personal finance

All financial decisions and activities of an individual, this could include budgeting, insurance, savings, investing, debt servicing, mortgages and more. Financial planning generally involves analyzing your current financial position and predicting short-term and long-term needs.It looks at how your money and future is managed. Often individuals will seek advice from financial planners, but the use of software or websites is also an option. For example personal finance would include monitoring your spending, budgeting for an emergency fund, and paying down debt.

Personal finance is the financial management which an individual or a family unit is required to do to obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

The key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and reevaluation. In general, it involves five steps:

1.    Assessment: A person's financial situation is assessed by compiling simplified versions of financial statements including balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses

2.    Goal setting: Having multiple goals is common, including a mix of short term and long term goals. For example, a long-term goal would be to "retire at age 65 with a personal net worth of $1,000, 000," while a short-term goal would be to "save up for a new computer in the next month." Setting financial goals helps to direct financial planning. Goal setting is done with an objective to meet certain financial requirements.

3.   Creating a plan: The financial plan details how to accomplish the goals. It could include, for example, reducing unnecessary expenses, increasing the employment income, or investing in the stock market.

4.      Execution: Execution of a financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.

5.     Monitoring and reassessment: As time passes, the financial plan must be monitored for possible adjustments or reassessments.


FINANCIAL MANAGEMENT

Financial Management means planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to financial resources of the enterprise. It isThe management of the finances of a business / organization in order to achieve financial objectives

 
Scope/Elements

Investment decisions includes investment in fixed assets (called as capital budgeting). Investment in current assets are also a part of investment decisions called as working capital decisions.

Financial decisions - They relate to the raising of finance from various resources which will depend upon decision on type of source, period of financing, cost of financing and the returns thereby.

Dividend decision - The finance manager has to take decision with regards to the net profit distribution. Net profits are generally divided into two:

Dividend for shareholders- Dividend and the rate of it has to be decided.

Retained profits- Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.

 

Objectives of Financial Management

The financial management is generally concerned with procurement, allocation and control of financial resources of a concern. The objectives can be-

•  To ensure regular and adequate supply of funds to the concern.
  

• To ensure adequate returns to the shareholders which will depend upon the earning capacity, market price of the share, expectations of the shareholders.
  

• To ensure optimum funds utilization. Once the funds are procured, they should be utilized in maximum possible way at least cost.
  

• To ensure safety on investment, i.e, funds should be invested in safe ventures so that adequate rate of return can be achieved.
  

• To plan a sound capital structure-There should be sound and fair composition of capital so that a balance is maintained between debt and equity capital.
  

• From the first day of trading, a business should set itself financial objectives.
  

• For a start-up, the relevant financial objective is likely to be focused initially on survival - i.e. not running out of cash. 
  

• After a while (hopefully sooner rather than later) the business aims to breakeven and then start generating a profit. 

Why set financial objectives?  It is quite simply because the performance of a business is traditionally measured in financial terms.

•  Create wealth for the business
  

• Generate cash, and
  

•  Provide an adequate return on investment bearing in mind the risks that the business is taking     and the resources invested
  

    There are three key elements to the process of financial management: 

(1) Financial Planning

Management need to ensure that enough funding is available at the right time to meet the needs of the business. In the short term, funding may be needed to invest in equipment and stocks, pay employees and fund sales made on credit.

In the medium and long term, funding may be required for significant additions to the productive capacity of the business or to make acquisitions.

(2) Financial Control

Financial control is a critically important activity to help the business ensure that the business is meeting its objectives. Financial control addresses questions such as:

• Are assets being used efficiently?
  

•  Are the businesses assets secure?
  

•  Do management act in the best interest of shareholders and in accordance with business rules?
  

(3) Financial Decision-making

The key aspects of financial decision-making relate to investment, financing and dividends:

 Investments must be financed in some way – however there are always financing alternatives that can be considered. For example it is possible to raise finance from selling new shares, borrowing from banks or taking credit from suppliers

 A key financing decision is whether profits earned by the business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growing revenues and profits further.

Internal and external influences on financial objectives The main internal and external influences which are likely to affect the financial objectives include:

Internal Influences

External Influences

Business ownership The nature of business ownership has a significant impact on financial objectives.  A venture capital investor would have quite a different approach to a long-standing family ownership.

Economic conditions As demonstrated by the Credit Crunch.  The economic downturn forced many businesses to reappraise their financial objectives in favour of cost minimisation and maximising cash inflows and balances.

Significant changes in interest rates and exchange rates also have the potential to threaten the achievement of financial targets like ROCE.

Size and status of the business E.g. start-ups and smaller businesses tend to focus on survival, breakeven and cash flow objectives.  Quoted multinational businesses are much more focused on growing shareholder value

Competitors Competitive environment directly affects the achievability of financial objectives.  E.g. cost minimisation may become essential if a competitor is able to grow market share because it is more efficient

Other functional objectives Almost every other functional objective in a business has a financial dimension – which often brings the finance department into conflict with other functions.

Social and political change Often an indirect impact.  E.g. legislation on environmental emissions or waste disposal may force an business to increase investment in some areas, and cut costs in others


Functions of Financial Management:

• Estimation of capital requirements: A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
  

• Determination of capital composition: Once the estimation have been made, the capital structure have to be decided. This involves short- term and long- term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
  

Choice of sources of funds: For additional funds to be procured, a company has many choices like-

• Issue of shares and debentures
  

• Loans to be taken from banks and financial institutions
  

• Public deposits to be drawn like in form of bonds.
  

• Choice of factor will depend on relative merits and demerits of each source and period of financing.
  

Investment of funds: The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.

Disposal of surplus: The net profits decision have to be made by the finance manager. This can be done in two ways:

• Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
  

• Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company.
  

Management of cash: Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintenance of enough stock, purchase of raw materials, etc.

Financial controls: The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.

courtesy: http://www.managementstudyguide.com/financial-management.htm
courtesy: http://www.tutor2u.net/business/accounts/finance_management_intro.htm



SAVINGS VS. SPENDING

Savings can help you achieve any financial goal. Whether it’s a comfortable retirement, a down payment for a house, or a new car or stereo, you can get there by setting money aside. And best of all, you can have what you want without getting bogged down in debt.

Yet if you’re like most people, you don’t save as much as you’d like to. Or you don’t save at all. Americans spend more than we earn. Consider that the national personal savings rate has dipped to the lowest point since the Great Depression. Today’s high energy, home and food prices may make saving seem less possible than ever.

But the time is now. And with a little forethought and effort, saving money is not only possible, it’s easy.

Make Saving a Priority
You’ll be more likely to save money if you make it a priority. Sit down and figure out what you’d like to save money for – retirement, a house, car, college, dream vacation –and how much it will cost. Then make your plan:

• Set a timeline for when you’d like to reach your goal.
  

• Set a schedule by dividing the total goal amount by the number of weeks, months or pay periods between now and your goal date.
  

• Be vigilant by treating your savings contribution just like any other must-pay expense, such as rent or groceries.
  

Find Money to Save
While it may seem difficult sometimes just to make ends meet, chances are you have extra money you didn’t even know about. Here are some ways to find it:

• Keep track of everything you spend for a week. You might be surprised what you’re buying, and what you can do without.
  

• Make purchases with cash. This can help you stick to a budget and avoid impulse purchases. Simply decide ahead of time how much you want to spend and then set aside that amount in cash before you go shopping.
  

•  Lower your bills. Many creditors will give borrowers a lower interest rate if they’re asked. Also, conserving electricity and gas can make a big difference.
  

• Rank your nonessential expenses. Keep the ones you like the best and cut the items on the bottom of the list.
  

• Pack a lunch. Or cook more dinners at home. Eating out at restaurants can eat up a lot of money that could be saved.
  

Pay Yourself First
You're probably inclined to pay everyone else first – whether it’s your landlord or your grocer or the electric company. But it’s vital to start paying yourself first by saving money. Once you’ve made a contribution to your financial longevity and well-being, then you can divide up your money to cover everything else. Don’t worry. You'll more than likely have plenty left over to cover everything you need.

In fact, most banks make this easier. You can have them automatically transfer funds from your checking account to your savings account, money market, mutual fund and other accounts. You might also check with your employer. Companies will often deduct savings from paychecks if asked.

The Spenders  

In an early experiment on children, commonly called the marshmallow experiment of the ’60s, researchers at Stanford presented nursery school children with a tray of goodies that contained marshmallows, pretzels, and cookies. Researchers told the kids to select one treat, and that if they ate it immediately, they wouldn’t receive any more, but if they waited only a few minutes, they’d receive another one. If they could delay their gratification for a few moments, they’d double their candy. They observed the children until they were adults and learned that the ones who were able to delay their gratification achieved much more success in life than the ones who wanted instant gratification.

If you’re a spender, you can’t delay the gratification. With cash in front of you, just like the marshmallow, you can’t resist the urge to have it right now even if you’d have more later. That’s why you don’t have much savings in the bank, but it doesn’t bother you. You’ve been happy making purchases and enjoying them in the moment. It’s worked out well enough for long enough, so you just stick with the habit. But if you’ve realized that you’re trending toward extreme spending, then you’re probably looking to kick or curb your habit.

These seven ways to calm your impulses will help you cut back on spending:

1.      Never use credit cards or other lines of credit. By using cash, you force yourself to consider just how much you’re spending.

2.      Withdraw cash from your bank account yourself, so that you can see the dwindling balance.

3.      Pay as you go. Don’t run a tab at a bar, and don’t pay everything up front for a romantic weekend getaway. Pay for everything as it comes, and you’ll better understand how all that money just “gets away from you.”

4.      Be vocal about your savings goals. If you tell close friends and family how much you intend to save and by what date, they’ll hold you accountable. You can even use personal goal setting tools like stickK to put money on the line to achieve your long-term financial goals.

5.      Reward yourself when you meet your savings goals, but only by spending a responsible percentage of what you saved. This can help prevent frugal fatigue.

6.      Stop and ask yourself before each and every purchase whether or not you truly need the item. Know the difference between needs and wants.

7.      Look at the future, no matter how uncomfortable it is. Ask yourself questions like how much money you’ll need to retire, or how you’ll pay for your child’s college education.

   

The Savers

In another famous experiment, adults had the choice of receiving $50 immediately or waiting a year and receiving $100. Most participants surprised researchers by taking the $50. The instant gratification appeared more valuable than doubling the earnings after a delay. Savers are the rare ones who sacrifice plenty of gratification to make sure to get the full $100 when it’s available.

Sometimes you’ll go without things that you really need, like good medical care through a health insurance policy or a warm coat, because money in the bank is more satisfying than anything you could ever buy. You rarely carry a credit card balance, and even on an average salary, you astound others with the huge nest egg that you’ve built up over the years, while they took just one marshmallow and the instant $50.

While many people take pleasure in buying things, savers don’t feel that same way. Instead, you’re uncomfortable with shopping, and you feel real emotional pain when you’re paying. But what makes you tick and brings you pleasure as a saver? Are you missing out on some of life’s simple, inexpensive joys? Are you sacrificing too much and endangering your health?

Researchers explain that two primary motivators drive savers: pain and pleasure. And if you’re not experiencing enough pleasure, you deserve to loosen the pursestrings and enjoy spending just a little bit.

When it’s time for something pleasurable, like a vacation, distance yourself by paying with a credit card. You’ve already set your budget and you have the cash to cover it, so now you can take your mind off of the expense and relax.

Be vocal about your spending goals. When you’re planning to make an exciting purchase, even if it sounds like a boring necessity, tell everyone you know and set a date to close the deal.

Treat your purchases as a reward for something that you’ve done well, so they’ll take on more value in your mind.

Think of your future: Do you really want to have regrets over the things you didn’t do because you wouldn’t spend some money on enjoyment?

courtesy: http://www.moneycrashers.com/psychology-of-money-saving-spending-habits/

Born to Spend (or Save): It’s All in Your Genes When it comes to personal spending and saving habits, it's all in the genes, a new study says. Is it true that we really can't help ourselves?

Now I get it. We can’t help ourselves. When it comes to spending and saving, we are genetically wired to be what we are, and there isn’t a lot anyone can do about it, according to a study by Stephan Siegel at the University of Washington and Henrik Cronqvist at Claremont McKenna College. The two scholars looked at the money habits of 15,000 sets of Swedish twins and found the same patterns in even those who had lost contact with one another.

Some of us naturally squeeze every penny; the rest of us can’t leave the mall with more than the lint in our pockets. That’s just the way we are.

But genetics do not tell the whole story, the researchers concede. Parenting and life experiences have an impact, especially on the saving and spending habits of young people. Still, by the age of 40, the authors assert, learned money behaviors recede and habits are almost fully governed by a person’s genetic predispositions.

“Parenting effects on savings behavior are strong for those in their twenties but decay to zero by middle age,” the authors write. “Parents do not have a lifelong non-genetic impact on their children’s savings.” As reported on advisorone.com:

“There is overwhelming evidence across the board that the genes matter and that between one-third and 50% of our behavior is determined by our genes,” Siegel says. “As such, it seems that it would be counterintuitive to try to change a spending or saving behavior, since it’s determined to such a great extent by genetics.”

The report says that any serious overhaul of an individual’s financial behavior may not only be difficult, but also pointless.

“A person might be better off if they can do what’s innate to them—like if they’re a big spender, then they’re probably better off spending and having less in retirement, than being forced to save and go against what’s natural,” Siegel says. “So long as people don’t become dependent on the state — and this is what policymakers are trying to make sure doesn’t happen — a person might have better utility if they are allowed to do what they want to do, rather than being forced to do something that is against what is innate in them.”

When it comes to innate savers, I hope this is all true because most of us come from households that set a bad example, financially speaking. How else can you explain $16 trillion of personal debt? We don’t need to change the savers; we need to encourage them.

But we do need to change the spenders, and despite this bit of dismal science it can be done. This is what the global financial literacy movement is all about. This is what is behind the push for personal financial education in schools. Get to people early and at least some will form good habits that last.

Even the authors say that genetics, while the dominant influence, is not the only influence on our money habits. They also point out – and this is critical – that society can tolerate innate spenders only as long as they are able to pay their way. For obvious reasons, many end up needing public assistance.

So, it seems, many spenders must either change against their nature or have change forced upon them. We no longer have the resources to indulge what comes natural.

courtesy:http://business.time.com/2011/10/06/born-to-spend-or-save-its-all-in-your-genes/




PIGGY BANK SAVINGS VS. INVESTMENTS

Piggy Bank Savings
Most people are probably more concerned with how much money is saved in their piggy bank rather than wondering why exactly we save our spare coins in pig-shaped containers. But how did those containers get that shape?

Containers for storing coins, known as moneyboxes or coin banks, have been used for centuries. To encourage saving, a small slit was placed on the top of these so that coins could enter but not exit. Because the only way to get the coins out was by breaking the container, they were mostly made of cheap materials. Eventually, these simple containers evolved into piggy banks.

Early piggy banks are hardly ever found—they were shattered in order to retrieve the saved coins—which has made it difficult to study their beginnings. Still, a couple of theories exist regarding the origins of the piggy bank.



'INVESTMENT' 
An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

'INVESTMENT' The building of a factory used to produce goods and the investment one makes by going to college or university are both examples of investments in the economic sense.

In the financial sense investments include the purchase of bonds, stocks or real estate property.

Be sure not to get 'making an investment' and 'speculating' confused. Investing usually involves the creation of wealth whereas speculating is often a zero-sum game; wealth is not created. Although speculators are often making informed decisions, speculation cannot usually be categorized as traditional investing

courtesy:http://www.investopedia.com/terms/i/investment.aspL