PERSONAL FINANCE

PERSONAL FINANCE. Personal finance[edit]Main article:ÿPersonal financeQuestions in personal finance revolve around:Protection against unforeseen personal events, as well as events in the wider economiesTransference of family wealth across generations (bequests and inheritance)Effects of tax policies (tax subsidies or penalties) on management of personal financesEffects of credit on individual financial standingDevelopment of a savings plan or financing for large purchases (auto, education, home)Planning a secure financial future in an environment of economic instabilityWarren Buffettÿis an American investor, business magnate, and philanthropist. He is considered by some to be one of the most successful investors in the world.Personal finance may involve paying for education, financingÿdurable goodsÿsuch asÿreal estateÿand cars, buyingÿinsurance, e.g. health and property insurance, investing and saving forÿretirement.Personal finance may also involve paying for a loan, or debt obligations. The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:[1]Financial position: is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person’s balance sheet, calculated by adding up all assets under that person’s control, minus all liabilities of the household, at one point in time. 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: the analysis of how to protect a household from unforeseen risks. These risks can be divided into the following: 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. Business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning.Tax planning: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. 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 higherÿmarginal rate of taxÿmust be paid. Understanding how to take advantage of the myriad tax breaks when planning one’s personal finances can make a significant impact in which it can later save you money in the long term.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 that will be necessary to be able to achieve these goals. A major risk to the household in achieving their accumulation goal is the rate of price increases over time, orÿinflation. Using net present value calculators, the financial planner will suggest a combination of asset earmarking and regular savings to be invested in a variety of investments. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typically will subject the portfolio to a number of risks. Managing these portfolio risks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. This asset allocation will prescribe a percentage allocation to be invested in stocks (either preferred stock or common stock), bonds (for example mutual bonds or government bonds, or corporate bonds), cash and alternative investments. The allocation should also take into consideration the personal risk profile of every investor, since risk attitudes vary from person to person.Retirement planningÿis 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 including: individual (IRA) structures, or employer sponsoredÿretirement plans.Estate planningÿinvolves planning for the disposition of one’s assets after death. Typically, there is a tax due to the state or federal government at one’s death. Avoiding these taxes means that more of one’s assets will be distributed to one’s heirs. One can leave one’s assets to family, friends or charitable groups.Corporate finance[edit]Main article:ÿCorporate financeJack Welchÿan American retired business executive, author, andÿchemical engineer. He was chairman and CEO ofÿGeneral Electricÿbetween 1981 and 2001. During his tenure at GE, the company’s value rose 4,000%.Corporate finance deals with the sources of funding and theÿcapital structureÿof corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. Although it is in principle different from managerial finance which studies the financial management of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. Corporate finance generally involves balancing risk and profitability, while attempting to maximize an entity’s assets, net incoming cash flow and the value of itsÿstock, and generically entails three primary areas of capital resource allocation. In the first, “capital budgeting”, management must choose which “projects” (if any) to undertake. The discipline ofÿcapital budgetingÿmay employ standardÿbusiness valuationÿtechniques or even extend toÿreal options valuation; seeÿFinancial modeling. The second, “sources of capital” relates to how these investments are to be funded: investment capital can be provided through different sources, such as by shareholders, in the form ofÿequityÿ(privately or via anÿinitial public offering),ÿcreditors, often in the form ofÿbonds, and the firm’s operations (cash flow). Short-term funding orÿworking capitalÿis mostly provided by banks extending a line of credit. The balance between these elements forms the company’sÿcapital structure. The third, “the dividend policy”, requires management to determine whether any unappropriated profit (excess cash) is to be retained for future investment / operational requirements, or instead to be distributed to shareholders, and if so, in what form. Short term financial management is often termed “working capital management”, and relates toÿcash-,ÿinventory- andÿdebtorsÿmanagement.Corporate finance also includes within its scope business valuation, stock investing, orÿinvestment management. An investment is an acquisition of anÿassetÿin the hope that it will maintain or increase its value over time that will in hope give back a higher rate of return when it comes to disbursing dividends. Inÿinvestment managementÿ? in choosing aÿportfolioÿ? one has to use financial analysis to determineÿwhat,ÿhow muchÿandÿwhenÿto invest. To do this, a company must:Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;Identify the appropriate strategy: active versus passive hedging strategyMeasure the portfolio performanceJames Harris SimonsÿAmerican mathematician,ÿhedge fund manager, and philanthropist. He is known as aÿquantitative investorÿand in 1982 foundedÿRenaissance Technologies, a private hedge fund based inÿNew York City.Financial management overlaps with the financial function of theÿaccounting profession. However,ÿfinancial accountingÿis the reporting of historicalÿfinancial information, while financial management is concerned with the allocation of capital resources to increase a firm’s value to the shareholders and increase their rate of return on the investments.Financial risk management, an element of corporate finance, is the practice of creating and protectingÿeconomic valueÿin aÿfirmÿby usingÿfinancial instrumentsÿto manage exposure toÿrisk, particularlyÿcredit riskÿandÿmarket risk. (Other risk types includeÿforeign exchange, shape,ÿvolatility, sector,ÿliquidity,ÿinflationÿrisks, etc.) It focuses on when and how toÿhedgeÿusing financial instruments; in this sense it overlaps withÿfinancial engineering. Similar to generalÿrisk management, financial risk management requires identifying its sources, measuring it (see:ÿRisk measure: Well known risk measures), and formulating plans to address these, and can be qualitative and quantitative. In the banking sector worldwide, theÿBasel Accordsÿare generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.[citation needed]Personal Finace is based on your on work to make money in your on waysÿSo do the things which you like not to do which you dislike…

PERSONAL FINANCE