Personal finance is the financial management performed by an individual or family unit to budget, store, and spend monetary resources from time to time, taking into account financial risks and future events. When planning personal finances, individuals will consider suitability for their needs from various banking products (checks, savings accounts, credit cards and consumer loans) or private equity investments (stock markets, bonds, mutual funds) and insurance (Life insurance, health insurance, insurance disability) of products or the participation and monitoring of corporate sponsored pension plans or social security benefits, and income tax management.
Video Personal finance
History
Before specialization in personal finance is developed, the various disciplines closely related to it, such as the family economy, and consumer economics are taught in various colleges as part of the home economy for over 100 years. The earliest known research in personal finance was conducted in 1920 by Hazel Kyrk. His dissertation at the University of Chicago laid the foundations of the consumer economy and the family economy. Margaret Reid, a professor of Home Economics at the same university, is recognized as one of the pioneers in the study of consumer behavior and behavior of the Household.
In 1947, Herbert A. Simon, a Nobel laureate, suggested that decision makers do not always make the best financial decisions because of limited educational resources and personal inclinations. In 2009, Dan Ariely suggested the 2008 financial crisis shows that people do not always make rational financial decisions, and the market does not necessarily self-regulate and correct any imbalances in the economy.
Therefore, personal finance education is needed to help individuals or families make rational financial decisions throughout their lives. Prior to 1990, major economists and business faculty had little regard for personal finance. However, some American universities such as Brigham Young University, Iowa State University, and San Francisco State University have begun offering financial education programs in both undergraduate and postgraduate programs in the last 30 years. These institutions have published several works in journals such as The Journal of Financial Counseling and Planning and the Journal of Personal Finance . Research in personal finance is based on several theories such as the theory of social exchange and andragogy (adult learning theory). Professional bodies such as the American Association of Family and Consumer Sciences and the American Council on Consumer Interests began to play an important role in the development of this field from the 1950s to the 1970s. The establishment of the Association for Financial Counseling and Planning (AFCPE) in 1984 at Iowa State University and the Financial Services Academy (AFS) in 1985 marked an important milestone in the history of personal finance. The presence of two communities mainly comes from the faculty and graduates of the business academy and the household economy. AFCPE has since offered several certifications for professionals in this field such as Accredited Financial Counselor (AFC) and Certified Housing Counselors (CHC). Meanwhile, AFS is working with the Certified Financial Planner (CFP Board).
Because concerns about the financial capacity of consumers have increased in recent years, various educational programs have emerged, serving a wide audience or to a group of specific people such as youth and women. Educational programs are often referred to as "financial literacy". However, there is no standard curriculum for personal finance education until after the 2008 financial crisis. The US Presidential Advisory Council on Financial Capability was formed in 2008 to encourage financial literacy among Americans. It also emphasizes the importance of developing standards in the field of financial education.
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Personal financial planning process
A key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and re-evaluation. In general, this involves five steps:
- Rating : A person's financial situation is assessed by compiling a simplified version of a financial statement including a balance sheet and an income statement. The personal balance sheet includes the value of a personal asset (eg, Car, house, clothing, stock, bank account), along with personal liabilities (eg credit card debt, bank loan, mortgage). Personal income reports include personal income and expenses.
- Goal setting : Having multiple goals is common, including a mix of short and long term goals. For example, the long-term goal is "retire at age 65 with a net worth of $ 1,000,000," while the short-term goal is "saving for a new computer next month." Setting financial goals helps guide financial planning. Goal setting is done with the purpose to meet certain financial requirements.
- Plan creation : The financial plan details how to achieve goals. That could include, for example, reducing unnecessary expenses, increasing job income, or investing in the stock market.
- Execution : Execution of a financial plan often requires discipline and persistence. Many people get help from professionals such as accountants, financial planners, investment advisers, and lawyers.
- Monitoring and reassessment : Over time, the financial plan is monitored for possible adjustments or reassessments.
Common goals that most adults and young adults have are paying off student/credit cards for student loans/housing loans/car loans, investing in pensions, investing in college fees for children, paying medical expenses.
Personal finance principles
Personal circumstances are very different, with respect to patterns of income, wealth, and consumption needs. Tax and financial laws also differ from country to country, and market conditions vary geographically and over time. This means that appropriate advice for one person may not be appropriate for someone else. A financial advisor can offer personalized advice in complex situations and for high-end individuals, but Chicago University professor Harold Pollack and personal finance writer Helaine Olen argue that in the United States good personal financial advice boils down to a few simple points:
- Pay off your credit card balance monthly, in full
- Save 20% of your revenue
- Maximize contributions to tax-benefiting funds such as 401 (k) pension funds, individual retirement accounts, and 529 educational savings plans
- When investing a deposit:
- Do not attempt to trade individual securities
- Avoid high costs and actively managed funds
- Find low-cost and highly diversified mutual funds that balance risk vs. reward you according to your retirement target
- If you are using a financial advisor, ask them to perform a fiduciary duty to act in your best interests
- Advocacy for government social insurance program
Limits imposed by law may vary by country; in any case personal finance should not ignore the principle of right behavior: one should not develop attachment to the idea of ​​money, morally reprehensible, and, when investing, must maintain a long-term medium term avoidance of harm in the expected return of investment.
Focal area
According to a survey conducted by Harris Interactive, 99% of adults agree that personal finance should be taught in schools. The US federal government and financial authorities have offered free educational materials online to the public. However, according to a Bank of America poll, 42% of adults are discouraged while 28% of adults think that personal finance is a difficult subject because large amounts of information is available online. By 2015, 17 of the 50 states in the United States require high school students to study personal finances before graduation. The effectiveness of financial education in controversial public audiences. For example, a study conducted by Bell, Gorin and Hogarth (2009) states that those who are undergoing financial education are more likely to use formal expenditure plans. High school financially educated students are more likely to have savings accounts with regular savings, fewer overdrafts and more likely to pay off their credit card balances. However, another study conducted by Cole and Shastry (Harvard Business School, 2009) found that there is no difference in the savings behavior of people in American countries with mandated financial literacy imposed and countries without literacy mandates.
Kiplinger publishes a magazine on personal finance.
Depreciation of assets
One thing to consider with personal finance and net worth targets is a depreciated asset. Deprecated assets are assets that lose value over time or by use. Some examples will be a vehicle owned by a person, a ship, and the cost of capital. They add value to a person's life but unlike other assets, they do not make money and should be their own class. In the business world, for tax purposes and bookkeeping, it depreciates over time due to the fact that its useful life is up. This is known as accumulated depreciation and the asset must eventually be replaced.
See also
References
Further reading
- Kwok, H., Milevsky, M., and Robinson, C. (1994) Asset Allocation, Life Expectancy, and Deficiency, Financial Services Review, 1994, vol 3 (2 ), pg. 109-126.
- Opdyke, J.D. (2010). The Wall Street Journal. Complete Personal Finance Handbook . The Wall Street Journal Guidebooks. Crown Publishing Group. ISBN 978-0-307-49887-8. Ã, 256 pages.
External links
- Media related to Personal finance on Wikimedia Commons
Source of the article : Wikipedia
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