Intro to Personal Finance

Sat, 22 Feb 2025 00:00:00 +0000

Approaching Your Finance with Purpose

Sat, 22 Feb 2025 00:00:00 +0000

The Benefits of Financial Planning

The Basiss of Financial Planning

At a high level financial planning is the process of assessing where you stand, where you want to go, and then plotting the course to get there one step at a time.

It’s about bringing all the pieces of your financial life together into one cohesive picture.
- Investing
- Paying down debt
- Saving for emergency
- etc.
Only then can you truly understand where you stand, how you compare, and what you should do next to progress towards your financial goals.

With personal finances, time can either be your best friend or your worst enemy. Just like with health or most other things in life, small healthy habits started earlier have a larger impact than more drastic actions taken later.

Lifecycle of Financial Planning

Common aspects of financial planning

Spending less than you bring home
Investing wisely,
Insurance plan: Having the right insurance in place.
Focusing on healthy habits
Finding the balance between enjoying the present and saving for the future

Planning in your 20s

Establishing healthy financial habits
Finding the balance between paying down debt
Finding the balance between paying down debt, saving for an emergency, and getting a jump start on savings goals such as retirement

Planning in your 30s

Have a backup plan in place to provide for your family in the event that the unexpected happens
Ensure that you’re doing a great job prioritizing between the many competing goals to make sure that you get the best use of your next dollar

Planning in your 40s or 50s

Prioritize your own financial future above all else
Make sure that you’re starting to dial in what life is going to look like when you retire

Planning in your 60s

Define a plan that accounts for unexpected events and health care costs in retirement

Healthy habits for any age

Develop small, healthy habits for long-term success
Follow a consistent approach to understanding your finances to accomplish your goals
Establish safeguards to make sure that your finances are resilient

Tips for Creating a Financial Plan

A financial plan is not just another word for budget or debt-reduction plan. It’s the long-term roadmap that could help make your vision for the future a reality.

Keypoints

Establishing a financial plan involves setting specific goals (such as building an emergency fund, growing retirement accounts, and eliminating high-interest debt).
Analyzing resources requires gathering financial documents to assess income, expenses, assets, and liabilities, ultimately calculating net worth to measure progress. ($\text{net worth} = \text{assets} - \text{liabilities}$)
Understanding monthly cash flow helps identify spending habits by categorizing expenditures into essential and non-essential items, revealing opportunities to cut costs.
Creating a budget aligns spending with priorities, with methods like the 50/30/20 rule helping to allocate income effectively towards needs, wants, and savings.
Investing in long-term financial growth becomes possible once debts are managed and an emergency fund is established, allowing for contributions to retirement and taxable investment accounts.

1. Setting Your Goals

Common top goals

Having an emergency fund.
- Generally, you’ll want to have to have at least three to six months worth of living expenses set aside in an emergency savings account. (If you’re self-employed or your income fluctuates, you might aim for six to 12 month’s worth of expenses.)
- This can be used to cover those unexpected expenses that invariably pop up, or float you through a loss of income, without wrecking your plan.
Growing your retirement accounts.

If your employer offers a matching contribution, consider contributing at least 100% of what they’ll match. Combine that with the magic of , and you could see your balance grow at a nice pace.
Eliminating high-interest debt.

Other goals

Establishing (and maintaining) good credit.
Paying off your student loans.
Living within your means.

Ideally, you don’t want to put anything on your credit card that you can’t pay off in full at the end of the month (or relatively soon thereafter), since this is an expensive form of debt.
Saving for your kids’ education.
Growing your investment portfolio.

2. Understanding Your Resources

Gather up all your paper and electronic bank statements, billing accounts, and portfolio documents. This might include:
- Income: Salary, investment income, alimony
- Expenses: Bank statements reflecting withdrawals or other debits, monthly billing statements, and other sources of everyday spending
- Assets: Savings accounts, home equity, or physical items you own (car, collectibles, etc.)
- Liabilities: Credit card debt, student loans, mortgage(s), and any other sources of debt
Next, you can use these documents to calculate your .
- Simply list all of your assets (such as bank and investment accounts, real estate, valuable personal property) and then all your debts (like credit cards, mortgages, student loans). Your assets minus your liabilities equals your net worth.
- If you find that your liabilities exceed your assets, don’t panic. This is a common scenario when you’re just starting out. With a financial plan in place, your net worth should grow over time.

3. Analyzing Monthly Cash Flow

It’s a good idea to get a sense of your monthly cash flow — what’s coming in and what’s going out.

You can use your bank statements from the last three or so months to come up with an average cash inflow and outflow.
- If you find that your monthly outflow equals your monthly inflow (i.e., you’re not saving anything) or your outflow actually exceeds your inflow (meaning you’re living beyond your means), you’ll want to drill further down into the outflow column.
Start by making a list of all your spending categories and the average you spend on each per month. Then divide the list into two main categories
- essential spending (e.g., rent/mortgage, utilities, groceries, insurance, debt payments) and
- non-essential spending (such as entertainment, shopping, travel, clothing).

4. Updating Your Budget

One simple approach is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:

Needs (50%)
- Rent or mortgage payments
- Utilities (electricity, water, gas, internet)
- Groceries
- Transportation (gas, public transit, car payments)
- Insurance (health, auto, home)
- Minimum debt payments
Wants (30%)
- Dining out and entertainment
- Shopping (clothes, gadgets, hobbies)
- Travel and vacations
- Subscriptions (Netflix, Spotify, gym memberships)
Savings and debt repayment beyond the minimum (20%)
- Savings (emergency fund, retirement accounts)
- Investments (stocks, real estate, mutual funds)
- Extra debt payments (beyond the minimum)

5. Tackling High-Interest Debt

Getting out from under high-interest debt (such as credit card balances, payday loans, or rent-to-own payments) is an important part of any financial plan.

- List your debts from the highest interest rate to the lowest.
- Throw all of your extra cash to the highest interest debt while continuing to make the minimum monthly payment on the others.
- Once you’ve paid off the highest interest debt, you move on to the next-highest interest debt, and so on.
- List your debts from smallest to largest based on balance size.
- put all your extra cash toward the debt with the smallest balance, while making the minimum monthly payment on the others.
- When that is paid off, you move on the next-smallest debt, and so on. This approach can help you stay motivated by achieving early wins.
: transferring your credit card debt to a balance transfer card or personal loan with a lower interest rate — allowing you to focus on just one monthly payment.

6. Investing in Your Future

Reference:

The Financial Planning Process

Financial Planning in 6 Steps

1. Understand what you own, owe and spend

Make sure that you have a solid understanding of your current financial situation
- Own: Include all of your assets, such as checking your savings accounts, investment accounts, retirement plans, a home, etc.
- Owe: Include all of your liabilities such as student loans, credit cards, personal loans, mortgages, etc.
- Spend: Include all of your inflows and outflows that occur on a regular basis

Identify your goals, concerns, and preferences

Goal	Example
Short-term	Having an emergency fund
Mid-term	Buying a house
Long-term	Retirement

As you work through your goals, prioritize them so that way you’re prepared to make trade-offs down the road.

Plot your course

Now you have your current financial position and your destination, you can assess what you need to accomplish to get from point A to point B. It’s important that you use reasonable assumptions and figure out if you’re in a good spot, an okay spot or a bad spot. From there, you can course correct and understand what you need to do and ultimately what you need to accomplish to get to your goals.

Identify your next best action

Figure out the best use of your next dollar.

Focus on that action for the next 30, 60, or 90 days

An extremely important mindset to adopt in your financial journey: Breaking down larger goals into micro goals will help you achieve your goals.

Rinse and repeat

Your financial plan is going to evolve as your life changes -> Establishing regular cadence to review your plan is important.

As you start to implement this process into your financial journey, remember that it’s important to take it step by step. It’s extremely natural to feel overwhelmed when you’re looking at all six steps at once.

How to plan for your future

Setting Goals: What and Why

How you plan for your future depends, in large part, on what your goals are. When you know why you’re moving towards a certain goal, it can provide powerful motivation for you to stay the course, even if something unexpected happens.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Understanding the Now

Another critical step for planning for the future includes calculating where you are right now, including

your assets (what you own)
your debts (what you owe)
your income (what you bring in)
your expenses (what you pay out)

As far as income goes, tally up how much you make monthly from wages/salaries, bonuses, and so on.

Then, list your fixed expenses, which could include your rent or mortgage payment, monthly utilities, property taxes (if applicable), insurance premiums, prescription costs, groceries, gas, and so forth. Also look at what you spend on clothing, hobbies, entertainment, and dining out.

Creating a Financial Plan

When thinking about how to plan for the future, it might be helpful to connect the dots between where you are today and where you want to be to achieve the goals you’ve set.

If you have multiple goals to accomplish, prioritizing them. It is very helpful to cultivate a pay-yourself-first attitude: the top priority is to put a predetermined amount of money into personal savings and investment accounts.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Implementing Your Plan

Once you’ve formulated a plan, it’s time to put it into action. Automate steps/payments to reduce the amount of time spent on managing this part of the plan.

Monitoring Your Progress

Include at least an annual review — or perhaps you prefer to do it biannually or quarterly — to see how your plan is progressing.

Investments: Planning for the Future

In general, there are three investor types:

active investor

Involved in each aspect of investing, embracing a hands-on approach
Buys stocks or other investments, and likely does research to decide which types of investments to make.

An active investor can have a professionally managed portfolio or they could choose to manage their own portfolio, if they believe they have the skills and expertise to do so. But there are risks involved, which include potentially losing money, so you’ll need to figure out .

passive investor/low-maintenance investor

Passive investor: Investing but don’t want to be significantly involved in making investment decisions
- “Buy-and-hold” philosophy where you buy securities and plan to hold on to them for a longer period of time, throughout fluctuations of the market.

hands-off investor/automatic investor

If you’re open to more activity on your investment account, but you don’t want to spend much personal time studying the market, , and otherwise handling all the details, then you may want to consider automated investing.

Use computer algorithms to generate tailored investment advice and financial planning. It may reduce the learning curve for some beginner investors, helping them start building and managing a portfolio to achieve their financial goals.
Use computer algorithms to select and trade stocks, , or other assets.

How automated investing works?

An interested investor takes an online survey about their financial situation, risk tolerance, and goals.
The automated investing platform then uses this data to recommend investments to the client.
Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor.

Reference:

Your Relationship with Money

Understand the Human Side of Personal Finances

Human psychology plays a significant role in your relationship with money. Your early money experiences shape your financial psychology, and your money personality was influenced by your parents and others around you during your formative years.

Klontz Money Script Inventory (KSMI) assessment: a tool to figure out your core money beliefs.

Assumptions
- Money beliefs are developed in childhood and often passed down through generations.
- They’re typically unconscious but connected to specific contexts or situations.
- Often just partial truths
- Money beliefs are a primary driver of how we interact with money, which is responsible for our financial outcomes. We make important decisions with our money because of them

Money scripts

Money avoidance

Rich people are greedy
Money should be avoided
There’s virtue in having less money
Don’t like to review your bank statements
May even suffer from financial anxiety

Money worship

Believe that the key to happiness and the solution to your problems is more money
Believe that you can never have enough money
Associated with lower-income, lower net worth, and sometimes, destructive financial behaviors

Money status

Your self-worth and net worth are likely closely connected
May struggle with desire to keep up with the Joneses
Buy flashy new things
Inclined to tell people you make more money than you actually do
Associated with poor financial behaviors, and people from poor backgrounds are even more vulnerable to this script

Money Vigilance

Recognize the importance of saving for your future
Downplay how much money you have or how much money you make
Associated with being secretive and frugal, which can be detrimental to your relationships and inhibit your ability to enjoy your current resources.

Read to dive into money personalities.

Couples and Money

How Emotions Impact Your Finances

Understanding Net Worth and Credit Score

Sat, 22 Feb 2025 00:00:00 +0000

Assessing Cash Flow and Taxes

Sat, 22 Feb 2025 00:00:00 +0000

Planning and Budgeting for Future

Sat, 22 Feb 2025 00:00:00 +0000

Personal Finance

Sat, 22 Feb 2025 00:00:00 +0000

Notes and summary for the course “The Fundamentals of Personal Finance Specialization” on Coursera.

Personal-Finance | Haobin Tan

Intro to Personal Finance

Approaching Your Finance with Purpose

The Benefits of Financial Planning

The Basiss of Financial Planning

Lifecycle of Financial Planning

Tips for Creating a Financial Plan

The Financial Planning Process

Financial Planning in 6 Steps

How to plan for your future

Setting Goals: What and Why

Understanding the Now

Creating a Financial Plan

Implementing Your Plan

Monitoring Your Progress

Investments: Planning for the Future

Your Relationship with Money

Understand the Human Side of Personal Finances

Couples and Money

How Emotions Impact Your Finances

Understanding Net Worth and Credit Score

Assessing Cash Flow and Taxes

Planning and Budgeting for Future

Personal Finance