Personal Finance

Personal Finance

Personal finance is a subject that revolves around your finances as an individual.

Unlike corporate finance, personal finance is controlled or affected by human behavior and management of finances in this level is governed solely by personal discipline. It is worth mentioning that good personal finance management results to savings and investments.

To effectively manage personal finances, one needs to understand the very basic accounting and finance concepts including treatment of below items.

• Income.
• Costing and expenses.
• Budgeting
• Time value of money.

1. Income/revenue

Income is money earned or inflows from employment, business etc.

It is prudent to master your revenue streams and have in mind your average income within a certain time frame. This enables to you understand your financial capability as to what tune of financial planning you can adopt.

On employment income it is worth mentioning that there is gross income and net income. Gross is the total income before deductions which are mainly statutory and net income is your take home after the deductions have been done.

On the business end, we talk of turnover which may be sales, it is then subjected to cost of goods sold to arrive at gross profit or loss which is further subjected to business expenses to arrive at net profit or loss.

2. Costing and expenses

I would like to split these two and discuss them separately.

i). Costing

Costs are expenses that are necessary for one to earn an income or revenue.

Example,

If you are employed, there are costs that you have to incur so as to deliver your job like transport costs to the office, meals at work, internet if working remotely, interest on borrowed working capital, pay for hired crew on contracted work etc. These may be costs that one should be aware of and properly factor before accepting an offer. 

Understanding costing will come in handy when dealing with consultancy engagements as you will need some input to deliver the work say audit, campaign or training etc. hence, it will help you to accurately arrive at what to charge for that piece of work.

Costing also enables one to decide whether to accept and an offer or not for instances where the budgets of the offering entity are capped to a fixed amount or figure. 

ii. Expenses

These are necessary consumptions to your day to day living. Examples include rent, food, utility bills, clothing, other traveling expenses etc...

Please note, that an item may be a cost to an individual and the same item may be an expense to another individual.

3. Budgeting

A budget is a financial plan of various areas/items that need money allocations which may be expenses, investment items or even savings. It lists the items and the amounts needed within a given time frame say a month or a year.

Budget enables one to have picture of total amount of money they need versus what they are able to earn in same period. Budgeting will determine if there is a deficit or a surplus for that given level of income.

In the case of a surplus, one may save the surplus, allocate more funds to the existing budget items or introduce additional items to the budget to the tune of the surplus. A blend of the three is possible too. On the other hand, a deficit may necessitate trimming item amounts, or doing away with some items completely or considering external borrowing or drawing from savings to finance the deficit.

Budgeting however does not stop at formulation stage; it continues tracking stage where you need to carefully note every spend and be guided against crossing the set limits of the budget amount. However, at times reallocating money from one budget item to another is possible especially where you find the item unnecessary to continue with hence, reallocating to a more critical item.

Personal Budget sample

Partial funding of budgets too is a concept that is practiced widely. In the above paragraphs, we were assuming 100% budget items are implemented, but in scenarios where there is a deficit, one may decide not to borrow or draw their savings. Therefore, they will only spend on budget items to the tune of the monies available and carry on the remaining items to the next period e.g., the next month. 

4. Time value of money

Another critical concept is time value of money. This is on the understanding that what a dollar can buy today is not what it can buy in future due to factor such as inflation that makes money shade its value over time, and also missed opportunities as a result of monies being held.

Therefore, if money for work delivered today is to be paid in future, this concept suggests that the amount to be charged should be relatively higher because you should get the same value. Value here and amount not being the same.

In the same way, you should pay more for items you have acquired today but payment is to happen in future.

With a believe that you are a step ahead of where you were as far as personal finance is concerned, why not practically give it a try?