CHAPTER 1 (A) INTRODUCTION Personal Finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain , budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management. (B) DEFINATION OF PERSONAL FINANCE Personal Finance refers to financial planning relative to the individual. In general, the terms relates to analyzing an individual’s current financial status, budgeting, and palnning for the future. Although each individual can perform these tasks for himself or herself, they may solicit the help of a ”personal financial planner” or “personal financial advisor” to assist. The defination of Personal finance is an inclusive term with regards to all the financial characteristics of an individual’s financial circumstance and monetary decision making. Managing your own finances is not actually just about protection, but those who possess self control, presevation, and accountability, as well as those who test themselves to economisze so they can follow their dreams, can appear comparatively secure that their personal finance abilities will ease them. OBJECTIVES OF THE STUDY THE MAIN OBJECTIVE IS TO KNOW WHAT IS PERSONAL FINANCE TO KNOW DIFFERENT TYPES OF PERSONAL FINANCE METHODOLOGY OF THE STUDY The Methodology includes the information of the features of PERSONAL FINANCE in the form of primary data tha have been received from the branch manager and the officers of RBI. It also includes the information from related books and the related websites. CHAPTER 2 (A) STEPS IN PLANNING PERSONAL FINANCE A key component of personal finance is financial planning, a dynamic process that requires regular monitoring and reevaluation . In general, it has five steps: 1. Assessment: Compiling simplified versions of financial balance sheets and income statements can assess one’s personal financial situation. A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account) along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal cash flow statement lists personal income amd expenses. 2. Setting goals: Two examples are “retire at age 65 with a personal net worth of Rs.200,000 Indian” and “ buy a house in 3 years paying a monhly mortgage servicing cost that is no more than 25% of my gross income”. It is not uncommon to have several goals, some short term and some long term. Setting financial goals helps direct financial planning. 3. Creating a plan: The finacial plan details how to accomplish your goals. It could include, for example, reducing unnecessary expenses, increasing one’s employment income, or investing in the stock market. 4. Execution: Execution of one’s financial plan often requires discipline and perseverance. Many people obtain assistance from professionals such as accountants, financial planners, investment advisors, and lawyers. 5. Monitoring and reassessment: As time passes, one’s personal financial plan must be monitored for possible adjustments or reassessments. (B) SIX KEY AREAS OF PERSONAL FINANCIAL PLANNIG The six key areas of persoanl financial planning, as suggested by the Financial Planning Standards Board, are: 1. Financial Position: This area 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 etermine to what degree and in what time the personal goals can be accomplished. 2. Adequate Protection: The analysis of how to protect a household from unforeseen risks. These risks can be divided into 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 antertainers require specialized insurance professionals to adequatlety protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning. 3. 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 your income grows, you pay a higher marginal rate of tax. Understanding how to take advantage of the myraid tax breaks when planning your personal finances can make a significant impact upon your success. 4. Investment and Accumulation Goals: Plannig how to accumulate enough money to acquire items with a high price is what most people consider to be financial planning. The major reasons to accumulate assets is for the following: a- Purchasing a house b- Purchasing a car c- Starting a business d- Paying for education Achieving these goals reqires projecting what they will cost, and when you need to withdraw fumds. A major risk to thehousehold in achieving their accumulation goal is the rate of price increases over time, or inflation. 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 suject the portfolio to a number of risks. Mnaging 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, 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. 5. Retirement Planning: Retirement planning is 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. 6. Estate Planning: Involves planning for the disposition of your asset when you die. Typically, there is a tax due to the state or federal government at your death. Avoiding these taxes means that more of your assets will be distributed to your heirs. You can leave your assets to family, friends or charitable groups. (C) 4 BASIC PERSONAL FINANCE PRINCIPLES Managing your personal finances is a mixture of planning ahead and developing responsible spending and saving habits. It involves asking yourself how much money you need at varous points in the future and how you are going to get that money. In general, personal finace relates to analyzing your current financial status, setting financial short-term and long-trem goals, planning the execution for these goals, executing the goals and monitoring the progress, and reassessing the achivements and making necessary adjustments. There are a few basic principles of personal finance that everyone should master. Budgeting: The keystone to personal finance is budgeting. A budget is a financial game plan that will protect you from impulse buys and fiscal catastrophes. Operating without a budget usually leaves you mistified as your paycheck seems to magically disaapear; leaving you empty-handed by the time the end of the month rolls around and it’s time to pay bills or put food on the table. Take time to tally up all your monthly costs and designate a portion of your paycheck to each item, such asfood, utilities, transpotation, and entertainment and so on. Make sure you account your monthly overhead before committing money to luxuries. Creating a budget makes it easy for you to manage your money, pay your vills on time, and even set aside money for extra expenditures like vacations or large purchases. When creating a budget you need to consider both your income and expenses. Investing: Given the nature of the economy, it is important to choose wisely when investing your savings. You are actually losing money by stashing your cash underneath the mattress. Put your money to work earnings interest in a savings account or returns in retirement fund or a mutual or index fund or build equity in your home by payingdown your mortgage. Better yet, diversify your assets by investing in afew of these options, while keeping a liquid savings account for emergencies. Failing to take advantage of free money is a common personal finance mistake amounting in money lost to inflation and missed opportunity. Be wary also of investments that promise a high return with little or no risk. Debt Management: The single most vexing aspect of personal finance for the great majority of individuals is debt management. Mismanaging your debt through over spending, failing to budget or high interest rates can quickly send you in a downward spiral. The lower you go, the harder it is to climb back up. Avoid the temptation to “buy now, pay later” and only take loans for the essentials in life: education, transportation and habitation. If you can’t buy your wants with cash, better forget it. As a general rule, do not finance anthing for longer than its useful life. Once you have your mortgage, student loan and auto loans; be diligent in seeking the best possible rate.