User:Koof99/Personal finance

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

When planning personal finances, the individual would take into account the suitability of various banking products (checking accounts, savings accounts, credit cards, and loans), insurance products (health insurance, disability insurance, life insurance, etc.), and investment products (bonds, stocks, real estate, etc.), as well as participation in monitoring and management of credit scores, income taxes, retirement funds and pensions.

Personal Finance Principles
Individual situations vary significantly when it comes to income, wealth, and consumption requirements. Moreover, tax and financial regulations vary between countries, and market conditions change both geographically and over time. This means that advice for one person might not be appropriate for another. A financial advisor can offer personalized advice in complicated situations and for high-wealth individuals. Still, 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 credit card balances every month in full
 * Dedicate 10-20% of post-tax income savings and investments
 * Create an emergency fund that can last at least 6 months
 * Maximize contributions to tax-advantaged funds such as a 401(k) retirement funds, individual retirement accounts, and 529 education savings plans
 * When investing savings:
 * Avoid trading individual securities
 * Look for low-cost, diversified index funds that balance risk vs. reward appropriately to an individual's target retirement year
 * If using a financial advisor, require them to commit to a fiduciary duty to act in an individual's best interest

Personal Financial Planning Process
The key component of personal finance is financial planning, a dynamic process requiring regular monitoring and re-evaluation. In general, it involves five steps:


 * 1) Assessment: A person's financial situation is assessed by compiling simplified versions of financial statements, including balance sheets and income statements. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account, cryptocurrencies), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses.
 * 2) Goal setting: Multiple goals are expected, including short- and long-term goals. For example, a long-term goal would be to "retire at age 65 with a personal net worth of $1,000,000", while a short-term goal would be to "save up for a new computer in the next month." Setting financial goals helps to direct financial planning by determining the parameters and expectations one aims to achieve.
 * 3) Plan creation: The financial plan details how to accomplish the financial goals set in the previous step. It could include, for example, reducing unnecessary expenses, increasing employment income, or investing in the stock market.
 * 4) Execution: Execution of a financial plan often requires discipline, perseverance and sacrifice. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
 * 5) Monitoring and reassessment: The financial plan is monitored in regular intervals to determine if one is on track to reach their goals. This information is evaluated to make potential adjustments as time passes and circumstances change.

Goals for Personal Finance
In the modern world, there is a growing need for people to understand and take control of their finances. These are some of the overarching reasons;

1. Lack of comprehensive formal education for personal finance: '''Although many countries have some formal education for personal finance, the Organization for Economic Co-operation and Development (OECD) studies show low financial literacy in areas it is not required, even in developed countries like Japan. '''


 * Personal finance in public education is not always required, with just under 30% of high schools in the US in 2024 not having personal finance as a graduation requirement. 
 * Graduate students with financial educations averaging higher credit scores and receiving more favorable loan conditions. 
 * Hence, it is essential to associate the connection of financial courses in the education system and the generational shift of personal financial educations.

This illustrates the importance of learning personal finance from an early stage to differentiate between needs vs. wants, improve financial literacy, and to build financial planning skills.

Areas of Focus
12. Credit: A line of credit is the ability of a customer to receive goods or services prior to payment with the promise that the debt will be repaid in the future, often with interest and or fees. Credit can be acquired through a variety of means, including unsecured debts such as personal loans, student loans, and credit cards, as well as secured debts such as car loans and mortgages. Using debt as a means to purchase goods and services brings about a variety of pros and cons that the consumer must become educated on before diving in. Some examples of the benefits of using credit are as follows:


 * Building credit: A credit score is a measurement of a borrowers trustworthiness to a lender, ranging from 300-850. Improving ones credit score is determined by a variety of factors, including making payments on time, keeping low outstanding balances, having credit lines open for long periods of time, applications for credit accounts, and variety of accounts open. These factors help lenders to determine the amount of money and the interest rate they are willing to grant to each individual applicant.
 * Buy now, pay later: Although saving up and using cash is often the most preferable option, many people resort to credit to make purchases before they have the funds to do so. For example, getting loans for major purchases such as houses and cars allows the borrower to use these goods while they pay them off over time.
 * Emergencies: Although an emergency fund is widely considered the best way to cover emergency expenses, credit allows those without emergency funds to temporarily offset the financial burden of an emergency.
 * Perks and Bonuses: Many lenders incentivize borrowers to use their lines of credit, such as credit cards, by offering perks such as travel kickbacks, sign-on bonuses, and purchase protections. When used properly by paying balances in full each month, these rewards allow the borrower to take advantage of perks they would not otherwise have access to through the use of debit cards.

However, credit does not go without its downsides. Oftentimes, lesser financially educated individuals use credit improperly, driving them into debt and disadvantaged situations. Some of these downsides include:


 * Overuse: Due to the nature of credit, borrowers are able to spend money when they do not have the ability to pay off. This puts the borrower in a position of financial distress where they become dependent on debt.
 * Interest and Fees: Interest and fees are a means for the lender to make lending money worth it for them. By holding balances for long periods of time, the borrower will accrue interest, resulting in having to pay back more money than originally borrowed.
 * Monthly Payments: Many lenders often require minimum payments at regular intervals to see some return on their lending. If a borrower builds up high amounts of debt, these minimum payments can grow larger and become overwhelming.

Although credit can provide a variety of benefits and opportunities to the borrower, it is important to fully understand the advantages and disadvantages to borrowing to ensure sound financial decisions.