More simply, these topics may referred to as Budget, Investment, and Insurance. We will be discussing each of these, and a lot more, on this site.
Wikipedia refers to personal finance as a detailed analysis of financial flows at various points in time. Time is a basic variable in personal finance, and we have an intuitive sense about its effect.
We know that if we deposit money in a bank account we will receive interest. Because of this, we prefer to receive money today rather than in the future. Money we receive today is more valuable to us than money received in the future by the amount of interest we can earn with the money.
This is referred to as the time value of money (TVM). To adjust for this time value, we use two simple formulae. The present value formula is used to discount future money streams, that is, to convert future amounts to their equivalent present day amounts. The future value formula is used to convert today’s money into the equivalent amount at some time in the future.
Our next step is to develop a budget. Try the worksheet at the Federal Trade Commission site. Do you need to keep a “diary” for a month to get a better handle on what you are spending? Wikipedia cautions us that “Most people grossly underestimate how much they spend each year.”
Assessing your financial situation is usually done by compiling several lists. These lists are simplified versions of corporate income statements and balance sheets. For your personal income statement see the example at Wikipedia.
On your personal balance sheet, you list all your assets (e.g., car, house, clothes, stocks, bank account) and give their values. You also list all your liabilities (e.g., credit card debt, bank loan, mortgage) and give their values. Subtracting your total liabilities from your total assets will indicate your personal net worth.
Once you have good sense of your current financial status, be sure to set financial goals for the future. Setting goals gives your life a financial direction. Examples of financial goals are: “To retire at age 50 with a personal net worth of $800,000”, or “To buy a house in 3 years paying a monthly mortgage servicing cost that is no more than 25% of my gross income”. It is not uncommon to have several goals, some short term, and some long term.
Below are links to several other resources that you may find useful:
Sample Credit Report
Wishing you success,
John B. Vinturella, Ph.D.
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