Personal Finance and Debt Management

What is Personal Finance?

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.
The key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and reevaluation. In general, it has five steps:

  1. Assessment – One’s personal finance situation can be assessed by compiling simplified versions of financial balance sheets and income statements.
  2. Setting goals – Goal-setting is done with an objective to meet certain financial requirements.
  3. Creating a plan – The financial plan details how to accomplish goals. It could include, for example, reducing unnecessary expenses, increasing one’s employment income, or investing in the stock market.
  4. Execution – Execution of one’s personal financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
  5. Monitoring and reassessment – As time passes, one’s personal financial plan must be monitored for possible reevaluation and/or adjustments.

What is Debt Management?

To put it simply, debt management is the act of managing debts. However, it can also refer to a credit counseling service that consolidates your unsecured debt into one monthly payment, which is sent directly to your creditors by the credit counseling service.
Debt management is one of many options that consumers have for reducing their credit card debts. Consumers can try to manage their debts on their own. Financial experts recommend that consumers should be tracking how much money they pay out every month, not only in terms of what they pay to reduce their various debts, but also for everyday and cost-of-living expenses. By doing so, they may be able to identify ways to cut costs for luxuries and other purchases even before making more radical decisions.

Basic Rules to Budgeting and Money Management

  • Assess your financial situation. Determine your living expenses, periodic expenses and monthly debt payments you owe.  Compare your expenses to your monthly net income. Be aware of your total debt.
  • Develop a realistic plan. Create a worksheet to document your monthly expenses. Record where and what you are spending money on. These expenses could be fixed (housing, utilities, child care, student loan payments, etc.) or flexible expenses which vary from week to week or month to month (unexpected emergencies, medical and prescription bill, eating out, etc.) Once you know what you’re spending money on, you have the ability to take control of your finances by creating a budget.
  • Determine the difference between needs and wants. Create a sound budget by taking care of your needs first (food, housing, clothing, transportation). Money should be spent on wants only after needs have been met.
  • Don’t allow expenses to exceed your income. Make adjustments in your budget when you are close to over spending. Take your lunch for the week instead of eating out. Evaluate the importance of expensive luxuries such as cell phones, cable TV, and designer clothes.
  • Pay bills on time. Maintaining a good credit rating and avoid late charges. If you are unable to pay your creditors, call, explain your situation and set up a payment agreement.
  • Use credit wisely. Determine what you can comfortably afford to purchase on credit by reviewing your budget. Don’t allow your credit payment to exceed 20% of your monthly paycheck. Pay more than the minimum on charge accounts. Add a few extra dollars to your payment. Avoid borrowing from one creditor to pay off another. Make a conscious effort to use paper (actual dollars available) not plastic (credit cards).

Additional Resources