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Managing Personal Finances: Overview

Financial management is an important part of financial planning. When managing personal finances, having a clear objective and knowledge about one's finances is an essential part of creating a workable plan that is right for you. Financial management involves creating a budget, choosing a bank, paying taxes, managing debt, investing, retirement planning, and estate planning.

Assess Your Financial Situation

Determining one's net worth is an important element of managing personal finances. By assessing net worth, it is possible to place a monetary value on one's financial situation. Financial assets include:

  • money in a bank account
  • stocks
  • bonds
  • mutual fund accounts
  • retirement accounts
  • future income expected from Social Security benefits and pension plans
  • the value of a business or real estate investment
  • a personal residence, if the property will be sold or the money invested in it will be used to pay for living expenses in the future

Items such as cars and clothing are generally not included since it is impossible to live off them unless sold for their cash value.

Financial liabilities include:

  • car loans
  • mortgage on a personal residence if the home was included as an asset
  • mortgage on investment real estate
  • student loans
  • credit cards
  • personal loans

Determine net worth by subtracting total liabilities from total assets. This information will help evaluate overall financial health.

Create a Budget

To manage personal finances effectively, it will require creating a budget. A budget is a plan used to track income and expenses. A budget is also a good way to set financial priorities like saving for retirement or a vacation and managing debt. Creating and maintaining a budget is easy to do with a software program such as Quicken. Financial software programs allow the user to create a budget and to track income, spending, debt management, and financial goals.

Choose a Bank that is Right for You

It is important to choose a bank that will help you accomplish your financial goals. Be aware that some banks charge more fees for some services than other banks. For example, a number of banks charge fees for account maintenance, teller services, ATM usage, overdraft protection, and online bill paying.

Many banks will waive some fees if the customer meets certain criteria, such as having a paycheck directly deposited into a checking account or keeping a minimum balance in a savings account. When selecting a bank, it is important to consider whether the account provides unlimited check writing, whether most banking transactions will be conducted face-to-face, or whether overdraft protection is necessary. Also, note whether the bank offers fraud protection. Many banks offer zero-liability protection for fraudulent charges made on a debit card.

Pay Taxes

Paying taxes on time is an important part of managing personal finances. If self-employed, it may be necessary to pay estimated taxes throughout the year. Filing a tax return by the deadline will avoid the payment of costly penalties. Taxpayers that are unable to file a tax return on time can obtain an extension. The extension, however, does not extend the time allowed to actually pay the taxes owed.

Manage Debt

It is important to take control of debt. Although most people have some kind of debt, such as a car loan or a mortgage, high interest debt can lead to disastrous consequences. Warning signs of too much debt include only making the minimum payment every month, making late payments, having at least one credit card that is near its credit limit, and taking cash advances to pay bills. To get control over debt, an individual can sell investments, negotiate with a creditor to repay the debt in a payment plan, or file for bankruptcy.

Keeping debt low is also an important component of an individual's credit score. While making payments on time is the most crucial factor, the second most critical factor is the total amount of debt owed. A debtor can improve a credit score by paying down debt and by refraining from incurring any more debt.

Invest Your Money

Part of financial management includes a plan to generate income from investments. Investing is a good way to generate income through compound interest and capital gains. Investments, however, only make sense when an individual is debt-free or has a small amount of debt at a low interest rate. Depending on the level of risk that is personally acceptable, investment choices include certificates of deposit (CDs), bonds, mutual funds, real estate, commodities, stocks, and business ventures.

Each type of investment has a different level of risk and offers a different return on the investment. For instance, because stocks have a higher level of risk than a bond, the return is typically higher. Choose a type of investment that meets the level of risk that is most comfortable.

Plan for Retirement

Planning for retirement is essential to ensuring a comfortable life in the future. Investing in an employer-sponsored retirement plan like a 401(k) is a good way to save for the future, reduce tax liability, and earn tax-deferred growth. Some employers will even match contributions.

An IRA account is another way to invest for retirement. Like a 401(k), the earnings are tax-deferred, and, in some circumstances, contributions to an IRA are eligible for a tax deduction.

Plan for When You Die

Estate planning is another essential aspect of managing personal finances. A will can ensure that property and cash are dispersed to the appropriate heirs. An individual with minor children will also want to use a will to appoint a guardian to care for their children if they die. Also, consider using a living trust to designate property to specific beneficiaries. A living trust is beneficial because it is not subject to probate and can reduce estate taxes.

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Next Steps

Contact a qualified consumer attorney to assist with any credit, banking, or finance issues you face.

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