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How to have a good personal financial planning?

Updated: Mar 17, 2023

This article will include all the important concepts and the best ways to help you manage personal financial planning. We have included the solutions for both pre-retirement and retirees, which could be different in some ways.

What is personal finance?

The process of planning and managing personal financial activities, such as income generation, spending, saving, budgeting, investing, retirement, banking, debt, mortgages, protection, insurance, tax and estate planning, is called personal finance.

This personal finance is a term that covers managing your money as well as saving and investing.

Also, the process by which your finances are managed can be summarised as a financial plan.

What is personal financial planning?

Personal financial planning is the ongoing process of reducing stress about your money, supporting your retirement needs, and building your nest egg for long-term goals.

Having a plan on the ground for your finances is crucial as it allows you to make the most of your properties(or assets) and gain more confidence in your life.

You can make a financial plan yourself or get help from a financial planning professional. Online services like Robo-advisors have also made getting assistance with financial planning more affordable and accessible than ever.

As mentioned earlier, personal financial planning encompasses some key elements.

And we are going to discuss them as follows:

Part 1: Goal Setting

Establishing your personal financial planning goals is the first part of your personal financial planning.

1. The first step in creating your financial plan can often be the hardest.

It involves asking yourself the big questions, like where do you see yourself in five, in ten, in thirty years? It asks you to consider what you value in life.

One of the best ways to tackle these big questions is to think about what kind of life you’d like to live in the future, and not to dwell too much on the specifics.

Perhaps you like the idea of buying your place, having children, supporting them through college, and then retiring with a comfortable financial cushion.

Even if you have retired you still need to set goals about how you want your life to look in the future.

The bottom line is that you should get yourself involved in all activities that can help you to achieve your stated goals.

A general rule of thumb, according to the 50/30/20 budgeting rule, is to put 20 percent of your after-tax income towards your savings.

But in a condition where you have multiple long-term goals, you might need to figure out how to split your income to achieve your goals.

Maybe you would like to put 15% towards your investment and 5% for your children.

Or should you save up for each goal systematically?

The bottom line here is to prioritize your goals.

That leads us to the next step.

2. Prioritize your goals.

After understanding how you'd like your life to look like or the kind of life you want to be living in the next 20, 30, or 35 years, the next thing is to prioritize your savings goals to match every different stage of your life as you age.

Let's assume you're saving for a future with a mortgage, children, and retirement, your priorities may look like this:

● Save for a down payment on a home

● Save for supporting your children throughout their lives

● Save for your retirement

Now, of course, some of these priorities can overlap. You could simultaneously pay for your retirement while saving for your children’s trust funds.

However, if we take the example of wanting to get out of debt, your personal financial planning goals might be prioritized as follows:

● Save to get out of debt

● Save for supporting your children throughout their lives

● Save for traveling around the world

After you’ve saved a solid amount in your pension fund, with regular payments still being made into it.

You can start saving to have trips around the world and enjoy your time during your retirement.

3. Use a "SMART" goal-setting process.

The general rule of thumb is to make sure that your goals are:

● Specific

● Measurable

● Attainable

● Rewarding

● Time-based.

This process will help your goals become reality rather than a dream.

Specific goals do not try to complicate your goal setting. Make it specific!

Measurable goals: Adding some specific figures to your goals, such as "Get my credit score to 670" or "Save $45,500 for my child's education".

Making your goals measurable will show you if you are making any progress toward achieving such goals.

Attainable goals are reality-based. Making realistic and attainable goals will keep you focused and determined.

Rewarding (or Relevant) goals feel good once you achieve them. There should be a positive feedback loop where you finish a goal and then want to finish more.

Time-based goals are not vague rather they have deadlines and/or milestones that you can fail or succeed at.

Part 2: Spending

This involves all types of expenses you incur either before or during your retirement period which are related to buying goods and services or anything consumable (investment not included).

All your spending can be categorized into two: cash (the one you paid for with cash on your hand) and credit (the one you paid for by borrowing money from someone else).

Generally, allocating most of your income to spend is not a good indicator for anybody!

As a retiree or someone that's yet to retire, your common sources of spending are:

● Rent

● Mortgage payments

● Taxes

● Food

● Entertainment

● Travel

● Credit card payments

For a retiree, there could be more travel or entertainment spending, but with no work related expenses anymore.

Since we can only save or invest that money we didn't spend.

The expenses listed above all reduce the amount of cash an individual has available for saving and investing.

You understand that Income = Spending + Savings.

And savings might come in the form of cash or your investment.

Now, if your expenses are greater than your income, you will have a deficit.

That's why managing expenses are just as important as generating income, and typically you have more control over your discretionary expenses than your income.

Having a good spending habit is critical for good personal finance management in life.

Here we have an article about the most practical ways to save money.

Part 3: Budget and savings

According to Investopedia, "A budget is an estimation of revenue and expenses over a specified future period and is usually compiled and re-evaluated periodically. Budgets can be made for a person, a group of people, a business, a government, or just about anything else that makes and spends money."

You need to have a good budget for your expenses and savings to have a balance between your income and expenditure. A budget could be more important for a retiree since you have less income sources.

Once you have got a plan for your personal finance, it's time to take a good look at your current financial situation.

Personal financial planning requires you to create a budget based on all of your incomings and expenditures, to assess the necessity of your invariable costs.

Here’s how to create a budget:

● Make a note of all of your income and expenditures for 30 days.

● Then group all your expenditures into a variable or fixed costs.

Fixed costs are costs that do NOT change periodically such as your rent, your car, insurance, or your electricity and gas bills.

Variable costs, on the other hand, are those costs that change periodically including money spent on groceries, nights out, or any other expenses you incur that will require paying for them again.

Assess your variable expenses and identify unnecessary costs you could cut back.

You can use a budgeting app to make this process easier.

Allocate a certain amount from your variable expenses that you could put away into a savings fund each month.

Following an approach like the 50/30/20 rule might prove a valuable tool here.

The idea involves allocating 50 percent of your income to your fixed costs, 30 percent to your variable costs, and 20 percent to your savings funds.

Review your budget monthly, and make adjustments where necessary.

There are chances that your income would vary every month which would cost your savings to also vary.

So there's no need for sadness when you have fluctuations in your savings.

Here we have an article about how to make a budget as an adult. Most of the concepts about budgeting are the same.

Here we have another article about how to make a budget as a teen. Your children could start to learn how to make a budget, so that they can be more financially independent when they grow up.

Part 4: Investing

According to Investopedia, "Investing, broadly, is putting money to work for some time in some sort of project or undertaking to generate positive returns (i.e., profits that exceed the amount of the initial investment). It is the act of allocating resources, usually capital (i.e., money), with the expectation of generating an income, profit, or gains."

Investing also deals with purchasing assets or properties with the expectation of generating returns.

The amount of money you generate from your investment (which we always hope to be greater than the initial money invested) is called Returns On Investment(ROI).

As you already know, investment involves risks, and not all assets, properties, or any other investment opportunities always give positive returns.

That's why there's always a relationship between risks and return on your investment.

Common forms of investing include:

● Stocks

● Bonds

● Mutual funds

● Real estate

● Private companies

● Commodities

● Art

Investing is the most tricky area of personal finance likewise it's required advice from professionals to forge ahead in your investment journey.

The differences between risks and rewards are enormous and require seeking advice from top experts to protect your retirement portfolio.

Part 5: Debt

For pre-retirement, debt management could be more important than investing, which could save you lots of money from interest payments.

If you can manage it, it's a good idea to overpay your mortgage principal because of the hikes in interest rates. An online calculator will show you how much you can reduce your mortgage term if you pay a lump sum now.

You can also try to find opportunities to refinance your debts with lower interest rate.

As a retiree, one of the goals you can strive to achieve is to Get Out of Debt and Stay Out of Debt.

Sometimes you can be in debt if you know how to use that debt to make more money for yourself.

But if it's a debt that would be compound without any positive return to your pocket rather it will still take money out of your pocket.

The best thing is to stay away from such debt.

Don’t feel like you can’t adopt great personal finance habits simply because you’re in debt.

There are a lot of people out there who have pulled themselves out of massive amounts of debt as soon as humanly possible.

So being in a debt right now doesn't mean you can't get out of that debt for good.

But a key tactic is focusing on avoiding debt. This means paying off your debts. Many people start with the account with the highest interest rate, others start with the smallest debt, however, all agree that you must stash away the credit card to avoid accumulating more.

Getting out of debt and managing debt will give you peace of mind and as you’re chipping away with debt repayment, the stress will alleviate too.

Part 6: Protection

When you retire or before you even retire, it's not about earnings and savings only that need more expertise, but developing processes for protecting your investments, your life, and your family is also crucial.

This protection comes in different ways but it's majorly targeted toward protecting you against unforeseen and adverse events.

And you can use some products to protect yourself, your family, properties, assets, etc.

Common protection products include:

● Life insurance

● Health insurance

● Estate planning

This is another area of personal finance where people typically seek professional advice and which can become quite complicated.

There is a whole series of analyses that needs to be done to properly assess an individual’s insurance and estate planning needs.

Part 7: Insurance

According to, "Insurance is a system under which the insurer, for a consideration usually agreed upon in advance, promises to reimburse the insured or to render services to the insured if certain accidental occurrences result in losses during a given period. It thus is a method of coping with risk. Its primary function is to substitute certainty for uncertainty as regards the economic cost of loss-producing events."

Insurance is an important part of protecting your financial downside—but neither should you overpay for coverage you don’t need. In general:

As you are planning your finances it's a good idea that you consider insuring your properties in case of uncertainty.

As a retiree or anybody in general, the area of your life in which you can insure is as follows:

● Health and medical insurance

● Disability and long-term care insurance

● Auto and homeowners’/renters’ insurance

● Life insurance

● Income protection insurance, etc

Our advice for you concerning insurance, in general, is that you should do your research, and consider costs and coverage to make an informed decision. You should have good understanding of all the key terms for your insurance policies, including the coverage, deductibles, enrollment period, premium, term (timing), etc.

Part 8: Tax

What are taxes?

Taxes are mandatory payments levied on individuals or corporations by a government entity. It might be local, regional, or national.

Tax revenues finance government activities, including public works and services such as roads and schools, or programs such as Social Security and Medicare.

Types of taxes

There are several very common types of taxes:

Income tax: a percentage of your income that is paid to the state or federal government of your place of residence. This is the amount of money paid on your income which could be a progressive income tax system.

Progressive income tax involved charging a higher percentage of tax on individuals with higher income.

That means, the higher your income, the higher the income tax you are going to pay.

Payroll tax: a percentage withheld from an employee’s pay by an employer, who pays it to the government on the employee’s behalf to fund Medicare and Social Security programs.

Property tax: is based on the value of land and property assets.

Sales tax: taxes levied on certain goods and services; varies by jurisdiction.

Tariff taxes: are levied on imported goods; this is used to strengthen domestic businesses in a particular country.

Estate tax: this is levied on properties based on the fair market value (FMV) of property in a person’s estate at the time of death; the total estate must exceed thresholds set by state and federal governments.

Capital gains taxes: these are types of taxes that are particularly levied on investors.

This is Levied and enforced at the federal level, these are taxes on the profit generated when you sell an asset that's increased in value.

Some recommendations for tax planning:

The purpose of tax planning is the reduction of tax liability by the way of exemptions, deductions and benefits.

You can use tax-free accounts for investments, where the income is exempt from tax. But those tax-free accounts could limit how much you can invest in.

Consider long-term investments (like a year and a few days) for your taxable accounts will help you to minimize the amount of tax you will pay. Long-term capital gains could be partially exempt from tax.

You can time the realization of your long-term capital gains, so that you can be in a lower income tax bracket. This is especially useful for your retirement income.

And of course, if possible you can live in a tax-friendly state or country.

For tax optimization, you need to consult with a tax advisor.

Part 9: Estate planning

What is estate planning?

Estate planning is the process of designating who will receive your assets in the event of your death or incapacitation.

Often done with guidance from an attorney, one goal is to ensure heirs and beneficiaries receive assets in a way that manages and minimizes estate taxes, gift taxes, and other tax impacts.

Forms of estate planning

1. Wills and Codicils

The last will is a legal document that expresses how the properties of a testator (the party making the will) should be distributed and administered after the death of the testator.

2. Trust

A trust is a process whereby a party called the grantor transfers properties to another called the trustee to hold and manage the properties on behalf of the grantor's beneficiaries.

3. Deed of Gift

A Deed of Gift is a gratuitous arrangement that voluntarily transfers the ownership of a property from the owner (called the donor) to another (called the donee) without any consideration or compensation from the donee. Examples of gifts that can be transferred are real properties such as land or building and personal properties of the grantor.

4. Power of Attorney

The power of attorney is an instrument of delegation which allows a party (called the donor) to appoint another party (called the donee) to act on behalf of the donor.

For estate planning, usually you need to consult with an estate attorney or a financial planner.

You can look at an Investopedia article about estate planning check list.

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