Personal Financial Planning Definition:
Financial management of money by an individual or a family unit is known as Personal finance. The steps involves earning, spending and saving the income by keeping an account of risks involved and future life events. According to the Oxford dictionary, the word ‘finance’ signifies ‘management of money’. Khan and Jain, define finance as the art and science of managing money. Webster’s Ninth New Collegiate Dictionary has two definitions of finance. The first one says, “Finance is the money resources, income, etc. of a nation, organization, or person.” The latter one is “Managing or science of managing money matters, credit, etc is called finance.
In late nineteenth century there was no term as personal finance, it was a part of home economics. However, recently economists argue that personal finance is indeed an integral part of macro economics.
The invisible hand is the driving force behind most of the market theories and practices. It is based on the concept that everyone in a market economy will behave in their own self-interest, rationally. According to the theory invisible hand makes market fluctuations predictable, also it provides assurance to the consumer that the change is favor of them.
However, the question on assumption began to rise in early twentieth century. Economists argued that consumers act irrationally in real life scenario. Further adding to their statement, they said most of the consumers lack the sufficient information and are unable to make the most rational financial decisions for their family. Often they are manipulated by circumstances; they are misinformed about the market condition, this leads them to conclude a decision which is not as rational as it seems.
Example of Personal Financial Planning:
Personal finance not only involves the decision making process but also activities like budgeting, insurance, mortgage planning, savings and retirement planning. Basically all the activities fall under the impression of personal finance.
Personal Financial Planning Example-2: Let’s suppose Mr. X has a family of 4 members (a wife and two daughters) and he wants to invest in real estate in India. He will weigh pros and cons of this investment with reference to the future events like education of his daughters, their marriage and his retirement plans.
Personal Financial Planning Example-2: Assume that you have decided to give your child a best education in the world. Here suppose you have decided to send your child to abroad to USA for higher studies when he become 18 years old. Considering that your have thought to send your child abroad for higher studies when he is now 8 years old. Its now your duty to start personal financial planning to understand how much is the current cost for abroad studies and what will be the cost after 10 years when your child reaches 18 years of age. According to best of your knowledge, you should start budgeting and saving to fulfill your future goals.
Importance of Personal Financial Planning:
The importance of Personal Financial Planning corresponds to individuality. It focuses on identifying financial goals and objectives considering an individual’s personal, social, emotional and psychological factors. Further the planner aims to create such a personal financial plan that not only helps you to improve your current financial status but provides you with a long-term strategy for your financial future.
Importance of personal financial planning involves following steps:
Personal financial planning helps you build a robust foundation for your secure financial future. The very first step involved in personal financial planning is to be aware about your current financial position. For this you will have to evaluate your assets, mortgage payments, mutual fund investments, liabilities, tax returns, purchases of any bond or stock, record of securities transactions, insurance policies, wills, trusts, pension plans, etc. The valuation of your assets will give you an idea as to where you are capable enough to invest.
Once you’ve evaluated your net worth its time to decide where you want to be, financially. For this, you’ll have to be very specific about your personal and financial goals and objectives. If you’ve a family to support, consider all the possibilities with them in the future as well. Family financial planning like taking care of your aging parents, your children’s higher education and many more are to be taken under account. You don’t have to worry about it certified financial planners will always be there to guide you through your personal and financial values and attitudes.
The next step involves identifying and eliminating financial barriers. These problems will hamper your goals and objectives, for obvious reasons. Some of the financial barriers are inadequate cash flow, little or too much insurance, a big tax burden, or current investments that are losing the battle with inflation. These possible problem areas must be identified before solutions can be found. So basically the personal financial planning should be structured to minimize your financial barrier and optimize your financial objectives.
It’s time to execute the plan. Financial recommendations from your planner are only going to get you effective results if implemented properly. Although the planner will assist you during implementation, modification, or rejection the recommendations presented by him but the final call will have to be yours. You may also request your planner to co-ordinate with other knowledgeable professionals as required.
Mere implementation of the plan is not enough. You’ll have to have a regular background check on your personal financial plan. These periodic reviews are necessary to incur amendments in your plans with change in personal and economical conditions. The decision of accomplishing this task is on you, either you can use help of an expert or you can do it on your own. However, owing to their better knowledge of finance and policies financial planner’s assistance will be beneficial for you.
Personal Financial Planning Template:
You can download sample personal financial planning template in excel format from the below link. This financial planning template will assist you in developing your saving and growth plans. Check out the personal financial planning sample here.
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Financial Planning Basics For Beginners
- Chapter 1: What is Financial Planning with Examples
- Chapter 2: Different Types of Financial Planning Models and Strategies
- Chapter 3: Importance of Financial Planning
- Chapter 4: Personal Financial Planning Process
- Chapter 5: Benefits of Financial Planning
- Chapter 6: Financial Planning Process with Examples
- Chapter 7: Objectives of Financial Planning
- Chapter 8: Limitations of Financial Planning
- Chapter 9: Financial Planning and Control
- Chapter 10: Financial Planning and Analysis
- Chapter 11: Determine Financial Goals - Assessment, Budgeting and Goal Setting
- Chapter 12: What is Optimism Bias - Definition, Effects on Financial Decisions
- Currently Reading: What is Personal Financial Planning? Examples and Templates
- Chapter 14: What is Business Financial Planning? Means, Examples and Process
- Chapter 15: What is Financial Planner? Definition, Steps, Scope
- Chapter 16: Your Rights and Responsibilities as a Financial Planning Client
- Chapter 17: Strategic Planning and Execution of Financial Plan
- Chapter 18: Why Emergency Personal Financial Backup Plan is Needed
- Chapter 19: Top 10 Common Errors - Worst Financial Mistakes to Avoid
- Chapter 20: Basics of Financial Planning Quiz - Question and Answers
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