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Personal Finance

Personal finance involves using the basic principles of finance to manage ones money by keeping a record of income, budgeting, saving, investing and managing financial risks for example. After the 2008 financial crisis, there was a massive shift in focus from consumerism to saving and investing. According to government data from November and December 2008, consumer expenditure fell by 0.8 percent and 1.0 percent respectively - as personal income shrunk by 0.4 percent and 0.2 percent.

What is Personal Finance?


Personal finance covers:
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Budgeting: Determining the percentage of personal income should be spent on purchasing and consumables and how much should be saved. This takes into account necessary expenses like childrens education. Insurance coverage planning. Saving and investing in financial markets, including forex, stocks, bonds and commodities. Minimizing tax obligations and filing tax returns. Social security or government benefits and retirement goals. Loans such as consumer loans and credit card loans.

How to Calculate Your Net Worth


An individuals net worth indicates his/her financial standing. It's calculated by adding all personal assets and subtracting all the liabilities from that.

Net Worth = (Sum of Assets) - (Total Liabilities)


Personal assets generally comprise of:
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Cash Savings account and other Checking account Any other bank account or money market accounts

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Any assets or investments owned such as stocks and shares, bonds, mutual funds, ETFs, options, futures,currency, forex, commodities or alternative investments Certificates of deposits (CDs) Any property or real estate owned Home inventory value, comprising of valuable home contents Valuables like jewelry Financial liabilities may include:

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Mortgage Car loan Education loan Personal loan Home loan Credit card loan

Managing Your Finances


Banks offer to make personal finance more convenient to manage:
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Banks are the easiest source of obtaining and maintaining cash. People can deposit their savings in banks and receive interest on the saved amount. People can obtain short-term loans on an ad-hoc basis through credit cards. However, the interest rate on credit cards is typically very high. People can also obtain long-term loans from banks by pledging an asset as collateral. When interest rates come down, is a popular activity Home Loans: One can obtain loans to buy a home by keeping the property as collateral. Protect yourself and your loved ones by insuring against unforseen circumstances. Investing is an important way of supplementing the regular income stream. Investment choices may range from safer options, like banks accounts and mutual funds, to more risky ones, like the stock, real estate and commodities markets. It is also important to contribute to the employer-sponsored retirement account.

Managing Expenses
Here are some simple steps to have greater control over your personal finance:
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Start by preparing an annual budget. Calculate your approximate expenditure.

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Create a worksheet and divide the annual expenditure into months and days. Keep a track of all expenses. Focus on curbing expenditures that are going against the plan. Save for emergencies. Pay off credit card loans before other loans, since credit cards have the highest interest rates. Setting financial goals and meeting them within a specified period underlines the role of personal finance.

Personal Finance Investing


In personal investment finance funds are used for the purchase of shares or any other collective investment schemes. It can also be used for the purchase of assets which are subject to capital risks. The following are the kinds of personal investment finance:

Personal finance Investment in Real Estate


Here money is used to purchase property which can be used for personal purpose or leased out to earn some income. This investment is subject to capital gain or loss as the value of property may fluctuate. Real estate may be of two types:

1.Residential real estate:


Here the property that is purchased is houses of people. In certain cases, to facilitate such purchases, the buyer arranges for a lender. This lender can be a bank, a financial organization or a private lender. Due to very low levels of risk associated with lending for residential real estate, the lending rates are high, ranging from 70-90% of the purchase price.

2.Commercial real estate:


Here investments are made for the purchase of houses large or small which are later used for renting to business purposes. Investments in commercial real estate is associated with high levels of risk and hence invite lower lending rates ranging from 50-70%.

Other Major Sectors for Personal Finance Investment


Mutual funds: mutual fund is a company that pools the investors' money to purchase bonds and stocks. This allows for portfolio diversification Money Market Securities: they are most safe and liquid form of investment available. Investors who are risk-averse invest in such securities and they function through the money market dealers money center banks and Open Market Trading Desks. The money market securities are Treasury Bills, Certificates of Deposits, Commercial Paper and Money Market Funds. Bonds: Bond is a debt security. The person who invests in bonds becomes a bond holder and is required to pay the issuer the principal and the interest which is termed as the coupon at the committed date of maturity. So a bond can be

called a loan in the form of a security. Common stocks: Common stocks are the ordinary shares held by the public in the corporation. The stocks that can be repurchased are known as treasury stocks. These stocks are the last in the liquidity line. They receive their dividends after the preferred stockholders. IPOs: The Initial Public Offering is the first sale of the common shares of an organization in the public stock exchange. When the shareholder sells the shares then it is called the secondary offering which occurs in the secondary market and earns the shareholder profit or a loss. DPOs: This is the Direct Public Offering of a company directly to its employees and customers. The DPOs are less costly in comparison to the traditional underwritten offerings.

Personal Finance Tools, Investing and Money Management Tools


The personal finance tools help in managing personal finance of an individual. The personal finance tools can be classified into 4 and they are:
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Investing tools Money management tools Retirement tools Spending wisely toolsEach of the aforementioned tools may be discussed in detail under the following heads:

Investing tools
Investment in stocks: The Kiplinger's stock finder is a personal finance tool that helps in the investment in the right kind of stock. Here the investor is required to provide certain information regarding the stock criterion he is opting for and mention its value. By simply clicking on the search button, he can get the list of the stocks matching the specified criteria. Investment in funds: The Kiplingers mutual fund finder is another personal finance tool that helps to invest in the proper mutual fund. The investor has to select the type of stock that he wants to invest in and then select the appropriate performance criteria. After this, simply by clicking on the search button one has access to all the mutual funds that suit his needs. The Kiplingers mutual fund finder also helps to find

the right on line financial broker. It also helps to determine the time when the individual would sell the fund and invest money elsewhere. Investment in bonds: Just by filling in some information in the web one can find which type of bond would be most suitable for the investor, whether the investor should opt for a tax exempt or taxable bond. It also calculates the return if the bond was to be sold then.

Money Management Tools:


Budget worksheet: This is a special personal finance tool that plans the monthly finances in such a way that one is forced to save at the end of the month. It helps to project expenditure in various categories and then compare these with the actual expenditure. Credit calculator: In order to calculate how much money would be required to pay unpaid balances, one can use the credit calculator. This personal finance tool helps to calculate the real cost if the minimum balance is paid. Insurance calculator: The insurance calculator helps to understand how much life insurance is required. This personal finance tool also helps to estimate an individual's Medicare prescription and drug savings. Real estate calculator: This personal finance tool helps to find out how much one should invest in housing and whether the individual would be in a better financial status by renting instead of purchasing. It also calculated the amount that he should borrow to meet such financial needs.

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The other money management tool is the tax calculator.

Retirement tools:
The retirement income calculator helps to find which source of income would yield the maximum retirement income. It would help to calculate the amount of income that social security will provide.

Spending wisely tools:


This personal finance tool would help to calculate the monthly car payments and also searches the best car loan that is available in the individual's locality.

Personal Financial Planning


Personal financial planning is one of the most important aspects of personal finance. Personal financial planning can be done in the following 5 steps:
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Assessment: The financial condition of an individual can be gauged by formulating balance sheets and income statements. The personal balance sheet calculates the assets on the one hand and liabilities on the other. Assets include car, house, stocks, and bank account. Personal liabilities include credit card debt, bank loan, mortgage etc. Information regarding personal income and expenses is listed under the personal cash flow statement. Goal setting: After having done a proper assessment of the financial situation, an individual can set up long term as well as short term goals. Constructing a plan: Once the goals are set, appropriate strategies should be formulated in order to fulfill the goals. This could be achieved by curtailing unnecessary expenditure or by expanding the income level by investing in stocks, real estate or other interest earning assets. Execution: For proper implementation of the financial plans individuals lack patience and perseverance and hence seek professional help from financial planners, investment advisors and lawyers. Monitoring and reassessment: The financial plan of an individual should be monitored from time to time for reevaluation. The personal finance planning helps us to understand whether our financial decisions have any impact on other financial decisions. If they are affecting any short term or long-term life goal then we can revise our decisions.

A detailed net worth account should be maintained. The net worth account contains the following.
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Income data :It contains information on the salary, self-employment, alimony or any other income of each earning member and the family as a whole. Asset data: The asset data contains information of date acquired, ownership, current fair market value and encumbrances of the checking account, savings account, money market account, personal residence, other real estate, savings bond, stock, other bonds, fixed income securities, retirement plan, royalties, mineral interest and otter investments, business interest, jewelry collection, properties and notes receivable.

Liability data: This contains information on the date incurred, original amount, current balance, maturity date and interest rate of consumer credit, auto loan, home mortgage, personal loan, business loan, alimony and other loans.

Insurance Information
Information regarding the amount of insurance required should be determined for personal financial planning. One should list all the current insurance policies along with their coverage. Detailed information of self, spouse and child availing the life insurance policy should be kept on record. There are different types of insurance policies catering to different needs. They are:
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Health Insurance Policy Property Insurance Auto Insurance Savings and Investment Planning For any savings and investment planning one must determine The level of risk tolerance and Consider whether he has diversified his portfolio. Estate Planning Another important component of personal financial planning is estate planning. This is a method of taking out an inventory out of the assets and making a will or establishing a trust. This aims at minimizing tax liabilities.

Budget Calculator, Budgeting Tools


A budget calculator helps individuals and business organizations to keep track of all the sources of income and items of expenditure. A variety of budget software, with features developed to facilitate budget planning, is available in the market. A budget spreadsheet can be useful in listing savings accounts, auto maintenance, insurance payments and miscellaneous expenses, such as visits to a restaurant. These budgeting tools can prove to be extremely helpful in preparing an effective financial plan. The most important function of a budget calculator is that it shows the difference between the budgeted and actual amounts at any given point in time. Also, it can be programmed to pop up alerts when one spends more than the resources allocated. There are other features that help in the allocation of money for spending, keeping the purpose of savings intact. One can instantly calculate what percent of the income has been saved at any point in time. Special budget calculators are available for creating budget plans for the whole family. Through such software, one can also create a separate budget for each family member. Some budget calculators come with a feature called payment scheduler, which gives

reminders for making due payments. There is an option for monitoring the expenses of children.

How to Find a Budget Calculator


Budget calculators can be found on the Internet for a premium. There are several websites on which such budget software is available. On making the payment through a credit card, the software would be instantly sent by e-mail. There are also some online portals that offer live budget calculation functions. Those looking for such assistance can register themselves with these websites by paying for the service. These portals design customized budgets by asking the details of the budgeting expectations of customers. They place all accounts of a customer at one place in their server. Through the budgeting tools provided by them, the customer can easily manage his budget. Budget calculators are mostly multifunctional. They provide for static and actual budgeting functions for the purpose of planned and real time budgeting. They are customizable and also provide the features of generating a printable household budget report.