Keeping your money in line
Seven components of financial planning
Budgeting and taxes
Budgeting is a basic part of personal finance. It forces you to determine your net worth, establish your income, identify your expenses, and consider the impact of taxes. Doing this allows you to organize your expenses and it aids you in avoiding bankruptcy. Budgeting ensures that you will always have money for the things that you need and the things that are important to you.
Liquidity refers to how much readily available cash you have on hand for meeting immediate wants and need. With a good financial plan managing your liquidity will insure that you will not be caught off guard by unexpected expenses. Liquidity management involves both money management and credit management. It is important to take into account not only anticipated or budgeted liquidity needs, but also additional liquidity needs which may arise from unanticipated or surprise events.
Managing your risks
Managing your risks and preventing loss through insurance is key to your long-term finical security. Insurance covers the risks you will take with investing. Planning your insurance is an important component in financial planning. It will help you determine the types and amount of insurances you will need. Insurance is important because it protects a person from extreme unexpected financial loss. Insurance also protects people from financial devastation.
There are several ways to invest your money; stocks, bonds, mutual funds, and real estate. People invest money so that they may make more money. However, the higher your investment the more the risk you take. Investing creates wealth. It is easier to become financially independent when the money is working for you. When you invest money it is not only to have money in the future, but to protect the money you currently have.
Planning for your retirement and the transfer of your wealth
People who retire early are often people who begin planning for retirement while they're young. Starting a retirement fund early will open more options in the future. The earlier a person saves for retirement the less they have to worry about financial problems when they retire. Retirement planning involves determining how much to save for retirement every year and how to invest the money.
Communication and record keeping
Communication about your financial plan with your family is critical. Keeping good records is equally important as making personal financial decisions. It is very important that you not only keep track of your money, but to tell someone what you do with your money in case something were to happen with you.