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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.