Personal Finance

Personal finance is the financial management which an individual or a  family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.

When planning personal finances, the individual would consider the suitability to his or her needs of a range of banking products (checking, savings accounts, credit cards and consumer loans) or investment in private equity (companies shares, bonds and mutual funds), and insurance products (life insurance, health insurance, disability insurance) or participation and monitoring of and- or employer-sponsored retirement plans, social security benefits, and income tax management.

Personal circumstances differ considerably, with respect to patterns of income, wealth, and consumption needs. Tax and finance laws also differ from country to country, and market conditions vary geographically and over time. This means that advice appropriate for one person might not be appropriate for another. A financial advisor can offer personalized advice in complicated situations and for high-wealth individuals, but University of Chicago professor Harold Pollack and personal finance writer Helaine Olen argue that in the United States good personal finance advice boils down to a few simple points.

• Pay off your credit card balance every month, in full.
• Save 20% of your income.
• Maximize contributions to tax-advantaged funds such as a 401(k) retirement funds, individual retirement accounts, and 529 education savings plan.
• When investing savings: (1) Don't attempt to trade individual securities; (2) Avoid high-fee and actively managed funds; (3) Look for low-cost, diversified mutual funds that balance risk vs. reward appropriately to your target retirement year.
• If using financial advisor, require them to commit to fiduciary duty to act in your best interest.

The limits stated by laws may be different in each country; in any case personal finance should not disregard correct behavioral principles: people should not develop attachment to the idea of money, morally reprehensible, and, when investing, should maintain the medium-long-term horizon avoiding hazards in the expected return on investment.

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This blog entry is sponsored by Pru Life UK.