Business Finance (Lesson 3)
PERSONAL FINANCE
Introduction
At the beginning of this course, financial management was introduced to teach potential
finance managers how to meet the best interest of stockholders. However, making stockholders
more affluent is not the only objective of financial managers. Being individuals with families and
needs to take care of, they must also find ways on how to manage their personal finances and
plan for a more financially secured future.
Personal financial planning is the process of managing one’s finances to achieve
personal economic satisfaction. The economic theory holds that people have unlimited wants.
Effective personal finance management involves the proper application of the various techniques
and principles in corporate finance to an individual’s activities.
The objective of personal finance is for the individual to experience and live a decent
life. It is attained when a person has financial security and independence, and meets all personal
expenditures without much difficulty.
Discussion
Personal Finance
Personal Finance refers to the management of financial activities of a person which
include, among others, the following:
a. Proper allocation of personal resources
b. Budgeting of household expenditures
c. Savings and insurance for retirement
d. Personal investing and financing activities
Effective personal finance management involves the proper allocation of the various
techniques and principles in corporate finance to an individual’s activities. Financial
management is a process in which individuals or families determine the resources and uses of
their funds, including the excess. Individuals budget, save, invest, and spend money and just like
corporation, they also have to consider various financial risks and future life events before
reaping personal returns.
The Personal Financial Planning Process
People who succeeded in their personal financial lives usually have a common
denominator: they manage their finances well by effective planning. They accomplish these by
recording their personal financial transactions and making well-informed decisions. The
common steps are as follows:
1. Conduct Personal Financial Assessment
A person’s financial situation is initially determined by the individual’s financial position. Thus,
the total assets, liabilities, monthly income, expenses, and savings are identified.
The basic questions that must be addressed during this stage are:
a. How much do I personally have?
The personal balance sheet provides a picture of the financial position of an individual. It
indicates important information about the liquidity and solvency of a person.
b. How much are my income and expenses?
It indicates the income and expenses of the person. In making an assessment, it is advisable to
use the income statements of previous years as the basis. The basic rule in making a personal
balance sheet and income statement is honesty. The data must reflect the real financial situation
and status of a person.
2. Develop personal goals
In setting the personal financial goals, the SMART principles – specific, measurable, attainable,
realistic, and time-bound – should be followed. The financial goals serve as the guidepost in
conducting financial activities. They direct the daily financial activities of the person or family
towards the fulfillment of financial dreams or aspirations.
3. Prepare a financial plan or budget
Budget is the financial goals or objectives expressed in terms of peso. It is an estimate of what
will happen financially in the future based on the events that have happened in the past.
4. Execute financial activities
The day-to-day activities should be carried out in accordance with the financial budget. It is
strongly suggested that financial activities followed the financial budget. Spending beyond what
is planned will definitely lead to financial problems.
5. Perform monitoring and evaluation
Areas of Personal Finance
The five areas of personal finance are income, saving, spending, investing, and protection.
1. Income
Income is the starting point of personal finance. It is the entire amount of cash inflow that you
receive and can allocate to expenses, savings, investments, and protection. Income is all the
money you bring in. This includes salaries, wages, dividends, and other sources of cash inflow.
2. Spending
Spending is an outflow of cash and typically where the bulk of income goes. Spending is
whatever an individual uses their income to buy. This includes rent, mortgage, groceries,
hobbies, eating out, home furnishings, home repairs, travel, and entertainment.
Being able to manage spending is a critical aspect of personal finance. Individuals must ensure
their spending is less than their income; otherwise, they won't have enough money to cover their
expenses or will fall into debt. Debt can be devastating financially, particularly with the high-
interest rates credit cards charge.
3. Saving
Savings is the income left over after spending. Everyone should aim to have savings to cover
large expenses or emergencies. However, this means not using all your income, which can be
difficult. Regardless of the difficulty, everyone should strive to have at least a portion of savings
to meet any fluctuations in income and spending—somewhere between three and 12 months of
expenses.
Beyond that, cash idling in a savings account becomes wasteful because it loses purchasing
power to inflation over time. Instead, cash not tied up in an emergency or spending account
should be placed in something that will help it maintain its value or grow, such as investments.
4. Investing
Investing involves purchasing assets, usually stocks and bonds, to earn a return on the money
invested. Investing aims to increase an individual's wealth beyond the amount they invested.
Investing does come with risks, as not all assets appreciate and can incur a loss.
Investing can be difficult for those unfamiliar with it—it helps to dedicate some time to gain an
understanding through readings and studying. If you don't have time, you might benefit from
hiring a professional to help you invest your money.
5. Protection
Protection refers to the methods people take to protect themselves from unexpected events, such
as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health
insurance and estate and retirement planning.
Four Simple Habits for Personal Finance Success
Personal Finance boils down to just four good habits, and if you follow these habits, the road to
financial recovery could be within your grasp.
1. Save Money
2. Avoid Debt
3. Invest
4. Don’t lose it.
