Personal finance is individual money – the money that an individual (or household) has available for personal use.
Personal finance is also the application of principles from finance to the monetary decisions of an individual or an entire family. This refers to how individuals or families acquire, budget, save or spend monetary resources over time, considering various financial risks and future events.
- Sources of revenue. These are, for example, salary, remuneration for work done, side income, freelance or business income, and others. A controversial topic is which are the best sources of revenue, as their usefulness is assessed by two different criteria: security and potential profitability. It is widespread among the public that salaried work is a more secure income than entrepreneurship and business. And is that right, especially in these times?
- Savings. Also, a debated point, mainly because of the questions „Is it worth saving,“ „What percentage of monthly income is reasonable to save“ and „How to save.“ Some groups reject saving altogether, arguing that inflation devalues saved money, and if it is not invested, it loses its value. However, it is possible to offset inflation and keep money from depreciating if it is placed in a deposit with an appropriate interest rate (greater than or at least equal to the inflation rate);
- Budgeting. Budgeting is a must in personal finance management. The budget helps to plan monthly expenditures in advance and to allocate income correctly;
- „No borrowing“ rule. Avoiding borrowing is critical to sound personal finances. As a rule, saving and making necessary purchases with money saved rather than money borrowed is better. In rare exceptions, however, borrowing is justified (for example, to buy a home or for investment purposes);
- Investing. Investing can bring higher returns than saving, but it carries higher risk, especially regarding short-term investing. When investing for the long term (over a more extended period), the return on money tends to be upward, even in temporary downturns.
Personal finance management consists of six main aspects:
– retirement planning.
– investment planning;
– insurance planning;
– tax planning;
– succession planning;
– Budgeting.
1. Retirement Planning – Answers the questions: When do I want to stop working, and how much money will I need to live decently after that?
- 2. Investment Planning – Answers the questions: What date are we today? What financial goals do we have: education, child’s education, home, car, or other? How might I achieve these goals, and when do I want to achieve them? Set goals and make a financial action plan. Evaluate your financial situation
- 3. Insurance planning – What is worth protecting? Do I have dependents on my income? Which financial goal do I want to meet, regardless
- 4. Tax planning – usually, the law allows us to pay fewer taxes, depending on the circumstances. The money saved on taxes
- can be used to help solve one of our financial goals.
- 5. Succession planning: Is it possible to inherit financial assets? When? And liabilities and who could be their source? How can I avoid inheriting liabilities?
6. Budgeting: This is a unified system for planning, controlling, and analyzing cash flows and financial performance.
Budgeting is a type of financial planning – managing the creation, allocating, and using financial resources. To that end, I am sending you the attached.
an expenses form to fill in. I also recommend the Monefy app – you can download it for free.
- Structure of personal finances
- running costs ( electricity, water, bills, fuel, food, clothing, transport) –
- we cover them with our current income (salary or other dividends)
- extra expenses ( unforeseen) – holidays, car repairs, treatment, vacations –
- We cover them with our emergency fund ( liquid money we can access at any time) – between 3 and 6 monthly expenses.
- Strategic costs – we cover them with strategic instruments ( they work with compound interest ) they need longer planning. More than 3 years.
- risk management costs – insurance.
The golden formula for personal finance management:
- 50% of the income – for fixed costs
- 30% of income – for fun and short-term purposes
- 20% of revenue – for strategic spending
financial goal = life goal
Each of our financial goals is only covered in 3 ways:
- Savings;
- Donation/Gift;
- Credit/loan.
Savings are divided into :
- Gathering
- Investing.
Investing in turn:
- Specula;
- Diversification.
When investing, compound interest is used. And this is- Anatocism (from Ancient Greek: anatokismos „compound interest,“ from ana „upward“ and tokos „interest“)
or Interest on Interest is the arrangement that Interest is due on Interest that has already expired (capitalization of Interest).
This stipulation consists of the agreement that the debtor owes the creditor in addition to the principal obligation.
Interest on interest thereon (compound interest).
Einstein said compound interest is the eighth wonder of the world.
For example, if we earn 2,000,000 dollars over our lifetime, depending on how we manage our money (whether compound interest works for us or against us), then we can consume either 2,200,000 or 1,800,000 of it. If we do not use compound interest instruments, we cannot preserve the long-term purchasing power of money, and it will depreciate due to inflation.
