Personal finance
Personal finance encompasses the methods and strategies individuals or families use to manage their money. It involves various activities, including earning income and making informed decisions about spending, saving, and investing. A solid understanding of personal finance is essential for maintaining a stable standard of living and achieving long-term financial security. Key components include securing sufficient income, often through career development, and diversifying income sources to mitigate risks associated with job loss. Effective budgeting is critical, requiring accurate tracking of income and expenses to maintain financial balance. Establishing a budget involves careful planning, including setting realistic income expectations and projecting future expenses. Additionally, personal finance encourages individuals to set long-term financial goals, enabling them to create strategic career and investment plans to achieve their desired financial outcomes. With diligence and education, anyone can improve their financial management skills, contributing to their overall prosperity.
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Subject Terms
Personal finance
Everything that a person or a family does to manage their own money can be considered a form of personal finance. Activities related to personal finance include earning or receiving income and making decisions about how that income should be spent, saved, and invested. Each person needs to address these aspects of personal finance; those who do it well, making carefully considered and informed decisions, are likely to have a consistent standard of living and long-term economic security. Conversely, those who make poor choices may find themselves with money problems that could have been avoided. Everyone can learn how to manage financial resources successfully if they invest the time. Doing so is an investment in personal prosperity.
Overview
The first step in successful personal finance is securing sufficient income. This usually means building skills in one or more career areas and having a successful work history. For most individuals, work is their primary source of income from young adulthood through middle age. However, an important part of personal finance in middle age is diversifying sources of income. Having more than one income stream means that if a person loses their job, they will still have cash coming in and will still be able to retire one day.
Diversification of income may be established by maintaining a regular savings account or certificates of deposit, which will provide interest income. Buying stocks is another approach, whether the objective is to receive dividends or to let the stocks rise in value and sell them later at a profit. A third option is an annuity, which involves investing a lump sum in order to get a fixed payment at regular intervals at some point in the future.
Of course, each of these requires money to set up, which is why another critical element of personal finance is budgeting. To budget successfully, a person needs to keep clear financial records, including balance sheet. A balance sheet gets its name from the fact that it balances a person’s or organization’s income and expenditures with the goal of balancing the totals. For example, a person who earns $60,000 per year from all sources will want to make sure that their expenses total $60,000 per year. In addition to basic living costs, such as rent, mortgage, utilities, food, and insurance, expenses can include entertainment, investments, and a rainy day fund.
Both income and expenses should be tracked carefully to maintain a balanced budget. By estimating income conservatively, a person can be confident that he or she will not come up short. Only income that is assured should be included in the budget. For example, a person’s base salary is certain as long as they retain a job, but possible raises or bonuses are not guaranteed. Thus, only the base salary should be counted on when making a near-term budget, say for a calendar year.
Projected income does have a place in personal finance. Many people develop earning and spending plans that cover decades. A central component of such plans is setting goals. This involves laying out the expenditures a person would like to make in future years and determining how much income that person will need to cover them. Then, the individual can then make long-term career and investment plans that will allow them to meet their lifetime financial goals.
Bibliography
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