Personal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan.
The main areas of personal finance are income, spending, saving, investing, and protection.
Income
Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their family. It is the starting point for our financial planning process.
Spending
Common sources of income are: Salaries, Bonuses, Hourly wages, Pensions, Dividends. These sources of income all generate cash that an individual can use to either spend, save, or invest. In this sense, income can be thought of as the first step in our personal finance roadmap. Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (i.e., not an investment). All spending falls into two categories: cash (paid for with cash on hand) and credit (paid for by borrowing money). The majority of most people’s income is allocated to spending.
Common sources of spending are: Rent, Mortgage payments, taxes, food, entertainment, travel, credit card payments ect.
The expenses listed above all reduce the amount of cash an individual has available for saving and investing. If expenses are greater than income, the individual has a deficit. Managing expenses is just as important as generating income, and typically people have more control over their discretionary expenses than their income. Good spending habits are critical for good personal finance management.
Saving
Saving refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings or investments. Managing savings is a critical area of personal finance.
Common forms of savings include: Physical cash, Savings bank account, Checking bank account. Most people keep at least some savings to manage their cash flow and the short-term difference between their income and expenses. Having too many savings, however, can actually be viewed as a bad thing since it earns little to no return compared to investments.
Investing
Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back more money than they originally invested. Investing carries risk, and not all assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return.
Common forms of investing include: Stocks, Bonds, Mutual funds, Real estate, Private. Investing is the most complicated area of personal finance and is one of the areas where people get the most professional advice. There are vast differences in risk and reward between different investments, and most people seek help with this area of their financial plan.
Protection
Personal protection refers to a wide range of products that can be used to guard against an unforeseen and adverse event. Common protection products include: Life insurance, Health insurance, estate planning etc. 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 analysis that needs to be done to properly assess an individual’s insurance and estate planning needs.
The Personal Finance Planning Process – Good financial management comes down to having a solid plan and sticking to it. All of the above areas of personal finance can be wrapped into a budget or a formal financial plan. These plans are commonly prepared by personal bankers and investment advisors who work with their clients to understand their needs and goals and develop an appropriate course of action.
Personal Loans
Personal loans help households meet any shortfall they experience in buying a house or a car, in children’s higher education, or even in cases of medical contingencies, among other things. Here’s a low down on personal loans to understand them better. It is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc. Unlike a home or a car loan, a personal loan is not secured against any asset. As it is unsecured and the borrower does not put up collateral like gold or property to avail it, the lender, in case of a default, cannot auction anything you own.
Education Loan
Education loans are unsecured loans that can be used to cover expenses related to education, such as tuition fees, books, living expenses and other such expenses as transportation costs, etc. If you wish to avail an education loan but are unemployed or still studying, a co-signer may be required to avail an education loan, like an eligible adult such as a friend, parent or relative. The repayment of the loan can be done once the student has completed his/her education. Given the flexible terms and conditions associated with the repayment of an education loan, availing one is fairly simple and straightforward. there are two wide categories of the education loans on the basis of location.
Domestic Education Loan
For educational courses within the geographical limits of the country. The borrowers have to meet various eligibility criteria and the
lenders will approve the loan if the student has got a secured seat in an institute that meets the requirements of the lenders.
Study Abroad Education Loan
For educational courses outside the geographical boundaries of the country. Like a domestic education loan, the borrower should get a secured seat in a college or university among the list of eligible educational institutions to approve the loan.
Car Loan:
Owning a car was once a luxurious commodity to have. But in today’s economically developing world, a car is a necessity and convenience to travel from one corner of the ever-expanding city to the other.
Though everybody may not have enough cash to purchase the car with a lump-sum payment, numerous lenders can help you realise your dream of buying the car through a car loan. Applying for a car loan is now hassle-free, easy, and paperless. The financing can go up to 85%-90% of the on-road price of the car. Some banks offer up to 100% financing on the vehicle’s on-road price to certain conditions. The loan tenure can range from one year up to seven years.
The loan amount can be up to three times the annual income of the applicant. Some lenders offer instant financing facilities for cars.
Home Loan:
As the name suggests, a home loan is the amount of money an individual borrow from banks or other financial institutions after meeting certain loan eligibility criteria to purchase a residential or commercial property. The money borrowed has to be paid back to the lender in easy monthly installments (EMI) at a particular rate of interest. There are many banks and financial institutions that offer loans to help you buy or construct your dream home. Loans are also available for renovation or extension purposes.