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How To Benefit From Personal Financial Planning |
By:
Andrew |
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How To Benefit From Personal Financial Planning
Andrew
So what is the role of personal financial planning? Quite a mouthful, but to paraphrase it, it simply begs the question of "What is personal financial planning" and "what can it do for me?". So what should your personal financial plan entail? The following information should be taken as a guide only, and individual circumstances differ from one to another.
Essentially, personal financial planning will involve the following areas: budgeting, savings and investment, insurance, management of "big-ticket" items, cash-flow management. Any financial education book will tell you that a good financial plan starts with budgeting, and it is true. A budget allows you to decide how much you can spend and save. Of course, the main objective is to make sure that your expenses do not exceed your income. This will create a surplus that can be used for your savings and investment.
Savings and investment are quite the same, yet not quite the same in its objectives. Both are "money left over" after your outgoing expenses are taken out from your income, and kept to achieve certain monetary objectives. But that is where the similarity stops. The difference between them lies mainly in their aims and and time period. Essentially, savings are meant to be "liquid" and can be withdrawn at short notice or within a short period of time. The returns from savings tend to be quite minimal. Just think of how much your bank savings account can get you in terms of returns. Investments tend to be less liquid (depending on the type of investments) and have a longer time horizon. The returns from investment can be much higher than savings. However, the risk can be high too. Depending on what you invest in, there is also a risk of losing the capital sum.
Insurance should definitely be part of personal financial planning. A big part of the role of personal financial planning is to ensure that one has the means to carry on living in the event of some unfortunate events, both big and small. In essence, insurance provides a safety cushion to provide some form of financial help when one meets with events like accidents, disabilities or illnesses. One major contribution of insurance is that it also provides peace of mind, knowing that financial help is at hand in the event things do go wrong. This kind of peace of mind leaves one with the energy and confidence to move forward in life.
Think very carefully when deciding on purchase for "big-ticket" items. These items could really be essentials like houses or cars for transportation. Yet other items may be considered luxury items like expensive sound systems. There is really no right or wrong answer on what are the "right" items one can purchase. Everybody buys things for for their own reasons - some which may seem totally irrational to outsiders. However, as a guide, the main rule of thumb in personal financial planning is never to put out cash for something you cannot afford.
Buying things on credit is usually a bad idea. The credit card companies do a great job of convincing the average folk that spending on credit is alright and that we should not delay our purchase until we can afford them in cash. Spending on credit, and in the process chalking up consumer debt is a bad idea. The prudent choice will be to wait until you can afford to buy the things you want.
There are of course exceptions to this rule of thumb on financial planning. But the exceptions are not many. One main exception is the use of credit to purchase a property to stay or for investment. Not many people can afford to pay up a house purchase at one go. A person may have to wait a whole life-time if he intends to wait until he can fully pay for it in one lump-sum cash. Buying property for investment may be a good idea if you know what you are doing. The essential is that what you pay to the bank in bank loan and interests is more than offset by the returns on the property purchase. This is the concept of using "other people's money" to make money for yourself. There are a lot more details to look at in this type of investment. So do proceed with much caution.
The role of financial planning is really this - to allow one to follow one's own personal financial plan based on his own financial and non-financial situation, In doing so, one's financial objectives at various milestones of his life can be accomplished. It helps to reduce unexpected incidents, so that one would not meet with financial catastrophes like nightmares turned real-life.
If you do not take good care of your personal financial planning - the price to pay could be your financial freedom!
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Article Source: http://www.statssheet.com/articles/article64572.html |
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