Areas of Personal Finance I

Key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:

• Financial position: is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person's balance sheet, calculated by adding up all assets under that person's control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished.

• Adequate protection: or insurance, the analysis of how to protect a household from unforseen risks. These risks can be divided into liability, property, death, disability, health and long-term care. Some of these risks may be self-insurable while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes, and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning. 

• Tax planning: typically, the income tax is the single largest expense in the household. Managing taxes is not a question whether or not taxes will be paid, but when and how much. The government gives incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as one's income grows, a higher marginal role of tax must be paid. Understanding how to take advantage of the myriad tax breaks when planning one's personal finances can make a significant impact.

• Investment and accumulation goals: planning how to accumulate enough money for large purchases and life events is what most people consider as personal financial planning. Major reasons to accumulate assets include purchasing a house or car, starting a business, paying for education expenses, and saving for retirement.

• Achieving these goals requires projecting what they will cost, and when one needs to withdraw funds. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savings to be invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risks is more often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. This asset allocation will prescribe a percentage allocation to be invested in stocks, bonds, cash and alternative investments. The allocation should also take into consideration the personal risk profile of every investor, since risk attidudes vary from person to person.

• Depreciating assets- one thing to consider with personal finance and net worth goals is depreciating assets. A depreciating asset is an asset that loses value over time or with use. A few examples would be the vehicle that a person owns, boats and capitalized expenses. They add value to a person's life but unlike other assets they do not make money and should be a class of their own. In the business world, for tax and bookkeeping purposes, these are depreciated over time due to the fact their useful life runs out. This is known as accumulated depreciation and the asset will eventually need to be replaced.

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