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Transaction volume across all payment app service providers in 2022 was estimated at about $893 billion, according to the Consumer Financial Protection Bureau. That agency also estimates tap-to-pay transactions from digital wallets will soar by 150% between now and 2028…..Story continues…
By: Stephanie Dhue & Sharon Epperson
Source: Here’s how to avoid unexpected fees with payment apps
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The key component of personal finance is financial planning which is a dynamic process requiring regular monitoring and re-evaluation. In general, it involves five steps: Assessment: A person’s financial situation is assessed by compiling simplified versions of financial statements, including balance sheets and income statements.
A personal balance sheet lists the values of personal assets (e.g., car, house, clothes, stocks, bank account, cryptocurrencies), along with personal liabilities (e.g., credit card debt, bank loan, mortgage). A personal income statement lists personal income and expenses. Goal setting: Multiple goals are expected, including short- and long-term goals.
For example, a long-term goal would be to “retire at age 65 with a personal net worth of $1,000,000”, while a short-term goal would be to “save up for a new computer in the next month.” Setting financial goals helps to direct financial planning by determining the parameters and expectations one aims to achieve. Plan creation: The financial plan details how to accomplish the financial goals set in the previous step.
It could include, for example, reducing unnecessary expenses, increasing employment income, or investing in the stock market. Execution: Execution of a financial plan often requires discipline, perseverance and sacrifice. Many people take assistance from professionals such as accountants, financial planners, investment advisers, and lawyers.
Monitoring and reassessment: The financial plan is monitored in regular intervals to determine if one is on track to reach their goals. This information is evaluated to make potential adjustments as time passes and circumstances change.Typical goals that most adults and young adults have are paying off credit card/student loan/housing/car loan debt, investing for retirement, investing for college costs for children, and paying medical expenses.
In the modern world, there is a growing need for people to understand and take control of their finances because of the following reasons: 1. Lack of comprehensive formal education: Although many countries have some formal education for personal finance, the Organization for Economic Co-operation and Development (OECD) studies show low financial literacy in areas it is not required, even in developed countries like Japan.
Personal finance in public education is not always required, with just under 30% of high schools in the US in 2024 not having personal finance as a graduation requirement. Graduate students with financial educations averaging higher credit scores and receiving more favorable loan conditions.
Hence, it is essential to associate the connection of financial courses in the education system and the generational shift of personal financial educations.
This illustrates the importance of learning personal finance from an early stage, to differentiate between needs vs. wants, improve financial literacy, and to build financial planning skills.. 2. Shortened employable age: Over the years, with the advent of automation and changing needs; it has been witnessed across the globe that several jobs that require manual intervention or that are mechanical are increasingly becoming redundant.
Several employment opportunities are shifting from countries with higher labor costs to countries with lower labor costs keeping margins low for companies. In economies with a considerably large younger population entering the workforce who are more equipped with the latest technologies, several employees in the middle management who have not up-skilled are easily replaceable with new and fresh talent that is cheaper and more valuable to the organizations.
Cyclical nature of several industries like automobile, chemicals, construction; consumption and demand is driven by the health of the countries economy. It has been observed that when economies stagnate, are in recession, and in war specific industries suffer more than others. This results in companies rationalizing their workforce. An individual can lose their job quickly and remain unemployed for a considerable time.
All these reasons bring to the realization that the legal employable age of 60 is slowly and gradually becoming shorter. These are some of the reasons why individuals should start planning for their retirement and systematically build on their retirement corpus, hence the need for personal finance. 3. Increased life expectancy: With the developments in healthcare, people today live till a much older age than previous generations.
The average life expectancy has increased even in developing economies. The average life expectancy has gradually shifted from 60 to 81 and upwards, which coupled with a shorter employable age reinforces the need for a large enough retirement corpus and the importance of personal finance. 4. Rising medical expenses: Medical expenses including cost of prescription medicine, hospital admission care and charges, nursing care, specialized care, geriatric care have all seen an exponential rise over the years.
Many of these medical expenses are not covered through insurance policies that might either be private/individual insurance coverage or through federal or national insurance coverage. In developed markets like the US, insurance coverage is provided by either the employers, private insurers or through federal government (Medicare, primarily for senior citizens or Medicaid, primarily for individuals of lower income levels).
However, with the rising US fiscal deficit and large proportion of the senior population, it needs to be seen whether the extent of the Medicare program is sustainable in the long run, therapy exclusions in the coverage, co-pay, deductibles – several cost elements are to be borne by individuals continually.
In other developed markets like the EU, most medical care is nationally reimbursed. This leads to the national healthcare budgets being very tightly controlled.
Many newer, expensive therapies are frequently excluded from national formularies. This means that patients may not have access through the government policy and would have to pay out of pocket to avail of these medicines In developing countries like India, China, most of the expenses are out of pocket as there is no overarching government social security system covering medical expenses.
Critical areas of personal financial planning, as suggested by the Financial Planning Standards Board, are: Financial position: Financial position 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 household liabilities, at one point.
Household cash flow is the total of all the expected income sources within a year minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and when the personal goals can be accomplished. Adequate protection: or insurance, is 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 wagers may be self-insurable, while most require 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 entertainers need specialized insurance professionals to protect themselves adequately. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be critical to the overall investment planning.
Tax planning: typically, the income tax is the single largest expense in a household. Managing taxes is not a question of whether or not taxes will be paid but when and how much. The 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. As one’s income grows, a higher marginal rate of tax must be paid.
Understanding how to take advantage of the myriad tax breaks when planning one’s finances can be significantly impactful. Investment and accumulation goals: planning how to accumulate enough money for large purchases and life events is what most people consider financial planning. Significant reasons to get assets include purchasing a house or car, starting a business, paying for education expenses, and saving for retirement.
Achieving these goals requires projecting their costs and when to withdraw funds. A significant risk to the household 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 various investments. To overcome the rate of inflation, the investment portfolio has to get a higher rate of return, which typically will subject the portfolio to several risks.
Managing these portfolio risks is often accomplished using asset allocation, which seeks to diversify investment risk and opportunity. This asset allocation will prescribe a percentage allocation for stocks, bonds, cash, and alternative investments. The budget should also consider every investor’s risk profile since risk attitudes vary from person to person.Depreciating Assets– One thing to consider with personal finance and net worth goals is depreciating assets.
A depreciating asset is an asset that loses value over time or with use. A few examples would be the vehicle a person owns, boats, and capitalized assets. They add value to a person’s life, but unlike other assets, they do not make money and should be a class of their own. In the business world, these are depreciated over time for tax and bookkeeping purposes because their useful life runs out. This is known as accumulated depreciation, and the asset will eventually need to be replaced.
Federal budget 2024: A personal finance report card
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