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Wednesday, February 2, 2011

Guide to personal finance: Money mangement tips

 Debt management, budgeting and investing are all important in personal finance
Personal financial management is a multi-tiered process

Personal finance is the managing of individual and/or household monetary circumstances and goals through use of financial instruments, methods and rules. Personal finance can be divided into a number of categories that form a comprehensive financial model that utilizes income, debt management, investment, and financial planning to achieve a more efficient, cost effective and optimal use of personal finances.

Since everybody's financial situation and aims tend to be different, personal finance applies conventional and unconventional money management methods with lifestyle objectives, short-term and long-term plans. Some of the areas of personal finance include the following:

• Budgeting
• Tax planning
• Investing
• Retirement planning
• Financial record keeping
• Cost management
• Estate planning


Budgeting is an important part of personal finance because it allocates income and "liquid" financial assets into allocations that allow an individual or family to meet multiple financial needs. For example, a typical household will have expenses, limited income, savings, insurance needs and retirement plans. To properly accomplish and attend to these financial tasks, a budget can be made use of.

A budget is a time-coordinated application of money to various uses with limitations. In other words, through a budget, money is pre-allocated to various monetary ends for the purpose of better applying that money. Preparing a budget can help reduce debt, build savings, maintain credit ratings and financial order to one's life. Budgets can be weekly, bi-weekly, monthly, annual or a combination of times where finances are accounted for and utilized in different ways.

Tax planning

Tax planning is an important part of personal finance because when properly done, tax savings and retained income can be maximized. For example, contributing to an IRA lowers total taxable income and defers taxes until retirement when total income may be lower for a net gain in tax savings. There are many tax savings techniques and methods that can be applied through deductions, tax filing status, exemptions and knowledge of tax rules, mechanisms and code.

Tax preparers and/or accountants can be helpful in proper tax planning and may be worth consulting before major financial decisions are made that are likely to impact one's income, inheritance, property, capital gains or other tax. Adequate application of tax methods may be useful in growing tax free income, and wealth building whether it be individual or family wealth.


Another key area of personal finance is investing. When done correctly, investing can not only be done tax free, but grow one's wealth through allocation of money into financial instruments. There are many ways to invest and these methods depend on personal financial goals, risk tolerance, age, available investment products, investment plans and services. Investing takes capital, research, time and patience and possibly the advice of a financial planner and services of a broker.

Depending on the investment goals, investment know how, and types of financial instruments invested in, financial services may or may not be necessary. Investment income is ideally not needed until a future point in time so that it may fluctuate in value without obstruction to the long term financial goals. In the case of low-risk and/or short term investing, money should also be allocated for these purposes and not needed.

Retirement planning

Eventually most people need to retire, and this can be facilitated by a retirement plan. Most financial advisors will say the earlier one develops and implements a financial plan, the better. The reason this is so is because more time allows an individual to save less each month to attain a long term retirement goal assuming the same yield on savings for two separate time horizons.

Examples of retirement planning include, 401(K), 403(B), IRA, Pension plans, property investments, trust savings, life insurance policies with cash value etc. Government social security may be part of a retirement plan but due to uncertainty regarding availability of social security due to an aging population, the security of these finances may be somewhat questionable in some countries. For this reason, having a self-guided, employer or other type supplemental retirement plan may improve one's financial retirement prospects.

Financial record-keeping

When budgeting, tax-planning, investing etc. good record keeping can not only help one know how and where money is going, but assists in facilitating these objectives more expediently, and can help with making adjustments to one's financial planning and personal finances when necessary.

Good financial record keeping can also help when applying for loans, filing for taxes, and accounting for cash flow or disputing charges. Strong financial recordkeeping is a tool of financial planning that spans across several areas of personal finance and organizes monetary management potentially saving time and lowering money related complications. Financial recordkeeping can be accomplished through financial software, or an individually customized financial records system.

Cost management

Cost management includes loans, credit cards, living expenses, bills, and any debt an individual and/or household incurs during a given time. Effectively managing costs of living includes debt management and is essential to keeping control of spending and staying within a budget. Costs are the single biggest way to render a complete financial plan ineffective as they can eat up and eliminate income and savings and potentially hamper or greatly reduce non-cost elements of a financial plan.

Cost management can be developed through mindful spending, adherence to a budget, lowering of expenses and reducing of debt and debt interest levels. Keeping debt under control, eliminating debt and/or reducing debt/income ratio are ways to manage costs. A quality cost management strategy can greatly improve a financial plan and one's personal finances in the short-run and long-run scenarios of managing money. Many tips, services and techniques exist to assist in cost management and becoming familiar with these methods may involve research and/or the use of financial services.

Estate planning

For the wealthiest of individuals with net worth in the millions of dollars, estate planning can be quite useful. Successful estate planning can lower taxes, grow income and assets, and legally protect money from lawsuits, estate taxation and inheritance tax through the use of financial instruments such as trusts, insurance policies, and retirement vehicles in addition to legal tools such as wills, family corporations and living trusts. Enlisting the assistance of accountants, attorneys and/or financial planners may be worthwhile especially when large amounts of money are involved as in the case of some estates.

Effective estate planning can help maintain fiscal privacy, protect finances, and legally avoid taxation. Estate planning may also incorporate retirement funds, health management savings, investments and insurance policies and may consist of a combination of financial strategies, financial instruments, tax techniques and legal mechanisms. For these reasons, estate planning has the potential to be complex and/or elaborate but may also end up improving one's personal finances significantly

To summarize, personal finance is the conjunction of personal goals, financial regulations, legal and tax environment with financial instruments, mechanisms and techniques. The objective of personal finance is to manage money effectively and this may include growing money, preparing for retirement, saving, managing costs, achieving lifestyle objectives, and protecting one's money and self through financial means.

Personal finance is a cornerstone of life management and quality of life because it helps facilitate life objectives and quality of life through the effective management of money and aspects of life affected by money. There are many sources of information, services and tools available to persons seeking to improve their personal finances, and these tools include online literature, financial services, financial plans, software and equipment.

The practice of personal finance may change over time as one's financial aims and/or the nature of the economic, financial and legal environment changes. Consequently, personal finance is not always a static practice and involves continual awareness and diligence to financial means and goals.

Image license: Simon Cunningham, CC BY 2.0