PERSONAL FINANCE

What Is Personal Finance, and Why Is It Important?

What Is Personal Finance?

Personal finance is a term that covers managing your money as well as saving and investing.
It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax,
and estate planning. The term often refers to the entire industry that provides financial
services to individuals and households and advises them about financial and investment
opportunities.

Individual goals and desires—and a plan to fulfill those needs within your financial
constraints—also impact how you approach the above items. To make the most of your
income and savings, it’s essential to become financially savvy—it will help you distinguish
between good and bad advice and make intelligent financial decisions.

Financial Planning

Financial planning is the process of developing a personal roadmap for your financial well
being. The inputs to the financial planning process are:

a. your finances, i.e., your income, assets, and liabilities,

b. your goals, i.e., your current and future financial needs and
c. your appetite for risk.

The output of the financial planning process is a personal financial plan that tells you how to
use your money to achieve your goals, keeping in mind inflation, real returns, and taxes.

In short, financial planning is the process of systematically planning your finances towards
achieving your short-term and long-term life goals.

Life goals
Most people nurture dreams of owning a bigger house or car, exploring the world, giving
their children the best possible education, a blissful retirement, etc. Basically, these dreams
are life goals. Consider this example.
Mr and Mrs Bhanot, 35 and 32 respectively, have a three year old daughter. Both work in
private sector companies. Mr Bhanot plans to retire when he’s 50. From their current one
Dr. Reetika Singh
Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

bedroom rented suburban Mumbai apartment, the Bhanots hope to move to their own two
bedroom apartment costing around Rs 25 lakh within the next five years. They own a small
car, for which they have availed of a loan. Mr Bhanot reckons that he will need Rs 15 lakh
for his daughter’s higher education 15 years later. He also wants to build a corpus of Rs 75
lakh for his retirement.

While distinguishing short term goals from long term goals, you must keep in mind that, as a
general rule, any life goal that needs to be met within five years can be considered as short
term. Beyond that, any other goal can be classified as long term. By this classification, the
Bhanots’ goals can be classified as follows:

Short Term Goals Long Term Goals

2BHK apartment Daughter’s higher education
Retirement corpus

Using a similar yardstick, you may classify your own life goals. Each of them needs
financing. How you plan your finances, to have the right amount at your disposal at the right
time, is what financial planning is about.

Importance of financial planning

Can you manage without financial planning? Many people do, but they may find—often
when it’s too late—that they don’t have the means to achieve their life goals.

For example, people today realize the importance of living life to the fullest. Consequently,
many opt for early retirement from full time jobs, as compared to a few decades ago, when
most people worked until the maximum retirement age of 58-60 years.

The average person can, today, expect to live a healthy life well into his or her seventies or
eighties, which means that retirement life is almost as long as working life. Financially, it
implies that savings (after taking into account inflation) should be enough, not just to
maintain the same lifestyle for almost 25-30 years, with no new income, but also to take care
of medical expenses, which are usually high the older a person gets. Planning for all this is a

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

tall order for anyone. That’s why it’s critical for everyone to plan their finances from an early
age.

Benefits of financial planning

Here’s a list of the benefits that a well chalked out financial plan can bring about:

 Helps monitor cash flows and reduces unnecessary expenditure.

 Enables maintenance of an optimum balance between income and expenses.
 Helps boost savings and create wealth.
 Helps reduce tax liability.
 Maximizes returns from investments.
 Creates wealth and ensures better wealth management to achieve life goals.
 Financially secures retirement life.
 Reviews insurance needs and therefore also ensures that dependents are financially
secure in the unfortunate event of death or disability.
 Lastly, it also ensures that a will is made.

Financial planning can help you achieve peace of mind since:

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

The financial planning process

Hopefully, you’re now convinced that you definitely need a piece of the action. What next?
When you actually get right down to it, financial planning consists of a series of steps. This
section examines each of these steps in detail.

Step 1: Identify your current financial situation

Sit down with all the earning members of your family and gather all information about your
sources of income, debts, assets, liabilities, etc. This gives you a picture of your current
financial situation.

Step 2: Identify your goals

Ask each member to list what they think are current and future family goals. Prioritize each
goal by establishing consensus and put a time period against each, i.e., when will you need
the finances to achieve that goal. If possible, quantify each goal. This exercise enables
recognition of short term and long term goals, and how much money you need for each.

Step 3: Identify financial gaps

Once you know where you stand financially, and where you want to be, i.e., how much you

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

have or can expect regular sources of income to generate, and how much you need to fulfill
various goals.

A simple calculation gives you an idea of the shortfall. This is important, because, identifying
the right investments to cover the shortfall depends on you quantifying the income from your
investments.

Step 4: Prepare your personal financial plan

Now review various investment options such as stocks, mutual funds, debt instruments such
as PPF, bonds, fixed deposits, gilt funds, etc. and identify which instrument(s) or a
combination thereof best suits your needs. The time frame for your investment must
correspond with the time period for your goals.

Step 5: Implement your financial plan

It’s now time to put things into action. Gather necessary documents, open necessary bank,
demat, trading accounts, liaise with brokers and get started.

Most importantly, start investing and stick to your plan.

Step 6: Periodically review your plan

Financial planning is not a one-time activity. A successful plan needs serious commitment
and periodical review (once in six months, or at a major event such as birth, death,
inheritance). You should be prepared to make minor or major revisions to your current
financial situation, goals and investment time frame based on a review of the performance of
your investments.

Financially challenged individuals who feel this is just beyond them, can of course always
consult professional financial planners, who takes one through the whole process. Being a
long term commitment, financial planning goes on until one meets his last goal. It is also a
personal decision, which implies that a person must select someone who he is comfortable
with, and can build a long term relationship that is mutually beneficial.

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

Tips for making the most of the financial planning process

1. Start now. Even if you are in your mid thirties or forties, it’s better to start now than
dawdle for another five years. Every day counts.
2. Be honest with yourself. Seek help when needed.
3. Set sensible, measurable goals for yourself. Be realistic in your expectations of the
results of financial planning.
4. Review your plan and financial situation periodically and adjust as needed.
5. Always review the performance of your investments; pull out if needed and reinvest
the money elsewhere.
6. Be hands-on. It’s your money and no one else will do your work for you.

Features of a good financial plan

How do you evaluate the quality and effectiveness of your financial plan? Well, here’s a
checklist you can use.

 Does it indicate your current financial situation?

 Does it list out all your goals in measurable terms?
 Does it lay out an investment strategy?

If professional help is sought, your financial planner will ensure that your financial plan also
contains the following:

 List of possible risks and a risk management plan.

 Expected returns from each investment.
 A mapping between the investments and goals, i.e., how each investment helps you
achieve your goals.
 Details of one time and recurring fees charged by him.

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

If you noticed, a professional financial planner helps you identify potential risks associated
with various investments and explains how those risks are managed. What risks can you
expect on your journey to financial freedom? Stay tuned. Chapter 3 will prepare you for all
that and more.

The Career Planning Process: Practical Steps

Career planning is a crucial step that can determine the direction of your professional life.
This process involves taking specific steps to achieve your goal, and you may be required to
reiterate these steps many times to stay on track in your profession. In this article, we find out
how to take practical steps in career planning so that you can continue to advance in your
career.

What Is Career Planning?

Career planning is a process of identifying the professional path that would suit your
personality, interests and goals. It involves exploring different career options, performing a
self-evaluation to test your suitability for these and finding the right ways to get on a career
track. For instance, you can find out which educational qualifications you would need for
your career, what type of training you can take and what professional opportunities might be
available to you later. If you are already in a career that you like, you can use the career
planning process to set short-term and long-term goals for what you want to achieve in the
next five, 10 or 20 years. You can also evaluate your options and decide to take a new career
direction.

What Are The Steps Involved In Career Planning?

For successful career planning, consider following these steps:

1. Complete a self-evaluation

The first, and sometimes most difficult, step of career planning is to make an informed
decision by understanding yourself and what you want to do. For this, you would require to
consider your personality, strengths, weaknesses, values, interests, talents, aptitude and goals.
Dr. Reetika Singh
Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

You can determine these things by creating a self-evaluation list that includes the following
questions:

 What do I enjoy doing the most?

 In what do I excel?

 What are the things that motivate me?

 What are the things I dislike doing?

 What strengths do I have?

 What are my weaknesses?

 What type of lifestyle do I want?

 What kind of work-life balance do I want?

 Do I want to work in an office or outside?

 What is my desired salary level?

 Am I an extrovert or an introvert?

 Do I enjoy frequent interactions with other people?

 Do I work better on my own?

 Do I want to do work that makes a positive difference to society?

 Do I want a career that brings me social prestige?

 What can I do with my educational qualifications and experience?

 Do I have the time and money to get the necessary qualifications and develop new
skills?

 Do I have leadership qualities?

 Do I have creative and enterprising qualities?

 Am I able to handle responsibilities?

 Am I able to bounce back from failures and setbacks?

 Am I able to stay calm and focused in stressful situations?

Dr. Reetika Singh
Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

 Am I willing to relocate for the job?

 Am I willing to work night-shifts if the job calls for it?

You can also use online career assessment tools or consult a career counselor to get help in
figuring out what kind of occupation and work environment would suit you best. Take your
time with the self-evaluation and make sure you are clear about what you want to do in the
future before you take the next step.

2. Conduct career research

After you have figured out your interests, aptitude and strengths, research different types of
careers that could potentially suit you. If you have consulted a counselor or used online career
assessment tools, you may get career suggestions, and you can start with those. Otherwise,
you can research the different industries that you find promising and compile a list of the jobs
that are possible in them.

You can then research each job separately and gather information about the educational
qualifications, skills, training and experience necessary for assuming that role. You can find
out what the work responsibilities are, what the work environment is like and what
advancement opportunities are available. Additionally, you can gather information about the
position's salary levels and benefits. It can also help to discover the advantages and
disadvantages of that profession.

Once you understand the practical realities of different jobs, trim down your list to the more
suitable options. You can research these further by connecting with experienced professionals
and getting their first-hand perspectives on what the work involves. Consider your interest
and capability for following in their steps. That would make it easier for you to make your
final choice.

3. Perform market research

Before you commit yourself to any career, it is advisable to conduct market research on its
current and future viability. You are required to find out if there is a current demand for the
job in the industry and if there would still be a demand for it in the next 10 or 20 years. You
can also find out how you can adapt and what types of work choices would be available to
you if things change in the future.

4. Start skills research

Dr. Reetika Singh
Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

Compile a list of educational qualifications and skills that are essential for the career and find
out how you can get them. You may be required to research educational institutes that offer
the requisite training. These institutes require to outline the courses you can take, if you can
take online, part-time or full-time courses, the course duration and the admission eligibility
and fees. It may also help to learn about the continuing education you would need once you
get started in the career.

5. Assess your options

After gathering the relevant information about the shortlisted careers, do an honest
assessment of how well-suited you are for them. Carefully consider if you can sustain your
interest in the job long-term, if you can handle the daily responsibilities of the position and if
it can provide you with the lifestyle you want. Determine if you have the time and resources
to get the necessary education for your selected career.

6. Consider interview research

Once you have finalised your career choice and decided how to get the education and skills
training, you require to plan the steps you can take to get the job. Find out what the interview
process is for the profession and prepare thoroughly for it. Look up interview videos online
and note how the successful candidates present themselves. Practice answering commonly
asked interview questions with a friend and record yourself to get an idea of your confidence
level and body language. Pinpoint your weaknesses and work to improve them.

7. Explore work experience options

Find out about the availability of internship opportunities or part-time work positions in your
chosen career. If there are any, consider sending in your application letters. While the salary
may be minimal for such jobs, you can get invaluable learning experience and be able to
develop important professional connections. Having work experience often makes it easier
for you to find a full-time job later.

8. Begin your job search

It is a good idea to start looking for jobs before you finish your educational qualifications.
You can find out about different companies in your industry, the types of job requirements
they have and which skills are in high demand. You can learn how to write effective
Dr. Reetika Singh
Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

application letters, cover letters and resumes that would catch the attention of recruiters and
hiring managers.

9. Accept a position

After you apply for positions, you may end up getting job offers from different companies. At
this juncture, the self-evaluation list you prepared before would prove useful. You can review
the company size, job demands, possibility of career advancement, salary, benefits, location
and so on and make a decision that is right for you.

Money Management Strategy: Financial Statements and

Budgeting

Successful money management is based on organized

financial records, accurate personal

financial statements, and effective budgeting. This chapter

offers a discussion of the importance

and type of financial documents. This is followed by an

explanation of the components and

procedures for preparing personal financial statements—the

balance sheet and the cash flow

statement. Next, the chapter covers the basics of developing,

implementing, and evaluating a

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

budget. Finally, savings techniques for achieving financial goals

are discussed.

Learning Outcomes

LO1: Recognize relationships among financial documents and

money management activities.

Successful money management requires effective

coordination of personal financial records,

personal financial statements, and budgeting activities.

Your system for organizing personal

financial records and documents is the foundation of

effective money management. This

structure should provide ease of access as well as security for

financial documents that may be

impossible to replace.

LO2: Develop a personal balance sheet and cash flow

statement.

A personal balance sheet, also known as a net worth statement,

is prepared by listing all items of

value (assets) and all amounts owed to others (liabilities). The

difference between your total

assets and your total liabilities is your net worth. A cash flow
statement is a summary of cash

receipts and payments for a given period, such as a month or a

year. This report provides data on

your income and spending patterns.

Dr. Reetika Singh
Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

LO3: Create and implement a budget.

The budgeting process involves four phases: (1) assessing your

current personal and financial

situation; (2) planning your financial direction by setting

financial goals and creating budget

allowances; (3) implementing your budget; and (4) evaluating

your budgeting program.

LO4: Relate money management and savings activities to

achieving financial goals.

The relationship among the personal balance sheet, cash flow

statement, and budget provides the basis for achieving long-
term financial security. Future value and present value
calculations may be used to compute the increased value of
savings for achieving financial goals

Money management refers to the day-to-day financial activities

necessary to

manage current personal economic resources while working

toward long-term financial security.

Opportunity Cost and Money Management

Trade-offs are associated with every spending, saving,

borrowing, and investing

decision.

Components of Money Management

Personal financial records, financial statements, and spending

plans (budget) are
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Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

the foundation for planning and implementing money

management activities.

A Personal Financial Records System

Organized money management requires a system of financial

records including the

following categories:

1. money management records

2. personal and employment records

3. tax records

4. financial services records

5. credit records

6. consumer purchase records

7. housing and automobile records

8. insurance records

9. investment records

10. estate planning and retirement recordsImportant financial

records and valuable articles should be kept in a location that

provides better security than a home file.

A safe deposit box is a private storage area at a financial

institution with maximum

security for valuables and difficult-to-replace documents.

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow
PERSONAL FINANCE

As more documents are provided electronically, and people

are storing financial records “in the cloud,” consider the
following actions:

Download copies of all statements and forms to your local

storage area using a logical system of files and folders.

Back up files on external media or use an online backup service.

Secure data with complex passwords and encryption.

Scan copies of documents so you no longer need to keep paper

versions.

Take appropriate action to completely erase files when

discarding items no longer needed.

Hard copies may still be required, such as car titles, birth

certificates, property deeds, and life-insurance policies.
Original receipts may be needed for returns or warranty
service.

A personal balance sheet and cash flow statement provide

information about a household’s current financial position and
a summary of current income and spending.

Dr. Reetika Singh

Faculty, Department of Commerce
University of Lucknow