Personal Financial Planning — The Scope
So far, we have defined personal financial planning and management and discussed its benefits and challenges. We will take up its scope today. The scope of personal financial planning and management refers to the broad activities that the subject covers. Generally speaking, these are the fundamental areas related to the economic welfare of a person […]
retirement plans
So far, we have defined personal financial planning and management and discussed its benefits and challenges. We will take up its scope today.
The scope of personal financial planning and management refers to the broad activities that the subject covers. Generally speaking, these are the fundamental areas related to the economic welfare of a person and/or a family. These are understood to include the following:
Revenues and Income: The starting point in personal financial planning and management is the revenues and income that the individual or family makes. Revenues refer to the gross amount of money that accrues to the individual or family over a period of time. In business, this is usually the same as the sales generated. On the other hand, income refers to the net profit made by a business after all appropriate charges are taken out. Basically, therefore, income is revenue less total expenses.
At the individual level, revenue is the sum of all monetary inflows the person or family receives or rightly expects to receive over a period. An annual revenue might therefore include such streams as the total monthly salary they receive plus the rents and dividends received over the year. Interestingly, however, unlike for a corporation or business entities in general, the line between revenue and income for the individual is blurred. This is because the total revenues available to the individual to be applied directly for their personal or family purposes such as buying groceries for the month, making housing loan repayments, etc. is equally considered income to the individual or family! In the end, at the personal level, therefore, the net of revenues over expenses would be more of ‘surplus’ available rather than as an ‘income’ in the way a business would think of and treat it.
Expense: Revenues and incomes at the personal level, as in businesses, will typically be applied towards covering day-to-day as well as long term personal needs. To what use these revenues and incomes are applied will determine whether we classify them as expenses, savings or investments. So for our purposes, we can define the purchase of monthly groceries as an expense. This is also termed as spending and represents an outflow of money that came in as revenues or incomes. Managing spending and expenses is a critical aspect of personal financial planning. This is because how wise, effectively and efficiently we spend will have a significant bearing on what we are able to save and invest.
Savings: I think we can look at savings from two perspectives. First is that it is the surplus of revenues and incomes after spending on groceries, telephone expenses, etc. The more surplus we have over our spendings, the more savings we have succeeded in making. We can also see savings as that cash and bank balance we may keep for whatever reason.
Generally speaking, we need to have a surplus from our revenues and incomes over and above our spending. However, the purpose of and what we do with the surplus is another matter and which we will discuss over the coming weeks.
Investments: One of the options we have to which we can put our surpluses is in making investments. Investment refers to the purchase of assets such as real estate, stocks, bonds, etc. with the aim of earning a return. The returns we make on investments could be by way of earning a profit from an ethical fund, dividends from shares, or plain capital appreciation over some period.
Whilst savings might be a good way to begin to build personal financial discipline that will make it possible to also begin to make investments, it is also possible to make leveraged investments, meaning making investments with borrowed funds. But making successful investments requires knowledge and understanding of the assets you are investing in, the local and global economic dynamics, risk management, etc.
Personal and Assets Protection: A key component of everything around personal financial planning and management is personal and assets protection. Personal protection refers to how you protect yourself and your family from avoidable financial and personal risks. These will include ensuring you take on financial risks that you are comfortable with and which you can manage. It can also include ensuring that you have necessary covers such as health insurances. Similarly, you will need to provide protection to your assets such as through fire, burglary and special perils insurance, etc.
Regulatory compliance: As members of our respective communities and citizens of our nations, we need to ensure that we comply with all regulations around our personal finances. It doesn’t matter whether we are employees in some public organisation or we are running our businesses. Being on the right of the law is imperative and has benefits that we will discuss. Financial compliance may include ensuring that we pay our personal income taxes
Retirement Planning, Legacy Management and Estate Planning: Other important components of personal financial planning and management are retirement planning, legacy management and estate planning. Retirement planning is about planning well and ahead towards retirement of the individual and family in line with their aspirations; Legacy management is about planning and working towards a desired legacy that the individual and their family may wish to leave behind. Estate planning is about ensuring that we make necessary arrangements for the use to which our assets would be put after our passage.