The Basics: What is Personal Finance?

Broadly defined, personal finance is the application of finance principles to the decisions you make about your money. This includes choices you make about earning, saving, spending, investing, insuring, and planning for the way you will manage these things now and in the future. Many people are afraid of these things, and that's ok so long as you are not paralized by it. Channel that fear into knowledge of your situation and action. Doing so will leave you with a feeling of relief that you might have never thought possible.

Many people narrowly interpret the term “financial plan” to mean investment plan. While an investment plan is an important component, it isn’t all that is necessary for a complete financial plan. One reason for such narrow focus is that it’s what most people talk about. After all, stock market news channels broadcast around the clock to popularize the act of investing, magazines breakdown the success and failure of virtually every investment available, internet sites promise ways to get rich by purchasing their investment advice. What’s more, if you know a little something about the stock market, doesn’t it make you more “in the game” and more likely to succeed financially in the future? The up to the minute knowledge of the direction of the stock market and the act of owning a few investments here and there will in fact not make you a personal finance champion. What will give you personal financial freedom is understanding your situation, planning a way to achieve the goals that you set for yourself, and following through with your plan. The simple act of preparing a financial plan will give you a sense of power in taking control of your finances.

Personal Financial Planning

A personal financial plan can include several components:

What do you want to accomplish? – You must begin this process by thinking about, and writing down, what your specific financial goals are: I want to get out of debt – I want to retire comfortably – I want to save for a house… These are important things and there are tools here to help you answer these questions. I would encourage you not to limit your plan with specific topics such as these but to expand your plan for the entire scope of your financial life. This includes a strategy for budgeting, investing and building wealth, insurance planning, estate planning, and setting up a method for periodically modifying and updating your plan.

Understand your situation – In order to achieve your financial goals you must first understand your current situation. You can plan and set goals only after you have developed your start point. Don’t hide from your finances just because you are afraid of what you might find. It really doesn’t matter how good or how bad your situation is, the truth is it won’t change by ignoring it. For many people this is the toughest obstacle to overcome.

Take action, collect information - Once you have allowed yourself to explore your situation, collect all of your financial information in one place. To begin the process, if you do nothing but pull the information all together, the act of doing this is a huge step in the process of planning for your financial future.

Write everything down – Compile all the information in one place. Getting organized is a key beginning to this process.

Communication – If you share your financial life with a partner, communication with that person is crucial to the success of your plan. This is often a source of frustration for many people and opening a dialogue with your partner is critical. Sometimes the best way to do this is in small increments over a period of time. Pick a topic to discuss, such as compiling the records, and talk for a short period of time. This way you gradually align your interests so that you are tackling the same problems together. If only one of you tackles the effort, the other will have a more difficult time taking ownership of the process. TAKING OWNERSHIP OF THE PROCESS IS KEY. Dividing responsibilities can be good, but be careful to work as a team on all aspects of the process.

Budgeting - There is one very important thing to remember when uncovering the mysteries of budgeting – it’s just math. A budget is quite simply adding up what you bring in each month and subtracting what you pay out each month. It’s not difficult to generate and managing it it’s the most important thing you will do to achieve your long-term financial goals. It doesn’t matter how much money you make, the math within a budget will always work the same. If you spend more than you make on a consistent basis, this will not be good for you. Over time you will find yourself borrowing money in order to pay for your excess spending.

Saving and Investing – Developing a saving plan is a very important part of your budget. Once you have determined a way to save on a regular basis, you should decide how to put that savings to work. Your investment plan should first include an understanding of investment concepts so you can use them within your plan. These concepts include various investment product choices, retirement accounts, taxable accounts, education accounts, real estate, and others.

Taxes – Having a tax plan is something to think about after you have a firm grasp of your over all personal financial profile.

Insurance – Insurance products are a very important part of anyone’s personal financial picture. Whether it be life, health, disability, long-term care, homeowner, or automotive insurance, a basic understanding of how they work is critical to determining what type and how much you should have.

Estate Planning – Basic estate planning, such as a Will and Power of Attorney for Healthcare Decisions, should be added to your to-do list. You don't need to spend a great deal of money to put these documents in place. There are great do-it-yourself sites that can help you for minimal cost.

Debt Reduction – Before you dive into the debt reduction process you should educate yourself to the different types of debt and where they are and aren't appropriate. There is debt that can be used for investing in the future (such as education or a business), debt that can be used for investing in appreciable assets (real estate), and debt that can be used for consumer spending. Although all debt can be dangerous if not structured and used properly, consumer debt can be particularly harmful to your financial health. Many people have too much debt. Reasons can vary from the loss of a job, unexpected expense, divorce, medical condition, loss of family member, or simply living a life of unhealthy and excessive spending habits. If you have too much debt, you may fall into one of these categories. The good news is that for most people, there is a solution. It will require understanding of your situation, development of a plan, and action. And the action may not be easy. As you go through the process, the act of doing something about your situation will hopefully provide you with some relief from anxiety.

Internet resources – A wealth of resources are available on the Internet for personal finance management. We have provided helpful links to many of the most helpful sites for various topics. Information on the various types of software available is provided along with some basic advice on how to manage the software on a regular basis. Using financial software is a great way to maintain your budget and financial plan.

Other sources – Do-it-yourself sites can provide tremendous amounts of helpful information. In fact there is enough information here to create an entire financial plan as long as you have the discipline to carry it through. Many times though, people need a more hand’s on approach to this type of planning or just want a professional looking over the shoulder. If this is the case for you we have devoted a section designed to help you understand the various types of financial planners and advisors as well as determining which one is right for you.

Whether or not you create the plan yourself or use the help of a professional, the plan by itself is not something to develop and put on a shelf. The planning process should be engaging and interactive in order for you to learn from the experience. The end financial plan is of course an important tool for you to use throughout your life, but the process will allow you the time and resources to digest many important financial concepts. In addition, taking action as part of the process will help alleviate many stresses you may have by taking control.

Procrastinating will never help you achieve your ultimate goal.