Thursday, August 21, 2014

7 Objectives of Personal Finance

Financial News

The goal of personal finance is financial freedom. There are 7 objectives to achieve this goal:

1.      Income: Your earning power is limited by what you can do with the ideas and skills you have. There are also other factors that contribute to the amount that you can earn. Among other things, luck plays an important role. Money may not bring you happiness but without money, you cannot survive. You can try to make more money but the point is that money is one of the scarce resources. This brings us to the next point.   

2.      Expenses: Your lifestyle is determined and limited by your financial resources. It does not matter how much you earn, if you don’t live within your means, you will incur debt and end up bankrupt.  The objective here is to spend less than what you can earn so that you can achieve your next objective.    

3.      Savings:  The objective of saving money serves many purposes. Having an emergency fund is on top of the list. You need an amount sufficient to meet unforeseen circumstances such as getting retrenched or meeting an exceptional expense like a major repair to your plumbing system. It is also prudent to save enough for a big-ticket item or an overseas trip.  Needless to say, you need to save for down payments to purchase your dream house and your dream car. One important objective of savings is to accumulate and build an investment fund.  

4.      Investment: The objective of investing is to grow your wealth to serve two important purposes. You need money for your children’s education and for your own retirement. The investment provides a source of passive income when you are no longer working to earn a living. It is all so well and good but life is full of unexpected events. That is the objective of the next topic.

5.      Insurance protection: Accidents do happen. You may suffer from one of the lifestyle decreases because your life is so stressful that your body cannot cope with it anymore. You need a life policy to compensate for your earning capability when you are disabled because of an accident or a critical illness. You also need insurance protection for your assets like your home and your car against unforeseen perils.
        
6.      Estate planning: When you are alive, you are there to manage your wealth, but you are not going to live forever. The objective of estate planning is to take care of your wealth when you are no longer around.  Drawing up a will is the sensible thing to do and a hassle-free way to distribute your wealth to your loved ones.   

7.      Constant monitoring: Life can present opportunities for you to earn more; you have to be prepared and ready for it. On the other hand, you have to control your spending and avoid overspending and getting into debt. You have to closely monitor your investment to meet the changing environment for the purpose of wealth preservation. You may also need to rewrite your will to reflect the current situation. Personal financial management is not a one-off thing; review your financial standing periodically. 

Conclusion

You can be financially independent when you achieve the seven objectives. 

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