Example of Personal Finance Top 5 Personal Finance
Example of Personal Finance The key to gaining the edge in Joe’s average finances and struggling with money worries is through obtaining a top-notch “financial education” that reduces any over-reliance on accountants, financial advisors, etc., so you can control and start managing and directing your own personal finances. A great starting point on this trip is to know and understand the top 5 financial needs in life according to classic financial planning.
Example of Personal Finance | Top 5 Personal Finance Needs in Life
In classic financial planning, there are 5 defined financial needs that a typical person will have, often in fairly predictable time frames.
I find it can be helpful for the back of a napkin checklist to have the following 5 financial needs listed in front of you and then wonder what you might be doing now to make sure you’re actively addressing each of these 5 financial needs:
Example of Personal Finance
Savings
Investments
Protection
Retirement Planning
Mortgages
1 Saving, i.e. the financial need to accumulate a lump sum of surplus income (usually saved from earned income) to meet some financial goal and/or accumulate a rainy day fund.
An example of this would be saving a down payment for the purchase of a home at some point in the near future. Another example of saving is the creation of an emergency fund (for example, setting aside 6 months of living expenses). You can also start saving in order to use these funds for a long-term goal, such as building up a rainy day or retirement fund.
2 Investments, that is, the financial need to invest a lump sum not required by you for a period of time, in order to obtain a better return than standard savings can generate. A common example of this is investing a sum of principal in bonds or stocks to generate a medium to high return. Another example of this need could be when you have recently retired and received a lump-sum retirement benefit and want to invest this properly.
You would have a financial need to invest this lump sum as appropriately as possible (according to your age, risk profile, and financial goals) to maximize your return on capital and/or generate a future stream of income (liabilities).
3 Protection, i.e. the financial need to financially provide certain unpredictable life events, such as ill health or death, that cause the total cessation of income from work for you and/or your dependents. An example of this is when you get a mortgage, you will take out a life insurance policy (mortgage protection payment insurance) that would ensure that the mortgage is paid in full if you die before the end of the mortgage term. In addition to simply buying life policies, you can “protect yourself” by building passive and portfolio income streams.
4 Retirement planning, i.e. the financial need to accumulate funds to provide a replacement income (passive income and portfolio income) in retirement, as you are no longer working (either by choice or necessity) and do not generate earned income.
5 Mortgages, i.e. the financial need to borrow a sum of capital to finance the purchase of a property, usually an apartment (condominium) or house, which will usually be used as your home.
Example of Personal Finance The typical timeline of your personal financial needs
Your financial needs usually change as you age. A typical timeline of changing financial needs over the course of someone’s life would be as follows:
Age 20- 30: Savings and Mortgages,
Age 30-40: Protection and long-term savings
Age 40-50: Investment and retirement planning
60 years: Investment
It is important to note that this is a very general timeline. Personally, I believe that retirement planning should be considered much earlier in life. With the exception of the current generation of children (who will actually live shorter lives than those of us in our 20s, 30s, and 40s due to the growing problem of obesity), people are living longer than ever before.
However, fewer and fewer people are planning and meeting their financial needs for a longer retirement than ever before. (Why not check out our website and other articles on retirement planning to better understand your retirement planning needs)? I’ve heard that it is said that people spend 5 times more time planning their vacation than their retirement! Sad but unfortunately true!
Become your own financial advisor Example of Personal Finance
The personal financial planning process is a process you can undertake yourself or most likely with a financial advisor. The goal of financial planning is to achieve your financial plans and goals through the most efficient management of your available financial resources and the proper use of financial products. Unfortunately, most people are not equipped to carry out financial planning on their own and therefore rely too heavily on advisors and financial institutions.
A word of warning!! There is only a minority of financial advisors who truly have their best interests at heart (sorry… but it’s true). Many are simply lashing their financial products for commissions and fees. The only financial advice worth taking is paid financial advice and written advice.
This is the closest thing to independent financial advice you’re going to receive, I’m afraid. At least by paying for the service, you know that the financial advisor is going to provide a service in exchange for payment instead of some financial institution lining its pockets with initial and follow-up commissions on the financial products sold to you, which may or may not be entirely adequate.
After the recent financial crisis and exposure to the entire financial system, there has never been a more important time to train and be your own financial advisor. I’m not saying you don’t have a team of financial/tax/legal experts that you can turn to for advice.
Do! However, I am saying, empower yourself and gain knowledge about the financial requirements you have and the strategies, tools, and techniques you’ll need to achieve them. Getting rich and creating wealth beyond mere averages requires you, at least to some extent, to become your own financial advisor.