refining your money skills through retirement and beyond.

What Personal Finance Classes Can’t Teach You

Personal finance education is a great idea for consumers, especially people starting out who want to learn investing basics or about credit management; however, understanding the basic concepts is not a guaranteed path to financial sense. Human nature can often derail the best intentions to achieve a perfect credit score or build a substantial retirement nest egg. These three key character traits can help you stay on track:

One of the most important tenets of personal finance is systematic saving. For example, say your net earnings are $60,000 per year, and your monthly living expenses—housing, food, transportation, and the like—amount to $3,200 per month.

There are choices to make surrounding your remaining $1,800 in monthly salary. Ideally, the first step is to establish an emergency fund or perhaps a tax-advantaged health savings account (HSA) .

To be eligible for a health savings account, your health insurance must be a high-deductible health plan (HDHP) .

Establishing an emergency fund takes financial discipline—without it, giving in to the temptation to spend rather than save can have dire consequences. In the event of an emergency, you may not have the money to pay the expenses—leading you to finance them through debt.

Once you have your emergency stash, you'll need to develop investing discipline—it’s not just for institutional money managers who make their living buying and selling stocks. Average retail investors tend to do better by setting an investment target and abiding by it rather than buying and selling stocks trying to time the market.

A Sense of Timing

Timing can be crucial. For instance, imagine you're three years out of college, have established your emergency fund, and want to reward yourself. A Jet Ski costs $3,000, but you want to start investing also. "Investing in growth stocks can wait another year," you say. "I have plenty of time to launch an investment portfolio."

However, putting off investing for one year can have significant consequences. The opportunity cost of buying a personal watercraft can be illustrated through the time value of money.

The $3,000 used to buy the Jet Ski would have amounted to nearly $49,000 in 40 years at 7% interest, a reasonable average annual return for a growth mutual fund over the long haul. Thus, delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 65.

Doing tomorrow what you could do today also extends to debt payment. If you were to put the Jet Ski on your credit card, the $3,000 credit card balance would take 222 months (18.5 years) to pay off if you only made minimum payments of $75 each month. And don’t forget the interest you’re paying: at an 18% annual percentage rate (APR) , it comes to $3,923 over those months. So, if you were to plunk down the $3,000 to pay the balance rather than let it compound, you'd see substantial savings—nearly $1,000.

Emotional Detachment

Personal finance matters are business, and business should not be personal. A difficult but necessary facet of sound financial decision-making involves removing emotions from a transaction.

Making impulsive purchases feels good but can significantly impact long-term investment goals. So can making unwise loans to family members. Your cousin Fred, who has already burned your brother and sister, will likely not pay you back, either. The smart thing to do is decline his requests for help—you're trying to make ends meet also.

The key to prudent personal financial management is to separate feelings from reason. However, when loved ones are experiencing real trouble, it pays to help if you can—just try not to take it out of your investments and retirement.

Many people have loved ones who always seem to need financial help—it is difficult to refuse to help them. If you include planning to assist them in real emergencies using your emergency fund, it can make the burden easier.

The personal finance realm may have more guidelines and tips to follow than any other. Although these rules are good to know, everyone has their own circumstances. Here are some rules prudent people, especially young adults, are never supposed to break—but can break if necessary.

Saving or Investing a Set Portion of Your Income

An ideal budget includes saving a portion of your paycheck every month for retirement—usually around 10% to 20%. However, while being fiscally responsible is important and thinking about your future is crucial, the general rule of saving a given amount for retirement may not always be the best choice, especially for young people just getting started.

For one thing, many young adults and students need to consider paying for their biggest expenses, such as a new car, home, or postsecondary education. Taking away 10% to 20% of available funds would be a definite setback in making those purchases.

Additionally, saving for retirement doesn’t make much sense if you have credit cards or interest-bearing loans to pay off. The 19% interest rate on your Visa card probably would negate the returns you get from your balanced mutual fund retirement portfolio five times over.

Finally, saving money to travel and experience new places and cultures can be especially rewarding for a young person who’s still unsure about their life path.

Long-term Investing/Investing in Riskier Assets

The rule of thumb for young investors is that they should have a long-term outlook and stick to a buy-and-hold philosophy. This rule is one of the easier ones to justify breaking. Adapting to changing markets can be the difference between making money or limiting your losses and sitting idly by and watching your hard-earned savings shrink. Short-term investing has its advantages at any age.

Common investing logic suggests that because young investors have such a long investment time horizon, they should be investing in higher-risk ventures; after all, they have the rest of their lives to recover from any losses that they may suffer; however, you don’t have to take on undue risk in your short- to medium-term investments if you don’t want to.

The idea of diversification is an important part of creating a strong investment portfolio; this includes both the riskiness of individual stocks and their intended investment horizon .

At the other end of the age spectrum, investors near and at retirement are encouraged to cut back to the safest investments—even though these may yield less than inflation —to preserve capital . Taking fewer risks is important as the number of years you have to earn money and recover from bad financial times dwindles, but at age 60 or 65, you could have 20, 30, or even more years to go. Some growth investments could still make sense for you .

Personal finance is the knowledge, instruments, and techniques used to manage your finances. When you understand the principles and concepts behind personal finance, you can manage debt, savings, living expenses, and retirement savings.

What Are the 5 Main Components of Personal Finance?

The five main components are income, spending, savings, investing, and protection.

What Is an Example of Personal Finance?

One of the key ideas behind personal finance is not to spend more than you make. For instance, if you make $50,000 a year but spend $65,000, you'll end up with debt that continues to compound because you'll be spending more than you make to pay for past expenses.

Why Is Personal Finance So Important?

The concepts behind managing your personal finances can guide you in making intelligent financial decisions. In addition, the decisions you make throughout your life on what to buy, sell, hold, or own can affect how you live when you can no longer work.

Personal finance is managing your money to cover expenses and save for the future. It is a topic that covers a broad array of areas, including managing expenses and debt, how to save and invest, and how to plan for retirement. In addition, it can include ways to protect yourself with insurance, build wealth , and ensure wealth is passed on to the people you want it to pass to.

Understanding how to manage your finances is an important life-planning tool that can help set you up for a life without debt; you gain control of financial stresses and have a way to manage the expensive surprises that life can throw at you.

Federal Reserve Bank of New York. " Quarterly Report on Household Debt and Credit; 2023: Q4 (Released February 2024) ." Summary Page.

YNAB. “ Gain Total Control of Your Money .”

Intuit Mint. " What is Mint, And How Does It Work? "

Discover. " Private Student Loans: Automatic Payments & Auto Debit Reward Terms and Conditions ."

Federal Student Aid. " Repaying Student Loans 101 ."

Federal Student Aid. " Repayment Plans ."

myFICO. " What Should My Credit Utilization Ratio Be? "

myFICO. “ What’s the Difference Between FICO Scores and Non-FICO Credit Scores? ”

myFICO. " What's In My FICO Scores? "

myFICO. " What is a FICO Score? "

Federal Trade Commission. “ Understanding Your Credit .”

Capital One. " CreditWise: Get Your Free Credit Report ."

Federal Trade Commission. " You Now Have Permanent Access to Free Weekly Credit Reports ."

Fidelity. " How Much Will You Spend in Retirement? "

Consumer Financial Protection Bureau. " Medical Debt Burden in the United States ."

Internal Revenue Service. " Credits and Deductions for Individuals ."

Mr. Money Mustache. “ Mr. Money Mustache: Financial Freedom Through Badassity .”

CentSai. “ Take the Fear Out of Finance .”

Million Mile Secrets. “ Beginner’s Guide to Credit Cards, Miles, and Points .”

The Points Guy. “ TPG Beginner’s Guide: Everything You Need to Know About Points, Miles, Airlines, and Credit Cards .”

Morningstar. “ Morningstar Investing Classroom .”

EdX. " About EdX ."

EdX. " Catalog ."

Purdue University, College of Agriculture. “ Planning for a Secure Retirement .”

Freakonomics. “ Freakonomics Radio .”

NPR. “ Planet Money: The Economy Explained .”

Apple Podcasts. “ Marketplace: American Public Media .”

So Money Podcast — Farnoosh. “ So Money with Farnoosh Torabi: Candid Conversations for a Richer, Happier Life .”

Internal Revenue Service. " Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans ." Pages 3-4.

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5 Ways to Manage Your Personal Finances

• Rakshitha Arni Ravishankar

First, let go of your limiting beliefs about money.

Talking about money can feel awkward, uncomfortable, and even scary. Here are five pieces of advice from our authors on how to feel in control of your personal finances.

• Let go of your limiting beliefs about money.
• Take ownership of your money.
• Always set a timeline for your money goals.
• Build an emergency fund.
• Create a diverse portfolio of investments.

Money can evoke a range of difficult emotions for many of us. This anxiety only grows when we’re living through economically fragile times or don’t come from wealth . It can feel awkward, uncomfortable, and even scary to navigate these feelings when they show up. But know that it’s still possible to make smart decisions that will help you become financially stable .

• RR Rakshitha Arni Ravishankar is an associate editor at Ascend.

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• Financial Planning

What Is Personal Finance?

Definition and examples of personal finance, how personal finance works, how can you be good at personal finance, increase your personal finance literacy.

Willie B. Thomas / Getty Images

Personal finance describes how you save, spend, and invest the money you have (your financial resources). If you’re good at managing money, then you’re good at personal finance and vice versa.

Key Takeaways

• Personal finance refers to how you spend, save, invest, and manage the financial resources you have.
• Personal finance is important because it determines the type of lifestyle you’re able to enjoy both now and in the future.
• At its most basic level, personal finance is about spending less than you earn and using what’s left to reach your goals.
• You can increase your financial literacy by seeking out personal finance podcasts, books, apps, and other resources.

Personal finance is a concept used to define how well you manage your money. It takes a look at how you spend, save, protect, and invest your financial resources to create the type of lifestyle you want to enjoy.

Personal finance covers a range of topics, including:

• Income generation
• Loans and mortgages
• Investments
• Retirement planning
• Tax and estate planning

“Personal finance is simply the approach we take to using money,” said Todd Christensen, AFCPE at Debt Reduction Services and author of “Everyday Money for Everyday People.”

According to Christensen, examples of personal finance might include:

• Planning your monthly spending
• Balancing your checkbook or debit account
• Transferring money from your checking account to your savings account
• Setting up direct deposit for an IRA
• Taking only the cash you plan to use on groceries into the store so you don't overspend

You may have heard your grandparents say, “Live below your means and save the rest.” This is the essence of personal finance—making smart decisions with your money now so you have freedom and options later on.

“Personal finance is more than budgeting,” said Lauren Zangardi Haynes, a CFP, CIMA, and CEPA at Spark Financial Advisors. “It’s understanding credit cards, how compound interest works for you (or against you), understanding Roth vs. pre-tax savings, planning for a rainy day, making housing decisions, and saving for college and retirement. It’s interwoven in our daily lives at every corner.”

Zangardi Haynes went on to say that understanding personal finance is key to reducing anxiety around money. You don’t have to be an expert. You just need to know the basics.

Being good at personal finance is all about making your money work for you—regardless of how much you have.

“Money touches every aspect of life, and if a person doesn't know how to manage it, then it can lead to a lifetime of headaches and stress,” said Ksenia Yudina, CFA, founder, and CEO of UNest. “Once a person gets a handle on their finances, then they can spend time focusing on the things that matter most in life.”

Here’s how to get good at personal finance.

Set Clear Financial Goals

Everyone has a vision of what financial success looks like to them. Maybe for you, it’s having a credit score over 800, retiring by age 50, or helping your kids avoid the student loan squeeze. For others, it may be driving a luxury car or owning a second home by the beach.

Whatever your goals are, you must create a clear framework for achieving them if you want to be successful. Be SMART about your goals . Make them specific, measurable, achievable, realistic, and time-bound (SMART).

Start Budgeting

Learning to budget is one of the basics of personal finance. It involves tracking your income and expenses so you can see where your money is going each month. When done right, a budget puts you in control of your money. It gives you the freedom to spend more on things you love by spending less on things you don’t. There are a lot of budgeting apps to help you automate the process.

Build an Emergency Fund

If you always feel like you don’t have enough money to pay the bills, an emergency fund could provide some relief. It’s one of the basics of personal finance because it gives you a safety net to fall back on if something unexpected happens (such as your car breaks down or your cat needs an emergency vet visit).

Many financial advisors suggest you keep three to six months of basic expenses in a savings account for your emergency fund . If that seems out of reach, start small with a $1,000 starter fund or one month’s worth of expenses. Anything is better than nothing.

Pay Off Debt

Getting out of debt can be challenging. But there are a lot of reasons why you should do it. Becoming debt-free increases your financial security, gives you more money to spend on things you enjoy, and improves your credit score.

Making a plan to pay off your debt can be one of the best things you do for your personal finances—especially if you have high-interest debt. “Eliminating high-interest debt should be a top priority when it comes to personal finance,” said Yudina. “This type of debt can quickly spiral out of control and derail any financial plan you have in place.”

Start Saving for Retirement

Saving for retirement has all types of benefits—you can deduct contributions from your taxes, you build up a nest egg for the future, and you may get free money if your employer offers matching contributions.

Many financial experts recommend saving 15% of your pre-tax income for retirement. If you’re not saving anything at the moment, contribute at least enough to get the full employer match , if one’s available. After that, consider maxing out a Roth IRA, then going back to your 401(k). (This is a popular retirement savings rule of thumb people follow.)

Stick With It

The goal of personal finance is to spend less so you have more money to save and invest. Although it’s a simple concept to grasp, it can be difficult to stick with it when you’re constantly bombarded with marketing messages telling you to buy more, more, more.

Each time you go to make a purchase, ask yourself, “Does this item bring me one step closer to the life I want to live? Will I enjoy this purchase or am I just buying it to buy it?” By asking yourself questions like these, you align your spending with your values and minimize your chances of wasting money on something that puts you farther away from your goals.

When you have financial literacy, you understand all the facts, tools, and principles you need to be smart with money. Unfortunately, financial literacy isn’t taught in many U.S. school systems. It’s up to you to seek out this information if you want to be successful with your finances.

Stuck on where to start? Here are three resources you can tap into to increase your personal finance literacy.

Personal Finance Podcasts

Some personal finance topics can be confusing, even dull—especially if you’re new to it. Podcasts that break topics down in clear, inviting ways can help you better visualize how they apply to your life. There’s no shortage of great personal finance podcasts to listen to and learn from.

Personal Finance Books

Reading personal finance books is also a great way to learn how to manage your money better. Books cover all the personal finance basics, including how to invest, pay off debt, change your money mindset, increase your income, and more.

Save money by borrowing personal finance books for free from your local library.

Personal Finance Software

Personal finance software and apps are hands-on tools you can use to manage your money and reach your goals. Some help you budget and track expenses while others help you manage your investments.

Fidelity. " How Much Should I Save for Retirement? " Accessed Nov. 19, 2021.

Financial Tips, Guides & Know-Hows

Home > Finance > What Are The Five Foundations Of Personal Finance?

What Are The Five Foundations Of Personal Finance?

Published: January 22, 2024

Learn the five essential foundations of personal finance to achieve financial stability and success. Discover key principles and strategies for managing your finances effectively.

• Personal Finance

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Understanding the five foundations of personal finance, budgeting: the bedrock of financial stability, saving: building a financial safety net, investing: growing wealth and securing the future, managing debt: navigating towards financial freedom, risk management: safeguarding financial well-being.

Introduction

Personal finance is a critical aspect of everyone's life, yet many individuals find themselves navigating its complexities without a clear roadmap. In today's fast-paced world, where financial decisions have far-reaching implications, it's essential to establish a strong foundation for managing personal finances. The five key pillars of personal finance serve as the cornerstones for achieving financial stability, security, and prosperity. By comprehensively understanding and effectively implementing these foundations, individuals can gain control over their finances and work towards their long-term goals.

The five foundations of personal finance encompass budgeting, saving, investing, managing debt, and risk management. Each pillar plays a vital role in shaping an individual's financial well-being, and they are interconnected, working in harmony to build a solid financial future. Throughout this article, we will delve into each foundation, exploring its significance and practical strategies for implementation. Whether you're a recent graduate, a seasoned professional, or someone looking to enhance their financial literacy, mastering these foundations is pivotal for achieving financial success. Let's embark on a journey to unravel the intricacies of personal finance and equip ourselves with the knowledge and tools to make sound financial decisions.

Budgeting serves as the cornerstone of personal finance, providing a roadmap for managing income, expenses, and savings. It empowers individuals to allocate resources efficiently, prioritize financial goals, and track their spending patterns. A well-crafted budget not only fosters financial discipline but also instills a sense of control and awareness regarding one’s financial standing.

Creating a budget begins with assessing all sources of income and categorizing expenses into essential and discretionary items. This delineation enables individuals to distinguish between necessities, such as housing, utilities, and groceries, and non-essential expenditures, including dining out and entertainment. By establishing clear spending limits for each category, individuals can curb impulsive spending and direct their resources towards their financial objectives.

Moreover, budgeting facilitates the cultivation of a savings habit. By earmarking a portion of income for savings and emergency funds, individuals fortify their financial resilience, ensuring they are prepared for unforeseen expenses or economic downturns. Additionally, a well-structured budget allows for the allocation of funds towards debt repayment, thereby aiding in the reduction of interest payments and eventual debt elimination.

Embracing technology can significantly enhance the budgeting process, with various apps and software offering tools for expense tracking, goal setting, and financial analysis. These digital resources streamline the budgeting process and provide real-time insights into one’s financial health, empowering individuals to make informed decisions.

Ultimately, budgeting is not merely a financial exercise but a mindset that fosters prudence, discipline, and foresight. It lays the groundwork for sound financial management, enabling individuals to live within their means, save for the future, and navigate financial challenges with confidence.

Saving is a fundamental pillar of personal finance, serving as a means to build a financial safety net, achieve financial goals, and secure one’s future. It involves setting aside a portion of income for future use, thereby cultivating a habit of prudence and foresight. Saving not only provides a cushion for unexpected expenses but also facilitates progress towards significant milestones, such as homeownership, education, or retirement.

One of the primary vehicles for saving is the establishment of an emergency fund. This fund, typically equivalent to three to six months’ worth of living expenses, acts as a financial buffer during unforeseen circumstances, such as medical emergencies, job loss, or major home repairs. By prioritizing the accumulation of an emergency fund, individuals mitigate the impact of financial shocks and avoid falling into debt due to unexpected events.

Furthermore, saving paves the way for achieving long-term financial aspirations. Whether it’s purchasing a home, funding higher education, or retiring comfortably, disciplined saving is integral to realizing these objectives. By diligently setting aside funds and leveraging the power of compounding, individuals can steadily progress towards their desired milestones, ensuring financial stability and peace of mind.

Automating the saving process can be a powerful strategy, as it removes the temptation to spend the allocated funds and reinforces consistent saving habits. Setting up automatic transfers from a checking account to a designated savings or investment account streamlines the saving process, making it a seamless and integral part of one’s financial routine.

Ultimately, saving is not solely about accumulating money; it embodies a mindset of prudence, preparedness, and future-oriented thinking. By embracing the discipline of saving, individuals lay the groundwork for financial security, enabling them to weather unexpected challenges and pursue their aspirations with confidence.

Investing is a pivotal component of personal finance, offering a pathway to grow wealth, generate passive income, and secure a prosperous future. It involves deploying funds into various financial instruments with the aim of earning returns that outpace inflation, thereby increasing the purchasing power of capital over time.

One of the fundamental principles of investing is diversification, which entails spreading investments across different asset classes, such as stocks, bonds, real estate, and commodities. Diversification mitigates risk by reducing the impact of volatility in any single investment, thereby safeguarding the overall portfolio from significant fluctuations.

Furthermore, investing fosters the power of compounding, wherein returns generated from investments are reinvested to generate additional earnings. Over time, compounding accelerates wealth accumulation, as the initial investment, along with its accrued returns, continues to grow exponentially.

For individuals seeking to invest, it is essential to align investment strategies with their risk tolerance, financial goals, and time horizon. Long-term investments, such as retirement accounts and equity holdings, are suited for individuals with extended time horizons, allowing for the weathering of market fluctuations and the realization of substantial growth over time.

Moreover, embracing a disciplined approach to investing, characterized by consistent contributions and periodic portfolio rebalancing, ensures that individuals remain aligned with their financial objectives and risk tolerance. Regularly reviewing and adjusting investment allocations in response to changing market conditions and life events is crucial for maintaining a balanced and resilient investment portfolio.

Ultimately, investing is not solely about generating wealth; it embodies a strategic approach to securing financial independence and realizing long-term aspirations. By harnessing the potential of investing, individuals can fortify their financial future, create opportunities for wealth accumulation, and pave the way for a prosperous and fulfilling life.

Debt management is a critical aspect of personal finance, influencing individuals’ financial well-being and shaping their ability to achieve long-term goals. While debt can serve as a tool for accessing essential assets, such as homes and education, effective management is essential to prevent it from becoming a burden that impedes financial progress.

One of the primary strategies for managing debt is to prioritize high-interest debt repayment, such as credit card balances and personal loans. By directing surplus funds towards eliminating high-interest debt, individuals can reduce interest payments and expedite their journey towards debt freedom.

Consolidating high-interest debts through methods such as balance transfers or debt consolidation loans can also be an effective approach to streamline debt repayment. This consolidation can lower overall interest costs and simplify the repayment process by combining multiple debts into a single, manageable payment.

Moreover, adopting a proactive stance towards debt management involves creating a realistic repayment plan and adhering to a structured budget that allocates funds towards debt reduction. This approach not only accelerates debt repayment but also instills financial discipline, ensuring that individuals remain focused on their long-term financial well-being.

Furthermore, prudent use of credit and the avoidance of unnecessary debt are integral to effective debt management. By exercising restraint in borrowing and maintaining a healthy credit utilization ratio, individuals can safeguard their financial stability and creditworthiness, setting the stage for future financial opportunities.

Ultimately, managing debt is not solely about repaying what is owed; it embodies a mindset of financial responsibility and empowerment. By adopting proactive debt management strategies, individuals can liberate themselves from financial burdens, pave the way for future prosperity, and embark on a journey towards lasting financial freedom.

Risk management is an integral facet of personal finance, encompassing strategies aimed at mitigating potential financial setbacks and protecting one’s assets and income. By proactively identifying and addressing risks, individuals can fortify their financial well-being and navigate unforeseen circumstances with resilience and confidence.

One of the fundamental components of risk management is the acquisition of insurance coverage to protect against various contingencies. This includes health insurance to mitigate the financial impact of medical expenses, property insurance to safeguard against damage or loss of assets, and life insurance to provide financial security for loved ones in the event of unforeseen circumstances.

Furthermore, establishing an emergency fund serves as a crucial risk management tool, providing a financial buffer to address unexpected expenses or income disruptions. By maintaining a readily accessible pool of funds, individuals can mitigate the impact of unforeseen events, such as job loss or medical emergencies, without resorting to high-interest debt or depleting long-term savings.

Additionally, prudent estate planning and the establishment of legal safeguards, such as wills and trusts, are essential components of risk management. These measures ensure that individuals’ assets are protected and distributed according to their wishes, providing peace of mind and financial security for their beneficiaries.

Moreover, diversification of investments and the cultivation of a balanced portfolio serve as risk management strategies within the realm of investing. By spreading investments across different asset classes and geographic regions, individuals can mitigate the impact of market volatility and specific economic risks, thereby safeguarding their long-term financial objectives.

Ultimately, risk management is not solely about preparing for worst-case scenarios; it embodies a proactive approach to safeguarding financial well-being and fostering peace of mind. By implementing comprehensive risk management strategies, individuals can navigate life’s uncertainties with resilience, protect their financial assets, and lay the groundwork for a secure and prosperous future.

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Personal Finance Lessons From the Pandemic

Our writer entered the pandemic believing he was in good shape financially. Now, he says, he has a lot more to do.

By Paul B. Brown

When you’re essentially confined to your house for weeks, you have a lot of time to think.

I thought most about preserving the health and safety of friends and family members. But soon I found myself obsessing about my own finances: Like so many others, I had a big problem.

As a freelance writer, I lost most of my income virtually overnight, putting me in the same situation as tens of millions of people whose paychecks vanished. Many people got government stimulus checks. I was not one of them.

Because I’ve followed the financial advice I’ve reported on for years, I wasn’t in terrible shape. I had an emergency fund and kept a respectable portion of my portfolio — about 35 percent — in medium-term bond mutual funds, which held up well while the stock market plummeted.

But now that things seem to be slowly inching toward normality, I am planning to learn from this crisis and do some major tweaking of my finances.

Here are the three things that are going to change:

I’ll try to keep even more cash on hand.

The standard personal finance advice is to have at least three months of living expenses stashed away in something liquid and ultrasafe, “just in case.” That made sense to me long before the coronavirus began to spread.

But I didn’t pay a lot of attention to the money I threw sporadically into my emergency fund and I didn’t know how much I’d stashed there. Fortunately, when my phone stopped ringing and potential employers stopped answering my emails, I had more than four months of money squirreled away.

That was really good.

It was so important that I am going to try to get that number up to a year’s worth of reserves. (It’s going to take a while.) The goal is more to create peace of mind than to increase my net worth.

Yes, I know the money could earn more elsewhere than in the tax-free money-market fund where I am saving it. But, if I can help it, I never want to worry about meeting day-to-day expenses again. And if I end up enduring more than a year without earning much or any, income, it will be time to do something else — or, maybe, retire.

I’ll manage my debt more aggressively.

I’ve always paid off my full credit card balances each month, so I have never had credit card debt, not even back when the interest was deductible (The Tax Reform Act of 1986 did away with that.).

But I do have three mortgages: two (a conventional mortgage and a home-equity loan) on our house in New Jersey, plus another mortgage on our small house in Cape Cod. They add up to a big monthly nut, something I kept pondering during all the time I was stuck at home.

When income was coming in on a regular basis, I always paid more than I had to each month on each mortgage, because I considered prepaying a kind of forced savings. But I wasn’t particularly strategic about it. I just paid in random amounts, rounding up what was due. For example, if the mortgage payment was $3,772.16, I would write a check for $4,000, with the additional money going to pay down principal. I did that with all three loans.

The mortgages have different interest rates. From now on, I am going to put all extra payments toward the one with the highest interest rate, the home equity loan in New Jersey. That makes the most economic sense. (This assumes there will be enough money coming in to do this.)

Make a plan for Social Security benefits.

Before the pandemic, I never really thought about my potential Social Security benefits. I remember playing golf with a buddy nearly four years ago, on the day I turned 62, and he said, “Congratulations, you can now take Social Security.”

When I got home, I went to the Social Security website and discovered if I applied for benefits immediately, I would get 75 percent of the benefits I would receive at age 66, my “full retirement age.”

I didn’t apply. There was no reason to. I didn’t need the money, and I hated the idea of taking a 25 percent haircut. So about 10 minutes after logging off the website, I forgot all about it. But during my long quasi lockdown, I realized that the money might come in handy, and I became curious about how much I might receive.

Well, if I can wait until age 66, which is right around the corner, I would receive about $3,000 a month, according to the retirement calculator on the Social Security website.

Even better, for every month I wait beyond age 66, the monthly benefit goes up 0.66 percent, which works out to be 8 percent a year. (For an excellent primer on how to how to think about applying for Social Security benefits today, see Mark Miller’s “Taking Social Security in the Pandemic: What to Know” which ran in The Times in April .)

Now, I am not going to be able to pay all my bills on the $3,000 a month I would receive from Social Security now, or even with the roughly $4,000 I would get if I delayed taking them until I turned 70. (There is no annual increase for delaying beyond that.)

But all this did trigger an interesting thought.

Suppose I quit work on the day I turn 67, a little more than a year from now. My monthly Social Security check would be an estimated $3,143 a month. And if I bought a $500,000 immediate annuity that started that day, I would receive another $2,612 a month, according to a projection, using current interest rates, from ImmediateAnnuities.com, an independent site that tracks these things.

That’s a combined $5,755 a month, or about $69,000 a year. That would cover my basics, and then some, in Cape Cod, where I plan to retire. And it would still leave me some retirement savings that, hopefully, could grow through investments in stock and bonds.

The numbers look a lot better if I don’t retire until I reach 70. Delaying Social Security until then would give me around $4,000 a month. And if I bought that $500,000 annuity in a few weeks, when I turn 66, and deferred taking payments until I turned 70, it would provide north of $3,400 a month, giving me nearly $89,000 a year.

I am going to keep playing with ways to combine my potential Social Security benefits with other ways to use my retirement savings to see what makes sense.

Why I need to save more.

You never buy insurance because you hope to submit a claim someday. You do it to protect against a time when something awful may happen.

I have always thought of saving money the same way. While it would be nice to spend it on something that would give me pleasure, there really isn’t anything important that I don’t already have.

But the pandemic has made me realize that I’m not sure how much I’ll really need to have salted away to protect my family and to keep our solidly middle class standard of living intact, both now and into the future.

The crisis has made life much more challenging. But it has also strengthened my resolve.

Home — Essay Samples — Law, Crime & Punishment — Personal Finance

Essays on Personal Finance

The importance of writing an essay on personal finance.

Writing an essay on personal finance is important because it helps individuals understand the importance of managing their money and making informed financial decisions. It also provides a platform for discussing various aspects of personal finance, such as budgeting, saving, investing, and managing debt. By writing about personal finance, individuals can improve their financial literacy and develop important skills that will benefit them in the long run.

Writing Tips for an Essay on Personal Finance

• Research: Before you start writing, make sure to research the topic thoroughly. Look for reliable sources of information and gather relevant data to support your arguments.
• Organize your thoughts: Create an outline to organize your ideas and ensure that your essay has a clear and logical structure. This will help you stay focused and on track while writing.
• Be clear and concise: Use clear and concise language to communicate your ideas effectively. Avoid using jargon or complex terminology that may confuse your readers.
• Provide examples: Use real-life examples to illustrate your points and make your essay more relatable to your audience. Personal anecdotes or case studies can help readers understand the practical implications of personal finance concepts.
• Revise and edit: After you have written your essay, take the time to revise and edit it. Check for grammar and spelling errors, and make sure that your arguments are well-supported and coherent.

Writing an essay on personal finance can be a valuable exercise in improving your understanding of financial concepts and developing your writing skills. By following these tips, you can create a well-organized and informative essay that effectively conveys the importance of personal finance.

Creating a budget is the first step in taking control of your personal finances. This essay will discuss the importance of budgeting, how to create a budget that works for you, and tips for sticking to it.

This essay will explore the benefits of saving and investing for the future, including the power of compound interest, the various investment options available, and tips for getting started with saving and investing.

Credit scores play a crucial role in personal finance, affecting everything from loan approvals to interest rates. This essay will discuss what goes into a credit score, how to improve it, and the importance of maintaining good credit.

Debt can be a significant burden on personal finances, but there are strategies for managing and paying off debt. This essay will discuss the different types of debt, strategies for paying it off, and tips for avoiding future debt.

Financial literacy is the foundation of good personal finance. This essay will explore the impact of financial literacy on personal finance, including the importance of understanding concepts like budgeting, saving, investing, and credit.

Insurance is an essential part of personal finance, providing protection against unforeseen events. This essay will discuss the different types of insurance, the importance of having insurance, and tips for choosing the right coverage.

Our attitudes and beliefs about money can have a significant impact on our financial decisions. This essay will explore the psychology of money, including common money mindsets and how they influence our financial behavior.

Taxes can have a significant impact on personal finances, but there are strategies for minimizing taxes and maximizing returns. This essay will discuss tax planning strategies, including retirement accounts, deductions, and credits.

Major life events can have a significant impact on personal finances. This essay will discuss financial planning for major life events, including buying a home, getting married, and having children.

Financial advisors can provide valuable guidance and expertise in navigating personal finance. This essay will explore the role of financial advisors, including the services they provide and tips for selecting the right advisor for your needs.

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Table of contents, building a strong financial foundation, investing in long-term growth, embracing financial education and literacy, promoting generational wealth and giving back, conclusion: the roadmap to financial fulfillment.

• Gutter, M. S., Garrison, S., & Copur, Z. (2010). Emergency savings: The household financial safety net. Journal of Family and Economic Issues , 31(3), 377-388.
• Bengen, W. P. (1994). Determining withdrawal rates using historical data. Journal of Financial Planning , 7(4), 171-180.
• Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature , 52(1), 5-44.

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Personal Financial Plan Essay Examples

Type of paper: Essay

Topic: Family , Taxes , Wealth , Unemployment , Time Management , Planning , Retirement , Finance

Words: 2000

Published: 02/02/2020

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Personal Finance

Personal Financial Plan Introduction A person’s financial success is determined by his ability to allocate and utilize his own financial resources. Planning is an integral part of every person’s future aspirations for a better life even retirement. However, financial planning is not as simple as outlining the current personal assets versus liabilities because similar to business financial planning it also considers both external and external environmental attributions. Internal factors vary from risk tolerance, projected financial situation, discipline, goals, spending, saving and investment patterns and consumption. On the other hand, external factors include social, legal, political, taxation and technological influences that has either direct or indirect effects to personal finances (Dalton, 2005, p. 38). In order to create a comprehensive personal financial plan, the step is to analyze the current financial situation and assess possible outcomes using the appropriate financial tools. Secondly, short-term, mid-term and long-term goals will be identified and ranked according to their importance in relation to expected and available resources. Lastly, due considerations will be given to asset protection, budgeting, time value of money, savings, debit/credit, estate planning and investment. After which, the first two steps will be incorporated to complete a financial development plan that will provide a clear picture of future finances.

Financial Plan

The financial model represents the family’s current financial situation and some illustrations of the possible direction that my family’s financial situation may take. The future market and economic conditions are generally unknown and at any time will changes at any point. These assumptions were made to represent the economic and market conditions that may occur in the future and was designed to promote actions needed to address any possibilities of risk. The main objective is to aid the family in terms of managing and maintaining a steady financial situation under changeable circumstances.

Current Situation:

- The family currently has assets estimated at $433,000. - Current liabilities are estimated at $140,000. - The entire family’s combined net worth is estimated at $293,000. - The family currently has a total of $183,000 worth of working assets adding $16,000 more per annum.

- My dad wants to retire at 64 and mom wants to retire at the same age as well. - The monthly after-income tax needed at the moment is $4,792 - In order to sustain finance until the age of 90 my parents would still need income even after retirement. - Meeting my educational goals will need an annual savings of $11,252 or $938 every month. Actions: It is apparent that my parents may run out of money before they reach the last life expectancy of 90 years old. However, there are range of possible options that they can take in order to improve the situation including increasing the rate of investments, increase annual savings by as much as $2,200 per year, reduce their retirement spending needs by means of deferring retirement for about 1 year and lastly, combine all the aforementioned and decrease requirement for each.

Asset Allocations

It is necessary for the success of the financial planning to ensure that the asset allocation is aligned with the goals. Therefore, it is important that the suggested assets should be compared to the current allocation because it the appropriateness of the allocation is beneficial to the situation provided that the assets have been allocated precisely. Below is the graphical representation of the asset allocation in relation to the above asset worksheet. The above represents a simple allocation of assets, which can be improved by diversifying the types of securities within the mix (Warschauer, 2002). Below is the suggested allocation, which represents a variation of asset allocation mix.

Goal Evaluation

Financial planning for the future requires organizing situations wherein the family would not be able to all the desired financial goals. Prioritizing is the key in achieving the desired goals by means of differentiating the goals and evaluating the long-term impacts of expenses towards the current financial situation for financial sustainability (Trochim and Linton, 1986). In addition, expenses associated with financial goals appeared to have a potential effect that would lead to a sustainable financial stability throughout life. Based on the current plan and suggested mix it appears that the success rate of the plan is likely to reach 25% Since it was indicated earlier that the planned expenses are also important, evaluations need to be conducted in order to determine the effects of such expenses to the sustainability of the long-term plans. In order to create the illustration, the current plan has been re assessed of its calculations several times excluding the associated expenses along with the various priorities of the financial goals. It starts with calculating the only the highest priority goals, retirement expenses and other expenses identified as important. Furthermore, the highest priority items will be categorized accordingly as primary and secondary and options will also be included. There are three expenses mentioned earlier, which are reconstructing the garage, remodeling of the basement rooms and a vacation in France. The categorizations of each expense are based on the current need for them to be executed. For example, the reconstruction of the garage is relatively important because it poses a hazard to other assets such particularly to the vehicles. The secondary priority is the remodeling of the basement room, which is designated as an office and study area. Finally, the French vacation is considered as least important because it is only regarded as a leisure trip, which has no long-term significant benefit to the family other than a self-compensation for long years of hard work.

Essential expenses only

Reconstruction of the garage: Start Year: 2014 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $8,000 Essential and Primary expenses Remodeling of the Basement rooms: Start Year: 2016 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $12,000 Essential, Primary, and Secondary expenses French Vacation: Start Year: 2018 / Inc. Rate: 3% / Number of years: 1 / Amount per year (1) $20,000 After reconsiderations have been made to the future expenses, the next step in the process is to create a retirement expense forecast to determine the amount required to spend for retirement. The retirement expense forecast is a combination of estimated Social Security benefits together with pre-defined pension benefits and plotted to show estimated living expenses on an annual basis during retirement. The estimation will begin during the legal retirement age of 60 years old and will continue until the pre-determined life expectancy. The basis of retirement expenses is the goal objective that has been adjusted according to inflation rate (personal.vanguard.com, N.D.). There is a rule of thumb being suggested when planning to live at a rate of about 80% of one’s current yearly income. It may sound feasible for a moment, but other factors such as cost of healthcare, cost of living, tax hikes and inflation also poses an immense impact to the overall outcomes of the retirement forecast. Ultimately, the amount allotted to the retirement fund is a kind of decision that will depend upon several factors such as the type of lifestyle intended in the future. It also explains the reason for maintaining a considerable plan that will serves as a guide in making financial decisions. In addition, several steps need to be considered when it comes to estimating expenses. First, is the non-discretionary spending, which includes residence mortgage, transportation, healthcare, insurance premiums, utility bills and taxes. Secondly, discretionary spending, these are the things that can either be reconsidered to be stopped at will or can be identified as the least priority. Some examples may include hobbies, travel, gifts, entertainment and charitable donations. Third, is inflation, this is a kind of expense that cannot be modified at will. Financial planning always needs an estimation of the inflation rate because the likelihood that the budget allotted for retirement may change over the years. There could either be an excess or variance to the budget depending on the increase and decrease on the time value of money. Lastly emergency funds, unexpected circumstances will call for an immediate financial response. For instance, one of the family members is being hospitalized and the current healthcare plan will not be sufficient to cover the cost. It is important that the budget also includes expenses during times of immediate need. After determining expenses, the next step is to sum up the gross income. Income may come from social security, pension plan, retirement portfolio, part-time employment and annuities. Determining all the aforementioned will measure the amount of money coming in to the household and will serves as a benchmark for spending. Maximizing the potentials of the said income streams would alleviate potential risks of running out of money and jeopardizing the long-term financial goals. Subsequently, any instances of shortfalls should resort to reduction of expenses, late retirement, saving more today or taking more jobs than the usual. If there a surplus of funds at hand, it would be best to reinvest excess money back to the retirement portfolio or put more money in the emergency reserves.

Other Considerable Factors in Planning

Like any other financial planning the complex and critical components include considerations for estate planning. An effective financial plan needs careful coordination of various areas in the financial plan. The primary goal of the estate planning section is highlighting the concept of illustrating potential benefits of estate planning basic techniques. Back in 2010 the estate tax rate was at zero (Larsen, 2010). Most people would minimize estate tax exposure as part of their primary goal. Some of the basic techniques used for estate planning are the maximization of the Applicable Exclusion Amount, Revocable Living Trust, Unlimited Marital Deduction, Annual Gift Exclusion, Irrevocable Life Insurance Trust and Unlimited Charitable Deductions. Other goals might also include minimizing income tax, estate liquidity and managing administrative, probate and other expenses. General assumptions made based on the family’s current financial standing and planning data, it can be assumed that funding a credit shelter will allow the family to utilize the available exclusion amounts, which is currently at $1,000,000 per person. Assumptions also include life insurance benefits that were kept out of the taxable estate. If the household has a $211,706 plus other assets amounting to $250,000 minus the estate tax base of $303,572 and exclusion amount of $2 Million ($1Million for each parent) the estimated tax would be $0.00.

Financial planning is crucial for the survival of an individual or in this case, our family. Determining the amount of money at hand including assets and liabilities is essentially helpful in terms of foreseeing the financial health of the entire family or any survivor after life expectancy. Personal financial planning ultimately leads to the achievement of future goal, being knowledgeable about own finances and being familiar with budgeting. A the budget becomes more familiar, the more the family would be able to cope up with untoward circumstances that has a adverse effect in the family’s financial health. With the apparent unstable economy, unexpected tax hikes and diminishing financial options, it becomes more apparent that financial survival is a key for a sustainable future.

Dalton, M. A. (2003). External Environmental Analysis. In Personal financial planning: Theory and practice (5th ed., p. 38). St. Rose, LA: DF Institute, Inc. Larsen, K. (2010). Overview of personal financial planning. Professional Development Network, 1(0). Personal.vanguard.com (n.d.). Evaluate your retirement expenses and income. Retrieved April 24, 2013, from https://personal.vanguard.com/us/insights/retirement/nearing/evaluate-expenses-and-income-needs Puelz, A. V., & Puelz, R. (1991). Personal financial planning and the allocation of disposable wealth. Financial Services Review, 1(2). Trochim, W. M., & Linton, R. (1986). Conceptualization for planning and evaluation. Evaluation and Program Planning, 9(4), 289–308. doi:10.1016/0149-7189(86)90044-3 Warschauer, T. (2002). The Role of Universities in the Development of the Personal Financial Planning Profession. Financial Services Review, 11(3).

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Essay about The Importance of Personal Finance

This is a sample essay on the importance of personal finance. Students can use it as an overall guide on how to organize and structure your own essay on the same topic. If you have problems with such writing, turn to  CustomWritings.com , an  essay writing service for professional academic help. In this case, you will get a professional to write the paper for you. This option is of much importance for those who want to see how real experts work on such pieces of writing.

It’s not an exaggeration to say that money is one of the most important aspects of living life. Many people spend the entirety of their lives needing money, training to make more money, or actually making it so they can afford all of life’s many expenses. That said, one cannot deny that the modern days numerous expenses call for personal financing and management for almost everyone, but especially students. It’s no secret that many college students struggle with their finances, and while this scenario can be somewhat attributed to the rising cost of a college education, there have also been many arguments supporting the notion that students simply do not understand the importance of managing their finances. This sample piece discusses the value of personal finance in a student’s life.

The primary reason many students suffer financially throughout their college years is that they are often impulsive, mostly due to being young and relatively inexperienced in living on their own. Most students do not fully understand the true extent of expense when living solo, often leading them to put less value on money for necessity rather than amenities. A lack of inhibition is to be expected to some extent, and there’s not much that can be done about it outside of life experience itself. Personal financing is an excellent alternative, due to its inherent nature of bringing money to the forefront of the student mind. The first step to solving any one problem, in this case, a student’s lack of awareness or experience on an issue, is to make the issue obvious so that it can be studied and accounted for. In this light, personal finance is important to students simply so that they may realize just how vital financial management is when living on your own.

Naturally, personal finance serves a very important functional purpose for students as well. Once the need for personal finance makes itself obvious, that usually equates to budgeting. Budgeting one’s finances is one of the most effective ways of countering the impulsiveness of youth, primarily by not condemning it outright. Being able to spend money on things one does not need but does enjoy shouldn’t be criticized, so long as it is done in moderation and secondary to necessities, which budgeting helps facilitate. By taking the time to partition one’s resources according to their needs, not only does a student learn the details of their living expenses, but they ensure that they can be met. Furthermore, this partitioning of money lets the student know exactly how much they have left over to satisfy their secondary wants following their primary needs. In this way, personal finance, and the budgeting it entails accounts for a student’s needs but does not punish them for also satisfying their wants, within reason. Not only does this lead to greater financial stability for them, but it helps keep them content as well.

Finally, and perhaps most importantly, personal finance helps facilitate fiscal responsibility in students that have, for the most part, been able to rely on the financial abilities of their parents throughout most of their lives. There is much to learn about the financial world, especially once you are living on your own. Many students do not know the true value of an investment, saving money on a monthly basis, or the dangers of relying on credit, despite how important it is to build that credit. To call the financial world complicated would be an understatement, which is exactly why personal finance is such a broad term; and why learning its intricacies is valuable for anyone, not just students. In truth, the value of personal finance cannot truly be ascertained since it includes such a broad spectrum of knowledge, skills, and tricks, but that value also cannot be overstated enough. It is a valuable life skill that will serve any individual for as long as they live, but students, who are usually facing the world alone for the first time, can reap more benefits from personal finance than nearly anyone else.

In short, the value of personal finance to students is potentially even more significant than it is for the average member of society. There’s no real specific reason for why other than the simple fact that knowing how to manage your finances in useful no matter who you are or what you do. All other factors notwithstanding, there’s truly no argument to be made against an individual learning as much as they can about personal finance. But for a younger person that has less life experience than others, the benefits of learning and mastering the many facets of personal finance are great. Aside from teaching them more about managing their own money in a way that still allows them to indulge to an extent, they will also learn the value of many different financial tactics and the risks of relying too much on riskier financial alternatives. Going into full detail on the values of personal finance for a student is not possible in this brief discussion, but in reality, it doesn’t need to be. That personal finance is a valuable skill to learn is obvious, regardless of what member of society is in question.

References:

• Basu, Sudipto. “Personal Finance for College Students.” One Cent At A Time, 30 Dec. 2017, onecentatatime.com/personal-finance-for-college-students/.
• Clark, Sophia. “Why Personal Finance Education Is Important.” TechBullion, 18 Feb. 2018, www.techbullion.com/why-personal-finance-education-is-important/.
• https://www.BlueShoreFinancial.com, BlueShore Financial: “Ten Reasons Why Financial Planning Is Important.” Ten Reasons Why Financial Planning Is Important | BlueShore Financial, 2018, www.blueshorefinancial.com/ToolsAdvice/Articles/FinancialPlanning/TenReasonsWhyFinancialPlanningIsImportant/.
• Joy, Devin. “Personal Finance for College Students | Lesson Plans and Workbooks.” InCharge Debt Solutions, InCharge Debt Solutions, 2018, www.incharge.org/financial-literacy/resources-for-teachers/college/.
• “Personal Finance Lessons: Budget Planning for College Students | SunTrust Resource Center.” SunTrust, 2018, www.suntrust.com/resource-center/personal-finances/article/personal-finance-lessons-budget-planning-for-college-students.
• Sherman, Brad. “The Importance of Personal Finance Knowledge.” Sherman Wealth Management | Financial Planning in MD and DC Metro, 1 Nov. 2016, www.shermanwealth.com/the-importance-of-personal-finance-knowledge/.
• Zucchi, CFA Kristina. “Why Financial Literacy Is so Important.” Investopedia, Investopedia, 19 Mar. 2018, www.investopedia.com/articles/investing/100615/why-financial-literacy-and-education-so-important.asp.

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