Personal Finance

Personal finance concerns itself with how families manage their money. Given the difficulties of this current economic situation, the understanding of personal finance issues is as important as it has ever been and is the key to a prosperous and secure financial future.

Budgeting
The foundation of any personal finance plan is the budget. A budget describes how the income of a family is allocated among its various expenditures, whether it be food, transportation, housing, etc. By specifically allocating money in this manner, a family can be assured that it does not spend more money than it earns in any given month. This is very important since a family that spends more than it receives will have to borrow to make up the difference. And once a family takes on debt, it can quickly spiral out of control until they reach a situation from which it can not extract itself.

Every family must budget for the necessities of life, usually as a percentage of their income. Housing is likely to be the largest single expenditure for a family. As a general rule, personal finance experts say that a family should not allocate more than 30 percent of their income towards housing. Other items, such as food and transportation, have more flexibility in how much income can be allocated to them. Beyond the necessities, it is important to allocate for longer-term savings goals like schooling and retirement. Many people fail to budget for these items, leaving them vulnerable to a lower standard of living as they get older.

Investing
Personal finance is not only concerned with how a family spends it money; it also addresses how a family invests its savings. Making sure that one’s income is more than its expenditures is only half the battle. It is also important to know the options available to allocate one’s savings.

Of course, there are many places to invest money: stocks, bonds, mutual funds, real estate, etc. Understanding where to put that money depends upon many factors, two of the most important of which would be one’s own risk tolerance and time horizon. Higher returns only come with higher risk. This is why the stock market is generally a riskier investment than the bond market. If a person has a personal appetite for risk and has a long time horizon, then investing in riskier asset classes can be a good idea. Alternatively, investing in the stock market for only six months or a year can be a very risky proposition and should be avoided.

In short, personal finance allows a family to clearly define its financial goals and allocate money in such a way as to successful achieve those goals.

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