What is personal finance?
Personal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan.
The key to successful money management is developing and following a personal financial plan. Research has shown that people with a financial plan tend to save more money, feel better about their progress, and make more appropriate decisions – no matter what their income. Moreover, a written financial plan is far more effective than a mental one. Seeing your plan in writing helps to remind you about what actions are necessary to reach your goals and it helps you to check your progress more easily than relying on memory alone.
A successful financial plan can be developed in six steps:
- Set goals
- Prepare a net worth statement
- Gather past income and expense records
- Complete the Spending and Saving Planner
- Keep records of spending and saving
First, take time to set goals and decide as a family what you hope to accomplish financially.
Knowing what is important to you and your family is a critical first step in a successful
personal financial plan. Use the Setting Goals worksheet to decide which financial goals are most important to the family and how much will be needed each month to accomplish these goals.
A well-defined financial goal is:
- Specific – what you want to achieve.
- Measurable — how much money you will need.
- Tied to a time frame — when you want to achieve the goal.
- Reasonable – it can be achieved with the time and money available.
Prepare a net worth statement
The next step in your financial plan is to look at your present situation by preparing the Net worth statement (also referred to as a Balance Sheet).
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