Abacus Wealth Management

Money 101- Lesson 1: Introduction to Personal Finance

(This is the 2nd article in the Money 101 Managing Your Money Series. We advise that you start from the the first article in the Series. Please click here to go to the Money 101 Managing Your Money introduction)

a. What, exactly, is personal finance mangement?

Personal finance management is the handling and control of your money. It is the taking into consideration your income, seeking to maximize that income and balancing its spread over lifestyle expenditure, saving, accumulation and investment.

In simpler term, it’s about being able to make the money that you earn meet your expenses, and help you achieve certain goals. It also includes avoiding getting into bad debt.

b. Personal finance planning

Personal finance planning is the process through which you identify the ways and means by which you can maximize your income and best distribute it to achieve certain set goals. It involves the identification of financial goals and objectives, the assessment of your current financial position, creation and execution of a plan to achieve stated financial goals, and constant monitoring, assessment and re-adjustment where necessary.

When personal finance planning is mentioned, most people think of budgeting, tightening their belts and lives of forced or imposed poverty. However, this is not the case. With proper finance planning, life is actually a lot better and a lot easier. You do not have to worry about

c. Areas of personal finance planning

The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:

d. Steps of personal finance planning

  1. Setting goals: Two examples are “retire at age 65 with a personal net worth of KES 50,000,000″ and “buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income”. It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning.
  2. Assessment: One’s personal financial situation can be assessed by compiling simplified versions of financial balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
  3. Creating a plan: The financial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one’s employment income, or investing in the stock market.
  4. Execution: Execution of one’s personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
  5. Monitoring and reassessment: As time passes, one’s personal financial plan must be monitored for possible adjustments or reassessments.

e. Benefits of proper financial management

With money being one of, if not THE, biggest concern for most people, the benefits of good financial planning and proper management of personal finances are wide and far reaching and include:

Next: Money 101 – Lesson 2: Setting Goals

  1. Money 101 – Lesson 1:  Introduction to Personal Finance
  2. Money 101 – Lesson 2: Goal Setting
  3. Money 101 – Lesson 3: Assessment
  4. Money 101 – Lesson 4: Understanding the Tools
  5. Money 101 – Lesson 5: Creating a Plan
  6. Money 101 – Lesson 6: Implementation
  7. Money 101 – Lesson 7: Monitoring and Assessment
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