Tag Archives: Financial Independence

What is Personal Finance and why is it necessary?

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By Brenda Cagara

Special to the Financial Independence Hub

Personal finance is the art of managing finance individually or for household purposes.

Why would I call it an art? As there are several factors that need to be taken into consideration, the word may seem simple but it is not.

These factors may include purchasing of financial products example, home and life insurance, credit cards mortgages, investments and vehicles: In other words, handling budget, savings, and spending monetary resources over time, taking into account various financial risks and benefits for future life events.

Nowadays, personal finance is regarded as a specialty on its own. Historically, it was taught as a part of home economics or termed as “consumer economics,” which was included as a curriculum in various schools, colleges and university. In 1947, Herbert A. Simon, a Nobel laureate, suggested a decision maker did not always make the best financial decision because of limited educational resources and personal inclinations.

In 2009, Dan Ariely suggested the 2008 financial crisis emphasized the fact human beings do not always make rational financial decisions, and the market is not necessarily self-regulating or corrective of any imbalances in the economy.  Therefore, it is crucial to obtain some basic information about this topic to help an individual or a family to make rational financial decisions throughout his or their lifetime.

Planning Personal Finance

To understand personal finance, one should first have at least a vague idea of financial planning. Financial planning can be defined as a process that requires regular monitoring and re-evaluation of income and expenses. It includes five components: assessment, goals, planning, implementation, monitoring and re-evaluation.

  1. Assessment. Financial position can be assessed by making a balance sheet or personal statement. A balance sheet includes value of all the personal assets and liabilities. A personal statement personal income and expenses.
  2. Setting up small targets acts as an incentive for a person to work hard enough to achieve a financial position is a smart idea. These goals can be divided into short term and long term. Long-term goals may be being retired at the age of 60 with a net worth of $15,00,000, whereas an example of short-term goal may be saving up to buy a new house, a car or a new television.
  3. Once we’ve decided our aims and objectives, we need to have a plan as to how we are going to go about it to achieve it. An ideal plan should include a road map to decrease expenses and a way to enhance earning.
  4. This is the most crucial part of the five steps and in fact the most difficult of all. Once a person comes up with an ideal plan, there should strict implementation of it with discipline and perseverance.
  5. Monitoring and reassessment. With time there are changes in every individual’s life, family and priorities. In order to accommodate these changes the plan will require some alterations over the period of time, making monitoring and reassessment very important.

Personal Finance Tips

1.) A budget is a financial roadmap allows you to live within your means, while having enough left over to save for long-term goals. A simple example of budget can be as follows:

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Financial planning should be a Parallel, not Serial, process

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By Darren Coleman

Special to the Financial Independence Hub

In a serial circuit when one light bulb goes out, all the lights go out. Each light is wired to the next and all of them have to work for each one to work. In a parallel circuit all the lights are wired together but independently from each other, so when one light goes out, the other lights still stay on.

This concept is important and comes into play in my book ‘RECALCULATING – Find Financial Success and Never Feel Lost Again’. The book applies the analogy of driving to investing and financial planning. (See earlier Hub blog on the book).

I have spent almost a quarter of a century counseling clients about their money and assets, and often see people who believe their financial planning should look like a serial circuit. They think they must achieve one goal before moving on to the next. They have constructed an order or sequence that must be strictly followed for them to feel comfortable about achieving their plan.

This is the view Marvin and Jesse had when I met them. A successful, professional couple, they had young children and a list of goals. No. 1 on the list was that they wanted to be mortgage-free by age 45. They also wanted their kids to go to a private school, and vacations every year with the family. In addition, they wanted a comfortable retirement by their late fifties. They had great jobs, were disciplined savers, and figured they should be able to achieve all these goals. But they didn’t know how to put all the pieces together and make it happen.

I reviewed the situation to gain an understanding of their current state, and discovered that almost all their uncommitted cash flow went to pay down the mortgage. There were only token amounts being saved for their children’s education, family vacations, and retirement plans.

A couple that used serial financial planning

When I asked about this, they said paying down the mortgage as quickly as possible was the central assumption – the core pillar – of their financial planning. In short, this couple looked at all their desired destinations as if they were part of a serial circuit. Once they had paid off the mortgage, they would move on to the other plans.

I told them they could do this, but achieving that milestone of being mortgage-free by age 45 meant they could not put their children in private school, take annual holidays with the family, or make tax-advantaged contributions to their retirement plans. So, while they could be mortgage-free at an early age, they would not accomplish their other goals. And, of course, they couldn’t get the time back.

None of us can.

Shift to financial planning in parallel

I showed them that changing the picture from a serial circuit to a parallel circuit might be the answer. Continue Reading…

How Group Annuities can help employers protect Defined Benefit pensions

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Source: Mercer Pension Health Index published October 2, 2017

By Brent Simmons, Sun Life Financial

Special to the Financial Independence Hub

Recently, employees and retirees of Sears were stunned to learn they may not receive all of their defined benefit (DB) pension when it declared bankruptcy. They learned their pension plan was underfunded and the company had requested that it be allowed to stop making the contributions required by Ontario laws. The plight of Sears employees and retirees has left many Canadians wondering if their DB pension plan is healthy and if their DB pension is safe.

The pension challenge

With a DB pension plan, a company promises their employees a pension for life and is responsible for paying the pension: whatever the cost ends up being. The problem is that low interest rates and choppy equity markets have made the funding level of many pension plans look like a roller roaster ride. This can be seen in the chart at the top of this blog.

Another challenge facing pension plans is that Canadians are living longer, meaning that pensions need to be paid for a longer time. A common rule of thumb is that one year of additional life expectancy at age 65 can increase the cost of the pension plan by 3% to 4%.

In a tough economy, the need to contribute to a pension plan can often come at a time when a company’s core business is also facing financial difficulties. If a company becomes bankrupt, then the company likely won’t be able to pay the contributions owed to the pension plan and employees may indeed face a shortfall in its pensions.

How Group Annuities protect their employees’ pensions 

The good news is that a growing number of Canadian companies are taking steps to protect their employees’ pensions. They are buying group annuities to transfer the financial risk of their pension plans to insurance companies, which are subject to strict regulations and must have funds on hand at all times to pay promised pensions. With a group annuity, an insurer assumes responsibility for providing the pensions to a company’s retirees in exchange for a fee, and the retirees continue to receive their promised pension.

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How Millennials’ financial priorities differ from previous generations

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By Gabby Revel

Special to the Financial Independence Hub

There is some truth and some fiction to the idea that millennials are not responsible with their finances. On the one hand, today’s youth is particularly adept at saving money and meeting their financial responsibilities on a monthly basis. However, millennials appear to have less foresight, as they’re not as interested in planning for their financial future as Generation Xers and Baby Boomers were.

Financial freedom

The most important element of a paycheck for millennials is the financial freedom it offers them. A study by Bank of America and Merrill Edge discovered that this generation is better at saving money compared to other generations, but what they choose to spend this money on differs greatly from older workers.

This same study discovered that 63% of millennials value financial freedom above all, meaning they set aside a certain amount of money to continue living their lifestyle of choice. This means planning for social trips or vacations, eating out at fancy brunch restaurants on Sundays and using Uber as one of their primary forms of transportation.

A survey by BMO Wealth Management found that 26% of millennials  —  ages 18 to 34 — believe “saving more” is their most important priority with finances. A further 25% value reducing and eliminating debt at the top of their list, while 20% want to invest effectively, 17% focus on budgeting and 5% believe in spending on personal needs or goals above all. All in all, millennials are reinventing the wheel in regards to where their finances should go, but they might pay the price moving forward.

Disregard for retirement

 A chunk of today’s youth has yet to begin planning for retirement, as they’re not thinking about what their needs will be in the future. Some believe Social Security (or in Canada CPP/OAS) will get them through their golden years, which only nets the average retiree about $1,300 per month nowadays. Others buy into the carpe diem or YOLO mentality that’s been instilled within millennials.

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Mobile Personal Finance apps for Millennials seeking Financial Independence

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By Reviews Bee

Special to the Financial Independence Hub

Smartphones and apps have enormously affected our daily life and financial management. And despite the fact the elder generation may still have some doubts about tracking incomes and expenses,  millennials are more likely to connect their financial independence with these apps.

The fact is many mobile apps nowadays enable quickly entering data on incomes and expenses, and to find information about completed operations, make changes, export the database or restore it from a backup, and track your expenses and income. They give you some perspective on major and minor decisions in life so it becomes much easier to make  right decisions on the flow of your personal money.

When choosing a program, it’s important to consider not only functionality and convenience of interface but also safety. To be sure the financial apps will not let you down, we have considered  functional peculiarities and user reviews of many similar mobile apps, on the basis of which we present some of the best ones:

Mint

The Mint application helps to form a budget, track expenses and achieve financial goals. Costs and savings can be easily tracked in a special list, where different types of financial transactions are marked with different colors, as well as in the tables and charts that the application forms.

Users can also track movements on their bank accounts and credit-card balances in real time, monitor investments and even break their expenses into categories.

In addition, you can set up alerts if it’s time to pay bills, or if users have exceeded their budgets. Another convenient feature: a weekly consolidated report of the movement of your funds is available.

Wally

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