Personal finance management
WHAT IS PERSONAL FINANCE?
Most of us want a job to provide us with income so that we can live a comfortable life .That income must be enough to provide food, housing, clothing, transport and other basic necessities .Those of us with a family have to provide food not only for ourselves but also for our spouse, children and in some cases for our aged parents.
We want to have a satisfying career, a flat to live in and a car or some form of transport o move around .We want to spend our holidays with family or friends. We want to keep some unexpected events such as illness. And at a later stage of our lives, we need to have enough savings to spend during our retirement years.
As all these goals cannot be achieved at the same time, we must decide which are our priorities. As all these activities involve money, we must learn how to manage our personal finance .
In very simple terms, personal finance means how to manage our own money : know where it comes from and it goes to. The basic objective is to achieve personal financial independence and live a comfortable life.
PERSONAL FINANCIAL MANAGEMENT
Every person or family is in a unique financial situation. Personal financial management or personal money management enables the person and the family to manage their money properly to meet their specific needs .
Proper financial management ensures comfortable life. It increases satisfaction by reducing uncertainty about future needs and resources .
Advantages
The advantages of proper financial management include:
- More effective uses in getting, using and protecting financial resources.
- Having better control of financial decisions by avoiding excessive debt and dependence on others for money .
- Having a sense of freedom from worries about money by knowing future income and expenses .
- Having a sense of achievement for reaching personal economic goals .
PERSONAL FACTORS IN FINANCIAL MANAGEMENT
As an individual member of society a person may not be able to influence the major events in the economy . For example, if the economy is in a recession, many companies will retrench some of their workers .The event is beyond the control of the individual employees . As there are no unemployment benefit schemes, people who are jobless have to depend on their savings until they find another job .
Even in a fast growing economy, some employees may be retrenched because their skills are no longer needed by the company. They have to learn new skills to stay with the same company. Alternatively, they can look for similar jobs in other companies but the salaries may be lower.
Every person has to spend on items needed for survival. The basic necessities are food, clothing, shelter and transport .Some needs are immediate, such as paying for food, clothing, school fees, bus fare and other daily needs . Other needs are intermediate, such as buying home appliances, a car and other durables which will last for several years .Some needs are less visible.
PERSONAL CHARACTERISTICS
Although most of us have similar basic needs, our personal financial management is affected by factors such as the following :
- Age and stage of life.
- Education, income and expectation.
- Standard of living.
- Career and family.
- Longer lives.
- Time frame.
- Opportunity cost.
OPPORTUNITY COST
An important aspect in personal financial management is opportunity cost. This simply means that the money we spend on an item cannot be used to pay for other items. For example, if we decide to buy a car with cash, then we cannot put that same amount of money in a bank to earn interest .The alternative is to get a car loan and keep the cash in a bank . In this case, we have to remember that the interest to be paid for the car loan is much higher than the interest we earn from the bank of deposit .
A longer term example of opportunity cost is education .For example, a young graduate may be willing to go for further studies shortly after graduation because the opportunity cost is relatively low .In contract, a graduate with ten years of work experience may not think it is worth the investment to sacrifice two years of income to pursue a full time course . That partly explains why part time or distance education courses are more popular among working adults .
PARTICIPANTS IN THE ECONOMY
Our personal financial management is affected by several important participants in the economy .These include the government, business firms, consumers and financial institutions.
MICROECONOMIC ENVIRONMENT
Many of our personal financial decisions are affected by what is happening in the economy. If we understand how the economy works and how the workplace and marketplace are related, we will be able to make better financial decisions .
PERSONAL FINANCIAL STATEMENT
In order to develop a financial plan, we must be able to keep track of our current financial position and project into the future in order to know the progress of our financial goals .This is done with the help of financial statements.
There are two basic financial statements: the balance sheet and the income and expense statement . Understanding how to prepare and interpret financial statements is an essential part of personal financial management.
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