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Personal Finance Essays

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family. 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. It refers to the financial decisions which an individual or a family unit is required to make to obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events.
The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are: 1. Financial position: It is concerned with understanding the personal resources available by examining net worth and household cash flow. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished. . Adequate protection: It is the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. 3. Tax planning: Income tax is the single largest expense in a household.
Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as one’s income grows, a higher marginal rate of tax must be paid. Understanding how to take advantage of the myriad tax breaks when planning one’s personal finances can make a significant impact. 4. Investment and accumulation goals: Planning how to accumulate enough money for large purchases, and life events is what most people consider to be financial planning.
Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement. Achieving these goals requires projecting what they will cost, and when you need to withdraw funds. A major risk to the household in achieving their accumulation goal is the rate of price increases over time or inflation. 5. Retirement planning: It is the process of understanding how much it costs to live at retirement and coming up with a plan to distribute assets to meet any income shortfall.
Methods for retirement plan include taking advantage of government allowed structures to manage tax liability. 6. Estate planning: It involves planning for the disposition of one’s assets after death. Typically, there is a tax due to the state or federal government at your death. Avoiding these taxes means that more of your assets will be distributed to your heirs. The four neo-classical personal finance frameworks are: •Classical utility maximization •Goal-directed financial planning •Risk management •Family life cycle
Utility Maximization: The problem with utility maximization is that it is difficult to be applied to practical scenarios. It requires solving stochastic equations that makes it complex. Kahneman and Tversky studies prove that people do not behave according to the expectations of this mechanism. Goal Directed Planning: The advantage of goal-directed planning is its correspondence with the way most people think about their life. They have certain goals to reach, education, buy a house, buy a car, etc. They need to plan their finances in order to meet those goals.
But this mechanism doesn’t show the risk involved in different plans. Probabilistic planning is what adds risk measure. Risk Management: It always brings more insight to personal finance without any disadvantages. But it cannot be used in isolation with other frameworks. Family Life-Cycle: Modigliani and Brumberg developed this model to portray where any person might find himself at any point of time in his/her lifecycle. This model is undoubtedly a valid portrayal of family behaviour. But categorizing and generalizing of personal finance is none less than lunacy.
Each individual across the globe has a different thought process and a different way of living depending on his/her age, gender, nationality, values and many more such factors. Tang et al. (2002a) examined on people’s endorsement of the money ethic across Taiwan, United States (USA), and the United Kingdom (UK). The respondents comprised 78 full-time employees in Taiwan, 137 employees in the USA, and 93 professional in UK. Data were measured through exploratory factor analysis, confirmatory factor analysis, multivariate analysis of variance, and multiple regression analysis.
American men considered money as their success, in contrast, British men considered money as evil. As for British women, they budgeted their money carefully. Tang et al. (2002b) studied the money ethic scale (budget, evil, equity, success, and motivator), self-reported income, demographic variables, and life satisfaction among 207 professors in the USA and 102 professors in Spain. American faculty reported higher scores on factors budget, equity, and success, and lower scores on factor evil than their Spanish counterparts.
Further, gender (male), budget, education, and work experience were predictors of American professors’ income, while work experience, gender (male), education, and factor motivator were predictors of Spanish professors’ income. For the American sample, marital status (married), budget, gender (male), a low level of education, and a low level of factor success were predictors of life satisfaction, whereas for the Spanish sample, marital status (married), young age, and budget were predictors of life satisfaction. Ryan (2001) conducted a survey of 700 retired people and the results revealed that men and women adjust differently to retirement.
Lim (2003) analyzed via questionnaire surveys in Singapore towards the attitudes of 204 senior workers towards work and retirement, retirement planning, and their willingness to continue working after retirement, and to undergo retraining. The results showed that work occupied a salient part of the lives of employees in their 40s and above. Respondents held rather ambivalent attitudes with regard to the prospect of retirement, i. e. while they did not view retirement negatively, they were nevertheless anxious about certain aspects of retirement.

•Hwang, T. and Gao, S. (2003), “The determinants of the demand for life insurance in an emerging economy-The case of China”, Managerial Finance, Vol. 29 No. 5/6, pp. 82-96. •Lim, V.K.G. (2003), “An empirical study of older workers’ attitudes towards the retirement experience”, Employee Relation, Vol. 25 No. 4, pp. 330-346. •Gitman, L.J. and Joehnk, M.D. (2005), Personal financial planning, Thomson South-Western, New York, NY.

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