Financial Management

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Published on Monday, January 3rd, 2011 | No Comments

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Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. Our sessions in managing your finances helps address the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

A key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and re-evaluation. Universally, financial planning has five main sections:

1. Assessment: this is done by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage).

2. Setting goals: Some examples of these are a set retirement age or a set date to acquire property. Having multiple goals is common, including a mix of short term and long term goals. Setting financial goals helps to direct financial planning.

3. Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one’s employment income, or investing in the stock market.

4. Execution: Execution of one’s personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.

5. Monitoring and reassessment: As time passes, one’s personal financial plan must be monitored for possible adjustments or reassessments.

Our sessions focus on the six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:

1 – Financial Position: this area is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person’s balance sheet, calculated by adding up all assets under that person’s control, minus all liabilities of the household, at one point in time.

2 – Adequate Protection: the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance.

3 – Tax Planning: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as your income grows, you pay a higher marginal rate of tax. Understanding how to take advantage of the myriad tax breaks when planning your personal finances can make a significant impact upon your success.

4 – Investment and Accumulation Goals: planning how to accumulate enough money to acquire items with a high price is what most people consider to be financial planning. The major reasons to accumulate assets are for the following: [a] – purchasing fixed assets [b] – settling debt [c] – starting a business [d] – paying for education expenses [e] – accumulating money for retirement, to generate a stream of income to cover lifestyle expenses.