Lesson: Managing Personal Finance

At the end of this lesson, you will able to:

1. Define Personal Finance
2. enumerate money management philosophies;
3. illustrate the money management cycle and gives examples of sound practices in earning,
spending, saving, and investing money.

Personal Finance covers all financial activities and decisions of individuals and households,
which involve budgeting, insurance, mortgage, savings and investments, planning for
unexpected events that are not covered by insurance and retirement. Throughout this book, it
was mentioned in more than one occasion that the way firms manage their finances is not much
different from what individuals do in order to make sure that their financial needs are met and that
financial goals are achieved.

The ultimate goal of

personal finance is for one to
gain financial success. How
do you define financial
success? Is it having millions
in your bank account and
other types of investments? Is
financial success owning a
beautiful house in a posh
neighborhood? Is it driving
luxury cars and travelling from
one country to another to relax?

The concept of Figure 1 https://moneyanswers.com/money-blog/6-steps-to-getting-control-of-your-personal-

finance/
financial success varies from
one individuals to another. Financial success is defined in many ways. From daily conversations,
you will hear people consider financial success as not having to borrow money and having even a
small amount of savings. Some people set higher stands before they consider themselves
financially successful – for instance, having a stable, good – paying job; owing a house and a car;
and being able to travel.

Given that financial goals vary, financial success may be defined as the achievement of
one’s financial goals. It is also important for someone to live his or her life according to what he or
she values to be important. For instance, if a father values being able to spend quality time with his
family, he may not consider himself financially successful if he has to work all the time, keeping
him away his loved ones. If one likes to travel and is unable to do so, the definition of financial
success may also vary even if there is money set aside for another needs.

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 Personal finance is a factor of one’s earning, lifestyle, and living requirements, as well as
his or her goals and objectives. In comparison with corporate finance, personal finance
encompasses the following aspects:

1. Setting one’s personal financial goals and objectives. Goals can either be short, medium
or long term. Nonetheless, individuals and households need to be clear on what to
achieve in terms of their finances.

2. Purchase of insurance coverage from reputable insurance provider. Individuals and

households also face many types of risks every day. And it is important for people to be
protected from those risks. If in number 1 goals and objectives were set, the point now is
that risk is the chance that something would happen and it will be a hurdle to the
attainment of any those goals and objectives.
3. Assessing one’s current financial position. Knowing one’s financial position is helpful in
determining the next steps to take in order to achieve goals and objectives. What is
one’s cash flow situation? If someone is in debt, for instance, then the first step would
be to start paying off those debts, even bit by bit, before one should start saving money.

4. Savings and insurance. When it is time to save, it is always best for an individual to seek
advice. Professional advice be expensive but there are other people who might be able
to give an individual some guidance on what financial assets to purchase.

5. Retirement Planning. A retirement goal is one of the most important components of an

individual’s long – term financial plans. When planning for retirement, the first
consideration should be to anticipate the kind of lifestyle an individual wants for himself
or herself upon retirement.

Areas of Personal Finance

The main areas of personal finance are income, spending, saving, investing, and protection.
Each of these areas will be examined in more
detail below.
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.

Common sources of income are:

• Salaries
• Bonuses
• Hourly wages
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• Pensions
• Dividends

These sources of income all generate cash that an individual can use to either spend, save,
or invest.
Figure 2 https://www.freepik.com/photos/income-increase

Spending
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 Figure 3 https://blog.bankbazaar.com/how-you-end-up-spending-more-money-than-
to spending. needed-at-grocery-stores/

Common sources of spending are:

• Rent
• Mortgage payments
• Taxes
• Food
• Entertainment
• Travel
• Credit card payments
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.

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Figure 4 https://thesocialmediamonthly.com/startup-can-save-money/saving-
money-image-1/
 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.

Common forms of savings include:

• Physical cash
• Savings bank account
• Checking bank account
• Money market securities

Most people keep at least some savings to manage their cash flow and the short-term
difference between their income and expenses. Having too much 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 Figure 5 https://www.wealthbuilders.org/2017/06/myths-of-investing/
return. This is where we see
the relationship between risk and return.

Common forms of investing include:

• Stocks
• Bonds
• Mutual funds
• Real estate
• Private companies
• Commodities
• Art

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.

There are 4 kinds of insurance we all need. And these are:

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 • Term insurance:
It is a kind of life insurance that ensures that your family or dependents do not have to go through
financial hardship if you die early. As compared to other health insurance products, the sum
assured for term insurance is higher as against the premium amount. Now if you calculate it
correctly, then you can account for day-to-day expenses of your family, a retirement corpus for
your spouse, cover for your liabilities like – home loan, and children’s education in the sum
assured.

• Health insurance and Critical Illness insurance:

Having health insurance ensures that you do not have to pay from your pocket in case you or any
of your family members have taken ill. Health insurance covers all costs for treatment of the
insured like hospitalization, medication, pre and post hospitalization expenses etc. Meanwhile you
can opt for critical insurance along with your basic health policy. In case you are diagnosed with
one of the critical illnesses mentioned in your policy, the insurance company will pay you the sum
assured.

• Mortgage Protection insurance:

Mortgage protection insurance pays off your mortgage if you die during the term of the mortgage. It
ensures the loan or mortgage for home, car, property etc. does not become a liability for your
family, in case you die early.

• Personal Accidental insurance:

In case you meet with an accident and get seriously injured, or become partially or fully injured, the
insurance company will pay the sum assured to cover the expenses for treatment and also loss of
income. Meanwhile, if you die during the accident, the lump sum amount will be paid to your family.
The payable amount, however, is dependent on the fatality of the accident.
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

This is another area of personal

finance where people typically seek
professional advice and which can Figure 6
become quite complicated. https://www.istockphoto.com/search/2/image?phrase=protection

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 There is a whole series of analysis
that needs to be done to properly assess
an individual’s insurance and estate
planning needs.

Personal Financial Planning

Personal Financial Planning is the

process of managing one’s financial
resources, particularly money, in order to achieve financial goals and in the end achieve personal
economic satisfaction.

A financial plan can help enhance the quality of one’s life. Furthermore, the uncertainty
associated with the future state of resources is reduced, if not totally eliminated. A well – thought –
out financial plan offers the following advantages:

• Effective use of one’s financial resource

• Protection of one’s financial resources all throughout his or her lifetime.
• Secures one’s financial future and independence
• Gives one a sense of freedom from financial worries.
• Gives one more flexibility in making decisions that affect his or her overall quality of life
such as career, education, and non – work – related activities.

Personal financial planning process

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A. Objective Setting
• Quantify monetary objectives with definite time frames.
• Prioritize objectives.
• Examine these objectives with an individual’s resources and limitations.

B. Data gathering
• Use surveys, questionnaires, and interviews to gather quantitative and qualitative information
from
the individual.
• Quantitative – for assessing financial status (i.e. investments, cash flow, liabilities, etc.)
• Qualitative – to identify individual’s goals and objectives, lifestyle, risk-tolerance, etc.

C. Data Analysis
• Analyze the individual’s financial position and cash flows.
Review legal papers (i.e. insurance policies, trust agreements, wills, etc.).
• Evaluate objectives vis-à-vis the individual’s resources and economic conditions.

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D. Financial Plan Recommendation
• Propose financial products.
• At this point, the individual can comment on the proposed solutions.

E. Plan Implementation
• Assist the individual in the execution of the recommended financial plan.
• Implementation may involve other entities so assist the individual in dealing with the parties
involved in the execution of the financial plan.

F. Plan Monitoring
• Review the financial plan periodically to evaluate changing market conditions (i.e. economic
conditions, taxes, interest rates, etc.).
• Evaluate the financial plan regularly to see if it effectively meets the individual’s goals and
objectives.

Six Key Areas of Personal Financial Planning.

financial position adequate protection tax planning

investment and
retirement planning estate planning
accumalation goals

Financial Position

Understanding of personal resources by checking an individual’s net worth and cash flow.
• Net worth = assets less liabilities at a point in time
• Cash flow = expected sources of income less expected expenses within a period (i.e. year)
• Helps in determining the time frame to which personal goals can realistically be met.
• May need to answer the following questions:
• Do they have a clear understanding of their goals?
• How do they track their income, expenses, and net worth?
• What financial benefits do they get from their employer?

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B. Adequate Protection
• Analysis of protection needed for unforeseen risks.
• Includes risks of liability, property, death, disability, health, and long-term care.
• Some insurance plans enjoy some tax benefits.
• May need to answer the following questions:
• What things can they not afford to lose?
• How will they take care of their dependents?
• How have they planned for financial risks such as disability, illness, long-term care, and death?

C. Tax Planning
• Management of when and how much taxes will be paid.
• Understanding possible tax incentives, deductions, rebates, etc. can have a significant impact on
managing personal finances given the magnitude of taxes paid by an individual.
• May need to answer the following questions:
• How do they manage their taxes?
• How do they plan the timing of income and deductions for tax purposes?
• Are they comfortable with the tax environment applicable to them?

D. Investment and Accumulation Goals

• Planning on wealth accumulation for large purchases such as house, educational expenses,
investments for retirement, etc.
• May need to answer the following questions:
• What are their goals for wealth accumulation? (i.e. education, home, business, retirement
comfort, etc.)
• How are their current investments performing to meet their goals?
• How much will they need? When will they need it?

Retirement Planning
• Understanding the cost of retirement.
• Analysis of cash flows to come up with investment plans that will meet the costs of retirement in
the future.
• May need to answer the following questions:
• How are they preparing for their retirement?
• How are their liabilities affecting their retirement objectives?
• Do they think they can maintain their standard of living during their retirement?

F. Estate Planning
• Planning for disposition of one’s assets after death.
• Estate taxes paid to the government are huge, so avoiding these taxes can significantly impact
one’s personal finances.
• May need to answer the following questions:
• How should their assets be distributed upon death?
• How will their intentions be carried out? (i.e. will, trust, power of attorney, etc.)

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Money
Before an individual
or a household can
efficiently and effectively
manage his or her
personal finances, he or
she needs an
understanding of money.
Imaging a world where
exchange of goods and
services need to take place
but there is no money to be
used. It was actually done
in the past through a
system called barter.
However, today’s
economic system has Figure 7 https://thehungryjpeg.com/product/3581874-watercolor-money-clipart-money-clip-art
become more complicated
with a wider array of goods and services.

There are four major functions of money, and these functions are as follows:
1. The primary function of money is as a medium of exchange. Money is used by people to
facilitate the exchange of goods and services. With the use of money, transaction costs are
reduced.
2. Money is a unit of account. Money denotes prices regardless of where a buyer and seller
are located. In fact, across countries, money serves as a universal unit of account which
allows people to travel, visit other places, and buy goods elsewhere.
3. Money is a store of value. When people keep money for a certain period of time instead of
spending or investing it. People do this because keeping money in their wallets or in some
safety box in the privacy of their homes reduces transaction costs and makes it more
convenient for them.
4. The fourth function of money is as standard of deferred payment. This happens when
people buy something but chooses to pay for it later. Nonetheless, the transaction is still
denominated in money.

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Financial Literacy
First and foremost, it
is imperative for an
individual to start learning
about finances as early as
possible. It is important for
people to be financially
literate. Financial literacy is a
person’s ability to
understand finances, as well
as understanding of the risks
and potential rewards of
financial investments and
the types of financial
products and services
available to help you achieve
your goals.

Figure 8 https://www.istockphoto.com/illustrations/financial-literacy

There are many ways by which an individual can become financially literate:
1. Talking (listening) to people who possess financial literacy. You can learn from other
people’s experiences and wisdom. You can also learn from their mistakes.
2. Attending free courses on financial literacy. Take an advantage of financial literacy classes.
If there are none, request school authorities to organize one for students.
3. Online courses. In line with free courses, there are free online courses as well.
4. Television shows. There are channels on cable television that have segments on personal
finance or money management.
5. Libraries and other sources of literature.

Planning and
Budgeting
Yes, planning
and budgeting are just
important to personal
finance as they are to
corporate finance.
Planning and
budgeting in personal
finance entail
Figure 9 https://webstockreview.net/image/budget-clipart-budget-plan/305971.html
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constructing a budget and planning for savings.

There are five keys activities for you to be able to plan your finances correctly and efficiently and
for you to achieve your financial goals and objectives as well.
1. Analyze your spending habit.
2. Determine your net worth
3. Create a personal cash flow statement
4. Prepare the budget
5. Review and revise your budget

To determine the one’s net worth use this formula. And used the Personal Statement of financial
position for the basis of the computation.
Individual’s Net worth = Total Assets – Total Liabilities

Note The net worth is not always positive. If an individual (or household) owes more than what they
own, then they will have negative net worth.

References
Book
Gamatero, Albert N. (2017) Business Finance (1st edition) . Diwa Learning Systems Inc. De
Guzman, Angeles A (2019) Business Finance for Senior High School (1st edition), Lorimar
Publishing Inc.

Unpublished References.
LEA M. BANTING,Business Finance, Quarter 2 – Module 6 : Philosophy and Practices in Personal
Finance, Lesson 2: Money Management Cycle First Edition, 2020
Commission on Higher Education (CHED), Business Finance, 2016

Internet References
https://www.etmoney.com/blog/5-key-aspects-of-personal-finance/

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