Personal Financial Plan
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Personal financial planning usually involves making a personal budget, tax planning and coming up with an effective saving and debt management plan. It is important to note that resources are limited and consumers have to make choices. Economics studies wealth creation and distribution. Economic activities have varying impact on personal financial planning. The forces of supply and demand in the society influence commodity prices, which in turn directly affects our personal finances. Other activities include interest rates and consumer spending (Kapoor, Dlabay & Hughes, 2007)
Use of credit can also be incorporated in a personal financial plan, because an individual will not always have the money to cater for the cost of an item they want to purchase. Credit in a financial plan may also prove useful as it allows an individual to pay for an item or service much easily through regular installments. The decisions to either use credit or not would depend on an individual’s ability to repay it. Credit use comes with various advantages and disadvantages. One of the advantages is that it is more convenient than carrying around cash, especially when travelling. Additionally, using credit will enable an individual to buy an item, which they cannot afford at that particular time while at the same time enabling them to meet certain emergencies at times when cash is insufficient. Apart from that, a use of credit enables one to establish a credit history and also allows them to make use of sales promotions when cash is not readily available. However, it comes withvarious disadvantages with the main one being that overtime it might develop into a habit and encourage users to overspend money. Apart from that, it also comes with an extra fee that makes the total costs of an item much higher. Additionally, misuse of credit leads to a poor credit record and regular use of credit reduces a person’s future buying power as huge part of the income would be going into repayment of the debt (Preston & Prochaska-Cue, 2007).
There are various types of credit that can be used to develop a financial plan. They include installment credit, service credit and non-installment credit. However, there are two other special types of credit. These are debt consolidation loans and leasing. Service credit can be included in a financial plan as it includes bills for power, gas and telephone. Credit involves using someone else’s money thus involves a cost. The cost includes a finance charge that is the total amount of money paid to use the credit. Others include the interest fee, service charge and credit report fee (Preston & Prochaska-Cue, 2007).
There are various sources of credit such as banks, credit unions, insurance companies, friends and families as well as loan companies. All these sources come with various advantages and disadvantages. For instance, with family and friends, interest rates and terms of repayment can easily be negotiated directly; however, failure to stick to the agreement might jeopardize the relationship. On the other hand, loan companies easily offer loans to individuals who find it hard to obtaiin it elsewhere, but one of the main disadvantages of this source is that the interest rates are usually high (Kapoor, Dlabay & Hughes, 2007).
The government plays a major role in personal finances. Commodity price policies, credit regulations and availability directly affect the consumer income thus affecting the personal finances of the citizens. Laws and regulations that govern work ethics and relation also affect the personal finances of citizens as the government usually set the minimum wages of workers and other benefits that employers should accord their workers. The government can assist individuals with their personal finances by ensuring that the minimum wages are reasonable enough and that the interest rates on loans is not overcharged. Policies that protect consumers from high inflation also play a key role in helping them with their personal finances. It is also important to note that government directly influences our personal finance planning through taxes. Tax evasion must be avoided as it might jeopardize one’s personal finances. One should also look at his or her charitable donations to find out whether they entitle them to tax breaks (Kapoor, Dlabay & Hughes, 2007).
Basic economic data such as rate of inflation and economic growth rate can be effectively used in planning for the future decisions, for instance, what products to consume and what particular ways to choose in order to save a part of an income. Sources of economic data include the consumer price indexes, economic census and bureau of economic analysis.
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