Personal Finances

Understanding your personal finances is a critical step toward a stable budget, debt management, and financial success. Many consumers, however, don’t fully realize all the sources of income and expenditures they truly have, nor how tracking them can help ease financial burdens.

Your finances include everything that requires or utilizes money in your life. Finances can usually be divided into one of four categories:

• Earning Money: Whether from a steady job, an inheritance, or another source of income, every penny you earn is part of your finances.
• Spending Money: Similarly, every penny and dime spent should be tracked as part of your personal spending plan.
• Budgeting: Budgeting helps you track your finances carefully and can illuminate strengths and weaknesses in your financial prospects.
• Saving Money: Even once it is in the bank, money can both earn income and create an expenditure. Knowing how your savings work for or against you is an important part of understanding your finances.

Understanding how each of these categories impacts your money will help you create a plan to meet your financial goals.

The first – and frequently the only – source of income many people think about is their job. While a career and a steady paycheck are undoubtedly the principle sources of income for most consumers, there are many other types of income available, and most people earn money from at least a few of these sources.

• Interest from savings or checking accounts
• Monetary gifts from friends or relatives, including inheritances
• Alimony or child support income
• Employer-matched contributions to retirement or flexible spending health accounts
• Social security income, retirement pensions, or IRAs
• Personal sales and services such as yard sales or babysitting
• Payments from stock portfolios or investment accounts
• Equity from home appreciation
• Loans, credit cards, and other sources of temporary income

Similarly, many people assume that the greatest expenditures they have are their monthly bills and living expenses such as housing, groceries, utilities, and transportation. This is certainly true, but there are other things that can quickly drain even the most amply stocked bank account, including:

• Late fees or other penalties on loans, credit cards, or utilities
• Bank maintenance or transaction fees, such as monthly charges or ATM fees
• Overpayment of state or federal taxes
• Entertainment, travel, gift, and other luxury expenses
• Business or educational expenses
• Charitable contributions
• Child support or alimony payments
• Credit card or loan interest

Understanding where your money is going as you spend it will help you control your budget and manage your personal finances. While you may not be able to eliminate every expenditure, you can look over what you do have and seek alternatives that have lower fees. Some consumer spending, such as charitable donations and business expenses, may even be tax deductible, helping save more money in the long run.

After establishing a budget with a basic idea of income and spending, many people question the need to track their finances, particularly for long-term items such as home equity or company retirement plans. Knowing where your finances stand, however, can be helpful in many cases. Consider these two examples:

Early Retirement

You may work at one company for six years, become vested in their retirement plan (to which your employer makes matching contributions), then decide you want a career change. How can you recoup your contributions to that retirement account? What penalties exist for early dispersal of the account? Must you accept payment in monthly installments or is a lump sum available? Can the retirement plan be transferred to your new career or company? Understanding this aspect of your financial resources can help you be prepared for lifestyle changes.

Emergency Expenses

You might own your home for ten years, gradually increasing your equity, until one day an automobile accident or unexpected illness results in thousands of dollars of medical expenses. How can you tap into the equity you’ve saved to pay those expenses? What are the fees and penalties associated with a home equity line of credit versus a second mortgage loan? How does the interest rate on the mortgage compare to rates on credit cards or for a personal loan? Knowing how you can access all your personal finances can make an emergency less of a financial burden.

For most people, simply being aware of their finances and how different sources of income and expenditures interact is sufficient to plan for their future, whether it is anticipating marriage, starting a family, buying a home, changing careers, or retiring. In extreme cases involving substantial debt or large estates, however, it is wise to seek professional assistance to manage your money.

Not everyone needs help with their personal finances, but for individuals who do, there are different professionals to help with different types of money management needs.

• Credit counselors help consumers manage lines of credit, including credit cards, with an emphasis toward debt reduction and responsible spending.
• Financial planners and consultants help individuals or families set financial goals and adjust their finances to meet those goals, whether it includes eliminating debt or simply growing investments.
• Accountants handle the day-to-day tasks of balancing a budget, paying and maintaining accounts, and coordinating the movement of money from one source to another.
• Stockbrokers deal exclusively with stock market investments, though specialized brokers may also provide assistance with more diverse investment portfolios.

Choosing the right source of professional help is an important step in making the most of your personal finances. With a meticulous understanding of both your income and your spending as well as knowing how to harness all your assets, it is possible to control your finances and make them grow effortlessly.

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