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Managing Personal Finance
Now, that you have already learned the basic concepts of finance in
business, let’s now apply it in your own personal lives.
After going over this lesson and activities you should be able to
Define personal finance
Develop personal financial goals
Know the basic principles of personal finance
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X.X Business Finance
12.1 Personal Finance
Personal finance defines all financial decisions and activities of an
individual or household, including budgeting, insurance, mortgage
planning, savings and retirement planning. Financial planning and
budgeting principles discussed in the past modules are also applicable
in personal finance.
A personal budget is an important tool. It is a finance plan that
allocates future personal income towards expenses, savings and debt
repayment. In making your budgets you should also consider your
needs and wants.
The following are basic activities in personal finance.
Earning
You are receiving money for services rendered, goods sold or interest
income.
Borrowing
You are receiving money from lenders causing a debt obligation. You
borrow money for your own reasons. One is that your earning might
not be enough to pay your expenses.
Saving
You are setting aside money for a specific purpose within a short
period of time.
Investing
You are putting your money into work so that it can earn interest or
appreciate in value within a long period of time. This involves greater
risk but yields greater returns.
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Spending
You are giving out money for your personal needs or wants.
Donating
You are giving out your money for charitable purposes.
12.2 Developing Personal Financial Goals
There are two factors that usually influence your future goals. The
first one is the time-frame that you desire for your goal to be achieved.
The other one is the type of financial need that drives such goal.
Timing of Goals
Goal setting may be viewed in three time frames. It may either be
short-term, medium-term or long-term. Short-term goal is a goal that
can be achieved in less than a year, a medium-term or intermediate
goal has a time frame from one to five years while a long-term goal
involve financial plans that are more than five years. Long-term goals
should be planned in coordination with short-term and medium-term
goals.
Goals for Different Financial Needs
Looking at the financial needs of a person, goals may be classified as
consumable-product goals or durable-product goals.
Consumable-product goals involve frequent or periodic purchases of
items which are used up quickly. This may involve spending for food
and entertainment.
Durable-product goals commonly involve infrequent purchase of items
which are ussyally expensive but long-lasting. This may include
purchase of equipment, car or a house.
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X.X Business Finance
Goal-Setting Guidelines
An old saying goes, “If you don’t know where you’re going, you
might end up somewhere else and not even know it.” That’s why goal
setting is essential in making financial decisions. This will become the
basis for planning, implementing, and measuring the progress of your
spending, saving, and investing activities.
Ideally, you must have SMART financial goals:
S— specific. You must have a specific or precise goal so you can
create a plan and strategy to achieve those things.
M— measurable. By being measurable, your financial goal must have
a particular amount. For example, “Accumulate Php500,000 in an
investment fund within three years” is more measurable than “Put
money into an investment fund.”
A— action-oriented. Goals must provide basis for the personal
financial activities that you will undertake. For example, “Reduce
credit card debt” will usually mean actions to pay off unsettled
liabilities.
R— realistic. Of course, goals must be truthful and must be based on
your income and life situation. Aiming for big things is good, but you
must ensure that it is realizable.
T— time-based. You must indicate a time frame for accomplishing
your goal. This enables you to measure your progress.
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12.3 Basic Principles of Personal Finance
The following are the basic principles of personal finance as described
by Mackensen & Company (2015).
Know your take home pay
Before committing to significant expenditures, estimate how much
income is likely to be available for you.
Pay yourself first
Before paying bills and other financial obligations, set aside an
affordable amount each month in accounts designated for long-range
goals and unexpected emergencies.
Start saving at young age
Recognize that your total savings are determined both by the interest
you earn on those savings and the time period over which you save.
Compare interest rates
Obtain rate information from multiple financial services firms to get
the best value for your money.
Don't borrow what you can't repay
Be a responsible borrower who repays as promised, showing you are
worthy of getting credit in the future.
Budget your money
An annual budget to identify expected income and expenses, including
savings, will help you live within your income.
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X.X Business Finance
High returns equal high risks
Engagig in highly risky activities usually have high returns as well.
No will just pay you high interest on a sure things which or things that
are not risky. Diversification of assets is the best protection against
risk.
Don't expect something for nothing
Everyone desires or even anticipates having something without any
exchange. In finance, you musn’t do this. Expecting for performance
bonuses at work is good but you mustn’t expect such bonus to be
given to you if you did not performed well at work or there are no
provisions regarding the issuance of such thing.
Map your financial future
You must take time to list your financial goals and have a realistic plan
for achieving them.
Your credit past is your credit future
Be aware that credit bureaus or business entities that you have engaged
with in the past may maintain reports regarding your credit history
with them. Negative information in credit reports can affect your
ability to borrow at a later point.
Stay insured
It would be great to be ensured. Staying ensured can somehow lessen
the burden in case of financial loss. You may avail insurances for your
personal protection in case of illnesses and you may also avail
insurance for your properties such as your house or business
establishment.
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Glossary
Goal- an aim or desired result
Personal Finance - the management of money and financial decisions
for a person or family including budgeting, investments, retirement
planning and investments
References
J. Keys (2016). “Personal Finance Basics and the Time Value
of Money”.
Mackensen & Company (2015), “Principles of Personal Finance”.
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