Download Taxes Affect Personal Finance Decisions

Indrani B C
FIN 1050
8 A.M. MWF
TEN PRINCIPLES OF PERSONEL FINANCE
1. The Best Protection is Knowledge: As with most else in life, it’s much easier to do
it right if you understand what you are doing and why you are doing it without any
knowledge. If you simply believe what others are guiding you to do you might end up
investing in the wrong mutual funds, stocks, etc.
2. Nothing Happens Without a Plan: A financial plan makes your journey to your
goal easier. So, making a financial plan is very important. Start planning for your savings
at an early age and expand your plan as time progresses.
3. The Time Value of Money: The idea that money available at the present is worth
more than the same amount in the future due to its potential earning capacity is the core
principle for personal finance. The same idea is applicable to savings too.
4. Taxes Affect Personal Finance Decisions: The taxes affect the return on the
investment. So, we must look at savings alternates on an after tax-basis. The affective
personal finance planning requires understanding of the tax laws and how they affect
investment decisions.
5. Stuff Happens, or the Importance of Liquidity: Though much of the focus of
personal finance planning is on long-term investing, one must plan for the short term
also. Because we need liquid money for an unexpected need. One should generally have
liquid money to cover 3-6 months of living expenses.
6. Waste not; Want not-Smart Spending Matters: In personal finance, spending
money smartly is as important as savings. A penny saved is a penny earned will always
be true. The steps of smart buying involves differentiating between wants and needs;
buying good quality goods; get the best price while buying and maintain your purchases.
7. Protect Yourself Against Major Catastrophes: Having the right insurance policy
is crucial in financial planning. Because if any catastrophe strikes and your insurance
policy does not cover it-it will make a considerable deb in your savings. One should
always be sure that their policy covers all the major catastrophes like earthquake, fire,
flood, etc.
8. Risk and Return go Hand in Hand: While all investments are risky some are safer
than others. Usually the more the risk the more the return. Diversification of one’s
investments lets them reduce the risk and help you achieve your expected return. One’s
age also plays an important role in risk taking factors.
9. Mind Games and Your Money: Behavioral biases that we all have can lead to big
financial mistakes. In effect one’s mind can get in the way of good decision making. One
should be careful while investing. They should make their decisions on a balanced
judgment
10. Just do it: The most difficult step in the entire personal finance planning process is to
get started. People are constantly postponing doing unpleasant tasks instead of thinking
of savings as a residual; one should put aside the savings and spend the rest. This is the
first step towards a good financial plan.
FIVE IMPORTANT STEPS TO FINANCIAL
PLANNING PROCESS
1. Evaluate your Financial Health: A financial plan begins with examining your
current financial situation. Prepare a balance sheet. Determine where your money
comes from and where it goes. Taking control of your financial well-being begins
with keeping track of what you spend and recording them.
2. Define your Financial Goals: Identify what you are saving for and how much
you need to save. Formulize your financial goals attaching costs to them, and
determine when the money you need to accomplish these goals will be needed. Only
when you set goals-and analyze them and decide whether you are willing to make the
financial commitment to achieve theme can you achieve them.
3. Develop a plan of Action: A solid personal finance plan includes an informed
and controlled budget, determines your investment strategy, and reflects your unique
personal goals. The most important factors that guide all sound financial plans are
flexibility, liquidity, protection from the unexpected and minimization of taxes.
4. Implement Your Plan: Implementation of the plan is equally as important as to
develop it. You have to stick to the plan carefully considering various aspects.
Always keep your goals in mind and keep driving toward them.
5. Review Your Progress, Reevaluate, and Revise Your Plan: As time passes
and things change, you must review and reexamine your plan. If necessary you must
be prepared to make a new plan.