Avoiding Downfall During Windfall
The common mistake that many lottery winners make is overspending. Too often, they lack the knowledge and skills needed to manage their finances. They get so used to pay-cheque-to-pay-cheque kind of life that when they encounter a financial breakthrough, it becomes too much for them to handle. People, regardless of their financial status, need to practice sound personal financial management.
Personal finance pertains to the application of the different concepts of finance to the monetary decision-making of an individual or family unit. It allows individuals or families to effectively obtain, budget, save, and spend their financial resources over a span of time, while taking into account possible risks and future events.
Planning is the key to a successful implementation of personal finance. It points to a dynamic process, which requires monitoring and re-assessment on a regular basis. For a clearer understanding of the subject, the five steps in financial planning are:
1. Assessment -– an individual's personal financial situation may be assessed through the compilation of simplified versions of financial documents such as balance sheets and income statements. A personal balance sheet includes: (a) personal assets like car, house, clothes, bank account, etc.; and (b) personal liabilities like credit card debt, bank loan, mortgage, etc. On the other hand, a personal income statement includes an individual's income and expenses.
2. Setting goals -– it is important to establish personal goals that a person desires to achieve. Goals should be attainable and realistic. They set the direction of financial planning. For instance, an individual may want to retire at the age of 65 with a personal net worth of 500,000 British pounds. Another example would be to buy a luxury car in two years, paying a monthly payment of utmost a fifth of one's gross income per month.
3. Creating a plan –- a financial plan details the methods, techniques, and strategies needed to accomplish one's goals. The common methods include eliminating unnecessary expenses, increasing income, or investing in the stock market.
4. Execution –- a sound plan would be futile if one does not put it into action. Execution of a personal financial plan normally needs discipline and determination. Often, a person requires help from professionals like accountants, planners, and lawyers.
5. Monitoring –- in this stage, an individual re-assesses his financial plan and checks whether adjustments are needed to make it relevant and effective.
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