Unit: 1 Introduction

Subject: PFIM
Class: TYBBA (General) (Sem-5)
College: SIBMT
Points Covered:
Concept
Meaning
Importance of Personal Finance
Objectives of Personal Finance
Financial Planning and Budgeting Process
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INTRODUCTION:

Every woman is doing cash budgeting or capital expenditure in her lifetime and every man is doing
business or investment in his life. Still there is a lack of awareness about personal financial
management. Even if there is some awareness, there is a lack of will to follow the personal financial
management process. Because of this, people might fail to take better and efficient personal financial
decisions. Financial illiteracy is impacting financial decision making.

Finance is an integral part of everyone’s life and financial principles are based on pure and simple
common sense. The ability to take financially intelligent decisions is financial management. Financial
management is the ability to understand the impact of every financial decision on net worth and to
ensure that all those actions should be undertaken that will strengthen it and do nothing that weakens
it.

Managing personal finances is essential to one’s financial wellbeing. Money management is a critical
function in self-management. It aims to give the power and the knowledge to take control of the
money. It provides the means to keep track of personal expenses, personal debt and subsequently
helps in calculation and enhancement of personal net worth.

WHAT IS PERSONAL FINANCE?

1) 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. This guide will analyze the
most common and important aspects of individual financial management.
2) When we talk about personal finance, the term is usually used to refer to the financial
management of an individual or a family’s resources. It comprises of how you manage your
money through expenditure, investments, and savings, considering various life events and risks.

IMPORTANCE OF PERSONAL FINANCE

1) Ensures That You Meet Your Money Needs: What we must understand is that money issues go
beyond what most of us think about. We should think of our finances in a much broader
perspective. This way, we will think beyond just going to work and making money.
We should have a plan that establishes how much our income is, what are our expenses, what
plans we have, as well as our financial future goals. This way, you will think beyond just working
to earn money.
✓ How to create and stick to a budget
✓ Timely payment of bills
✓ Managing loans
✓ Net Income vs. Gross
✓ Saving for your retirement
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✓ Time value of money

✓ Credit cards and credit scores
✓ Inflation and more

When you possess the proper personal financial knowledge and skills, it gives you an advantage
when facing financial challenges, opportunities, and responsibilities that will come your way.

2) Easily Manage Your Income: If you do not plan for your income, you will end up overspending
or spending on unnecessary items. With a proper financial plan, you will be able to manage your
income effectively.
Being able to manage your income will help you to know which expenses to handle first and
which ones come later. Also, you can effectively know how much is necessary for tax payments,
savings, or clear your monthly bills.
I like using a tool like trim for completely free, which will automatically analyze my bank
accounts to determine where I should “trim” expenses. Think of Trim as a personal assistant that
will find subscriptions, high cable bills and more to find opportunities for you to save money.
3) Budgeting, Spending, and Saving: Even if you earn a $200,000 salary every month, you can still
be living in huge debts if you don’t plan for that income. This is because you may be spending
much more than you are earning, sometimes without your knowledge.
4) Personal Finance and Cash Flow: Another reason why personal finance is essential is that it can
help you to increase your cash flow. When you keep track of your expenditures and your spending
patterns, you can easily be able to increase your cash flows.
Thing helps you to grow your cash flow include:
✓ Tax planning,
✓ Prudent spending and
✓ Careful budgeting
5) Offering Family Security: Financial security for you and your family is something that most
people long for. Everyone wants to know that they can cater to the money needs of their family,
whether the economy is failing or not.
No one wants to think of their families suffering due to a lack of money, especially when they are
not around to help. And for this reason, everyone is struggling to make sure that they earn enough
money that can offer them a sense of security.
6) Offers Better Financial Understanding: Yet another importance of personal finance in life is
providing a better understanding of your finances. It is possible to achieve a better understanding
of your finances, when you put in place measurable goals, understand the effects of your
decisions, as well as review the results of such.

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7) Keeps you off Unmanageable Debts: Having a few debts is not a problem. Being overly in debt,
however, is dangerous to your future finances. It’s vital to be able to manage one’s debts in a way
that guarantees no harm is done to your future’s financial stability. If you want to grow your wealth
quickly, you must know how to manage your debts. That is why personal finance is critical to ensure
that this happens.
8) Growing Your Assets: Owning assets as a form of the financial cushion is always a desire for
many people. However, many assets will come attached with some liabilities. This makes it very
important to have adequate knowledge of your finances. One must be able to determine the real value
of a specific asset. Knowing how to cancel or settle liabilities only comes through understanding your
finances and this only possible through personal finance. This way, you will be able to grow your
assets, being sure that they will not turn out to be a financial burden in the future.
9) Raising Your Standards of Living: Another importance of financial planning is helping you to
increase your living standards. But how does personal finance help you to do this? Well, the more
you plan for your finances, the more your savings will be. This means that instead of more money
going to unplanned expenses, more will be saved. Higher savings can help to cushion you during
financially challenging times.
Conclusion: Trying to understand your finances is one step to having a stable financial future. And,
although some will still not make a change until they are too deep in financial crisis, I hope that you
won’t be one of those who will always ask, “Why is personal finance important?” after this article.
Make a change now, and impact your future finances.
OBJECTIVES OF PERSONAL FINANCE:
Types of Financial Goals/Objectives
Examples of smart financial goals will depend on your situation. You might want to save a few
hundred for a new tablet or laptop, or a few thousand to buy a used car. In general, there are three
types of financial goals:
Short-Term Financial Goals
Short-term financial goals can be met in a year. Examples of short-term goals include vacations, small
home improvements, and electronics like televisions and laptops.
Mid-Term Financial Goals
Accomplishing something within the next five years is a mid-term financial goal. Setting goals like
this might involve more planning and preparation. Examples of mid-term financial goals include
improving credit scores, saving for a car payment, installing a pool or paying off a credit card.
Long-Term Financial Goals

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A long-term financial goal would take longer than five years to accomplish. Examples of goals that
you’ll work toward over a number of years include purchasing a house, saving for retirement, or
starting a college savings account for your children.

Some of the Goals of Personal Finance are as follows-

1) Organize Student Loans: If you have student loans, make sure you know the repayment schedule
and come up with a plan for paying them off as quickly as possible. The National Student Loan
Data System (NSLDS) is a great way to retrieve and track your loan information. Whenever you
move, provide your lenders with change of address information. Remember, you are required to
make payments whether you receive a bill for repayment or not.
2) Putting aside for a Rainy Day: Financial experts recommend having an emergency savings
account that will cover at least three months’ worth of living expense. If you're on a tight budget
you may think you don't have much money to spare, but moving as little as 2 percent of your
income into an emergency savings account each month will help you build a safety cushion and
avoid debt when you're hit with surprise expenses like car repairs, home repairs and medical bills.
Having a savings account helps you cover these unplanned events without amassing credit card
debt.
3) Saving for Fun: It's important to separate your financial assets if you want to make sure you use
the money for its intended purposes. Aside from an emergency fund, you should also consider a
savings account that sets aside money for vacations or other recreational activities. Again,

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planning ahead when you want to have a vacation helps you avoid overusing your credit card and
paying more in interest in the long run.
4) Investment Income: Once you’ve saved an emergency fund, try to find some extra cash to invest
in stocks, bonds, real estate, or other growth investments. If you’re willing to accept some
financial risk, stock investments can be very profitable over the long run. Just make sure you do
your homework and understand how the stock market works and the fees and commissions you’ll
need to pay on your investments.
5) Long-Term or Retirement Savings: Young people sometimes focus more on short-term financial
goals because long-term retirement planning seems too distant to worry about. Start your
retirement savings and investments early to give yourself a much better quality of life when you
get older. You may have a 401(k) or other retirement accounts through work. You can often set
up additional tax-free retirement accounts through a bank or financial services company.
Investing directly in stocks and other long-term investments is another option.
6) To Ensure Availability of Funds Whenever Required: The main object of financial planning is
that sufficient funds should be available in the company for different purposes such as the
purchase of long-term assets, to meet day-to-day expenses, etc. It ensures the timely availability
of finance.
7) To See That Firm Does Not Raise Resources Unnecessarily: Excess funding is as bad as
inadequate or shortage of funds. If there is surplus money, financial planning must invest it in the
best possible manner. As keeping financer resources ideal is a great loss for an organization.
8) Pay off debt: Smart Personal finance helps to develop strategies for budgeting and to reserve the
fund for paying off the debts.
9) Enjoying financial freedom: Financial freedom is having enough residual income to cover living
expenses. Personal finance management helps to have enough money to cover expenses and to
spend on your preferences.

PERSONAL FINANCE PLANNING

The phases of the personal-finance planning process are listed below:

1. Assess Current Financial Situation
In this step, the financial situation of the family or personal nucleus must be analyzed, identifying the
sources of income and all the expenses that are counted, as well as the savings and in general the
patrimony.
Based on this, a result of the monetary balance is obtained, this result provides the necessary clarity
regarding the available financial resources.
2. Determine financial Goals

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The objective or goal is chosen, taking into account the previously calculated financial situation, this
objective must be punctual and realistic, since, also, the factors that may hinder or optimize said
objective, increases, sudden layoffs, illnesses, extraordinary events, bonuses, among others.
For example, an individual wishes to increase his annual income by 10% or reduce his expenses by
40%, he must take into account all the factors that have the strength to intervene in said objective.
Setting up objectives according to the preferences is necessary for deciding in which direction the
next step should be placed, or where an individual should move forward in future.
3. Identify Priorities
By making a list of priorities, the processes that are being carried out are identified and found. In this
analysis, it should be taken into account that these processes must have quantifiable characteristics if
you want to make optimal use of personal finances.
For example, a car entails a certain periodic gasoline expense, a periodic maintenance expense, a
certain tax expense, however, it could also generate some savings compared to the use of other types
of transport, these variables must be measured and compared to make the best decision.
Likewise, the payment of other expenses such as apartment rent and utility bills should also be
considered.
4. Determine a Time Period
Based on the established objective, it is important to define a period of time in which these goals will
be developed. In this process, it must be taken into account if the objective is planned to be executed
in a short, medium, or long period since this will be relevant in the subsequent planning stage.
5. Methodical Strategy/ Determining all courses of actions:
In this step, the previously identified information is taken into account, and based on this, the most
appropriate strategy to execute is designed. To design this strategy, the individual must study all the
information present very well, since, in it, there are key and highly considered tools so that the plan
provides the best possible results.
Pinpointing the required plan and process should be captured in the current scenario and analysing the
time-frame work, expenses, and opportunities interconnected with each and every individual subject
of actions.
6. Execution
In this stage, the execution of the strategy carried out previously is carried out. This execution must be
supervised and monitored, since, if an altercation occurs, the subject will be able to act in time,
intervening in a timely manner in the face of said inconvenience. It is a high time to seize an action,
making the investments and performing the conventionalities.
7. Analysis of the Result
The last step of the planning is to analyze the result obtained in the previous execution process, in
areas of determining the strategies to maintain or improve the process. The necessary step is to follow

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up. Since the conditions are altering elementary and in the terms of changing environment, one should
be dynamic adequately and should analyze the actions from time to time in order to obtain the best
results.

BUDGETING PROCESS
WHAT IS A BUDGET?
A budget is a document business use to track income and expenses in a detailed enough way
to make operational decisions.
Budgets are typically forward-looking in nature. Income is based on projections and
estimates for the periods they cover, as are expenses. For this reason, organizations often
create both short- (monthly or quarterly) and long-term (annual) budgets, where the short-
term budget is regularly adjusted to ensure the long-term budget stays on track.
1. Understand Your Organization’s Goals
Before you compile your budget, it is important to have a firm understanding of the goals
your organization is working toward in the period covered by it. By understanding those
goals, you can prepare a budget that aligns with and facilitates them.
For example, consider a business that regularly experiences year-over-year revenue growth
that is offset by rising expenses. That organization might benefit from focusing efforts on
better controlling expenses during the budgeting process.
Alternatively, consider a company launching a new product or service. The company may
invest more heavily in the fledgling business line to grow it. With this goal, the company may
need to trim expenses or growth initiatives elsewhere in its budget.
2. Estimate Your Income for the Period Covered by the Budget
To allocate funds for business expenses, you first need to determine your income and cash
flow for the period to the best of your ability.
Depending on the nature of your organization, this can be a simple or complicated process.
For example, a business that sells products or services to known clients locked in with
contracts will likely have an easier time estimating income than a business that depends on
active sales activity. In the second case, it would be important to reference historical sales
and marketing data to understand whether the market is changing in a way that might cause
you to miss or exceed historical trends.

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3. Identify Your Expenses

Once you understand your projected income for the period, you need to estimate your
expenses. This process involves three main categories: fixed costs, variable expenses, and
one-time expenses.
Fixed costs are any expenses that remain constant over time and do not dramatically vary
from week to week or month to month. In many cases, those expenses are locked in by some
form of contract, making it easy to anticipate and account for them. This category usually
includes expenses related to overhead, such as rent payments and utilities. Phone, data, and
software subscriptions can also fall into this category, along with debt payments. Any
expense that is regular and expected should be included.
4. Determine Your Budget Surplus or Deficit
After you have accounted for all your income and expenses, you can apply them to your
budget. This is where you determine whether you have enough projected income to cover all
your expenses.
If you have more than enough income to cover your expenses, you have a budget surplus.
Knowing this, you should determine how to use additional funds best. You may, for example,
move the money into a rainy-day fund you can access should your actual income fall short of
projections. Alternatively, you may deploy the funds to grow your business.

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Class: TYBBA (General) Sem-V Subject: PFIM