Personal Finance explained for beginners part 2 – Part one is here.
Table of Contents
Personal financial planning process:
You can’t just become financially independent by having a sound financial plan, you must also stick to the plan, and make changes to the plan whenever necessary.
Budgeting plays an important role in your financial planning process and this allows you to determine your expenses, determine your savings, and determine how much you can put into investments.
If you have a significant amount of net worth, then it is wise to acquire the services of a financial professional such as a wealth manager or a financial planner.
Why? So that you can wisely take care of your financial situation while investing your money into the appropriate investment vehicles that suit your financial objectives.
If you are a high net worth individual and are having trouble finding a personal finance expert to take care of your investment needs, you can acquire professional financial services offered by us by clicking here.
In any effective personal financial plan, there are 6 main components for obtaining positive growth in your financial situation. They are given below:
- Plan modification
- Executing the plan
- Tracking regularly
- Making changes whenever necessary
So first what you have to do is to have an assessment of your financial situation, and the factors that influence your financial situation.
After assessing your financial situation, you now have to come up with some financial goals regardless of whether they are your personal financial goals or your family’s financial goals.
Remember, goals should be reasonable such as planning for retirement or buying a house for your family, and not something such as owning a private jet or buying a house worth billions.
We don’t mean to demotivate you or discourage you from your goals if you have such goals, but you should understand that the main objective is to be rich and not to look rich.
Now you have assessed your financial situation, and have come up with some good financial goals. Now you should create a plan that allows you to reach your goals while effectively handling all your expenses every month.
This financial plan or a budget plan should constantly be developed or modified to cope with your financial needs and make sure that you won’t have to deal with any sort of financial difficulties.
You won’t be able to take things into your hands by just having a plan, you also need to execute the plan. Don’t worry if you are finding it hard to follow your plan, it would become a habit after 2 or 3 months, and all you have to do is to be consistent with your strategy.
Don’t get deviated or sidetracked when you are not able to follow the plan you have created because the beginning is always the hardest.
Always try to stay on track while sticking to the plan you have created. Also, you must try and update your plan regularly so that it would become more effective.
It is wise to acquire the services of a personal financial advisor or any other financial expert before devising a personal financial plan rather than doing it on your own.
Financial professionals are aware of every type of situation and how to overcome financial difficulties, and therefore, they would be extremely helpful for you in devising a financial plan or a budget plan that suits your financial needs or even help you with your financial goals.
Personal Finance terms that everyone should be aware of:
Given below is a sum of the terms that usually most people keep hearing while they are getting involved with the realm of personal finance.
We have not only just described the terms that are related to personal finance, but instead, we have also provided some of the terms that are related to various types of investments (just the basic definitions).
This is nothing but the money that has been kept aside for situations or circumstances that are unexpected.
For example, an energy fund could refer to long term expenses such as losing your job or short term expenses such as accident repairs on unexpected health costs.
A financial advisor is a professional who has the skillset and the knowledge necessary for assisting people or corporations with their financial matters.
Financial advisors can help with financial situations such as planning for retirement, managing your financial situation, offering advice related to investments, etc.
Health savings account
Also known as HSA, a health savings account is a type of savings account that offers tax benefits to individuals. Health savings accounts can be used for medical costs such as getting new glasses.
A mortgage is a type of loan that is offered to individuals when they are trying to purchase a property. With the help of a mortgage, the borrower gets money from the lender in the form of a loan to purchase that property.
However, the borrower has to make payment in the form of instalments, which is comprised of the amount that has been taken in the form of a loan along with the interest that is charged on that amount.
In general most of the mortgages are paid as per the terms and conditions that have been set up while the borrower takes that mortgage and could take time up to 15 to 30 years depending on the amount taken and the instalments.
A retirement account is an account where you can put in money for future retirement purposes. A retirement account can either be sponsored by an employer such as 401(k) or a pension plan, or it can be an individual retirement account.
Retirement planning is one of the major aspects of personal financial planning and saving for retirement is a matter that should be taken seriously.
A savings account is an account that is offered by a bank, a credit union or any other financial institution that allows an individual to deposit funds while being able to earn a small amount of interest on the amount deposited.
A will is a document, which represents how an individual would like their state to be handled in the event of their death.
A will comes in handy when a person wants to make sure that their money and assets are allocated to their heirs according to their intention.
This is a financial strategy through which the investment portfolio of an individual is frequently intervened, i.e., when there is a regular activity of buying or selling assets.
This can either be done by a financial advisor or by the investor.
Adjusted Gross Income
Adjusted gross income is when you deduct certain types of adjustments like student loan interest, contribution to retirement accounts, alimony payments, etc., from the gross income.
Adjusted gross income is helpful in the process of determining an individual’s total taxable income.
Amortization refers to the process through which the overall amount of a loan is reduced as time goes by.
In most cases, when an individual is repaying the amount for the loan he or she took, then a higher proportion of the payment goes towards the interest in the beginning.
Gradually, a higher proportion of the amount that is being repaid would go towards the principal amount.
Annual Percentage Rate
The annual percentage rate, which is also known as APR, is the total amount that will cost an individual to borrow money.
Regardless of whether it is a loan, credit card, or any other similar financial instrument, the amount of interest you owe to the lender along with any incurring fees come under this category.
Annual Percentage Yield
This is exactly the opposite of the annual percentage rate, i.e., the amount of interest (including compound interest) that you gain from an investment or savings account in a particular year.
This is a financial instrument, which is generally offered by an insurance company, and guarantees a specific payout, which can either be paid in the form of a lump sum amount or increments.
The amount of increase in the value of any asset over time that you own is known as “Appreciation”.
In simple words, Arrears refer to the late payment, which is paid to an individual after the completion of work.
Ask Price Is the lowest possible amount that the seller of security would accept to offer that security.
Any item or property or any other similar thing, which either has a financial value or is expected to have a financial value in the future, is called an Asset.
The combination of various types of financial instruments (related to investments) such as stocks, mutual funds, ETFs, bonds, cryptocurrencies, commodities, cash, etc., are referred to as an investment portfolio.
The process of allocating these financial instruments in the investment portfolio based on the needs and goals of the individual is known as asset allocation.
The document that is provided to the investors, which consists of various types of financial details of a company such as assets, liabilities and shareholders’ equity is known as a balance sheet.
The legal procedure that allows an individual or an entity to become free from the responsibility of paying their respective debts is known as bankruptcy.
For this, the individual or the entity would have to prove that they no longer have the ability to repay their debts.
This is used to refer to a situation in the stock market when the prices of all the stocks are declining in their value.
The person who has been listed as the recipient of an asset or an item after the death of an individual is referred to as a beneficiary.
The highest price that a prospective buyer is willing to pay for acquiring security is known as the bid price.
This is a general term used to represent the stocks of companies that are deemed to be robust investments. A few examples would include Facebook, Tesla, Disney, Apple, etc.
Bonds of the debt instruments that are usually issued by the government or a corporation where’s the lender would be paid an interest along with the capital.
The total value of a company after deducting its liabilities is known as the book value of a company, and it is usually present on a company’s balance sheet.
A person or an organization that allows the process of purchasing and selling of assets on behalf of some other person or entity is known as a broker.
Usually, brokers charge a small amount of money known as Commission for offering services, and in some other cases, they might charge a flat fee for such transactions.
The exact opposite scenario of a bear market, i.e., when the stocks in the stock market are increasing in value.
The profit arising from the sale of an asset that has grown value is known as capital gain and capital gains are usually taxed at a rate that is higher than the actual income tax rate.
The loss arising from the sale of an asset that has depreciated is known as a capital loss, and these capital losses can be claimed as directions while filing for taxes so that at least some of the money can be recovered.
Certificate of Deposit
A financial instrument that requires the investor to put in some cash for a specific period in exchange for a higher interest rate is known as a certificate of deposit (CD).
Certified Financial Planner
A financial planner who is certified by the relevant authorities that can guarantee that the financial planner is capable of managing all the financial activities effectively is called a certified financial planner.
Chartered Financial Analyst
A licensed financial professional who has acquired the name chartered financial analyst (CFA) after passing the CFA institute examinations that are held specifically for financial analysts.
The date on which the credit card billing cycle ends is known as the closing date and the balance amount on your card by the time of the closing date is what the individual owes to the lender in the next bill.
Any item, asset, or property that is accepted by the lender as a guarantee for the loan being acquired by the borrower is known as collateral.
In any scenario when the borrower fails to make the payment the collateral can be claimed as the property of the lender.
Any financial account that belongs to an individual who is under the age of 18 years (not considered an adult) and is being run by an adult until that child reaches the age set by the terms of an account.
This is the overall amount of your liabilities divided by the amount you earn every month before the taxes are deducted.
Decrease in the value of a property or an asset over time.
The money that is paid by a company to the investors who owns shares of that company and these dividend payments are usually generated from the company’s earnings.
The economies of the countries that are developing rapidly on a global level are known as emerging markets. Investing in emerging markets is a great choice for individuals who want to diversify their portfolios and have access to robust investments.
The ownership of an asset minus the liabilities on that asset is known as equity. For instance, when you purchase a loan with the help of a mortgage, then the equity in that home means the home’s overall value minus the loan balance.
This is a process that refers to the activities such as preparing a will, designating the power of an attorney, taking care of insurance policies, and making decisions regarding the beneficiary or beneficiaries of a person’s assets.
In general, estate planning is done while keeping in mind the finances of an individual after their death.
Investment funds are the financial instruments that pull the capital from various investors and are managed by a financial professional known as a fund manager.
Now, ETFs are the investment funds that are generally made available on stock exchanges and are traded publicly. To make it easier for you to understand, ETFs work in the same way as stocks.
An investment fund that consists of securities that reflect a market index is known as an index fund, and this allows investors to have built-in diversification.
The increase in the cost of goods and services over time while the value of money decreases is known as inflation and is depicted by a percentage.
For example, if the gas price is $1 and the inflation is 5% then the gas price would be $1.05 by this time next year.
Initial public offering
Also known as an IPO, initial public offerings refer to the companies that are offering shares publicly for the first time.
Liquidity is the concept that allows us to understand how quickly and easily can we be able to sell an asset and convert it to cash.
The person need not necessarily have to be dead for a will to come into effect, and in such circumstances, a living would come in handy.
This document describes the legal measures that are to be taken if you no longer can do things on your own or express what you want.
Also known as debt consolidation, loan consolidation refers to the process where an individual acquires one big loan to pay off 2 or smaller loans.
This would simplify the process of repayment while having a possibility of reducing the existing interest rate or monthly payment.
Personal finance is something that shouldn’t be taken lightly because how you manage your financial situation would set a path for reaching your financial goals.
Learning and everything about personal finance might become hard for someone as they might already be occupied with their profession or any other passion.
In such circumstances, taking care of a personal financial situation becomes extremely hard and might even lead to financial difficulties.
If you are a high net worth individual and are having trouble finding the relevant financial services that suit your needs, then we got you covered because we offer the best in class financial solutions that are specifically tailored for high net worth individuals such as you.
To get access to our expert financial solutions, please click here.
You can even get access to over services with the help of our mobile application, and for that, click here and download our app.
Those who want to take care of the financial situation on their own can gain all the financial wisdom and the necessary knowledge by becoming a part of our Adam Fayed Academy.
That being said, we hope that you can find this information useful and we wish for you to have a stable and secure financial situation.
Pained by financial indecision? Want to invest with Adam?
Adam is an internationally recognised author on financial matters, with over 383.8 million answers views on Quora.com and a widely sold book on Amazon.