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Your life can suddenly turn into a rat race. However, you have already found the art of allocating your time among all the things that you have to manage on a day to day basis. You are able to manage your career, provide the needs of your family, attend to home repairs and deliver on a lot of other things which are expected of you. How about your finances? When was the last time you had evaluated and assessed your financial position?

It is important for you to learn the basics of financial management. You have to develop a keen understanding of the ways by which you can effectively handle your finances. This means that you must learn about net worth, cash flow, debt, credit scores, insurance and cash reserves.

Assess your Cash Flow

Using a spreadsheet or other financial management software, prepare a list of all sources of income and their respective amounts. Create another column where you will put the list of all your expenses. Include in this column your retirement contributions and automatic savings. Compare the two columns. The difference must always be on the positive range. If you are getting a negative amount, then this means that you are spending beyond your means. You have to get rid of the excess fat in your finances by reducing your expenses. You also have to look for ways by which you can increase the amount on the income column.

Assess Your Net Worth

Your net worth is a measure of your personal wealth. This gives you the “macro” view of financial health condition. There are 3 ways by which you can improve your net worth. You can increase your assets, reduce your debts and you can do both options simultaneously. Your net worth can be derived by subtracting your liabilities from your assets. You can use your net worth to determine whether you are meeting your financial goals or not.

Check Your Cash Reserves

The state of your liquidity is also a good measure of your financial health. Your cash reserve should be enough to cover your financial requirements under a worst case scenario. It is not enough that you have an existing credit line. A sufficient cash reserve is essential especially if your cash flow is limited or almost zilch.

For instance, you must have sufficient cash reserve in the event that you get separated from your present job. The amount must be enough to cover your expenses until you receive your employment insurance.

Check Your Credit Score

Develop the habit of regularly checking your credit score and credit report. You have to make sure that all the information that are reflected in your credit report are accurate and with basis. Make sure that errors are immediately rectified as this can seriously impact on your credit standing.

Check Your Insurance Portfolio

Your insurance is probably the most neglected item in your personal finance portfolio. You must be able to understand the importance of having the appropriate insurance policy that will protect your family from financial ruin in the event that something happens to you. It is important that your family can survive if your source of income is suddenly cut off as a result of disability or death.

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Personal Finances FAQ:

Question: From Canada, took out personal loan from finance company.
Applied over the internet, was called & informed of much different terms/payment info. Signed under duress. Is there a cooling off period allowed to cancel contract?

Answer: Generally if a contract for goods and services is signed in your residence, there is a cooling off period of 48-72 hours depending on the province. But if you signed it on their premises you’re SOL. However, there could be different terms for certain contracts. For instance, I believe if you are approved for a bank loan, the contract only becomes enforceable when you actually withdraw the money from your account. Also there may be special rules in the case where the borrower and lender do not actually meet. Call your provincial Ministry of Consumer and Commercial Relations.

Question: What are some tips to save money and what is the best type of account to open for savings in Canada?
I am single in my early thirties, and I only have $1500 in savings right now. I am trying to rebuild my finances after a devastating personal and financial loss.

Answer: The Canadian government has implemented a “Tax Free Savings Account”. It lets you save money and you don’t have to pay tax on any gains you make from interest, etc in the account. You can contribute up to $5,000 per year. Ask at your bank how to open one.

Question: Which checking account type would you choose and why?
What is one thing you might do to make sure you use an ATM responsibly? Why might someone choose a checking account that had a fee associated with it?

Answer: I personally use two types of accounts. One with a fee because it allows me the privilege of going into the bank and talking to someone. It’s the account that also allows me to get money orders, drafts, etc.

The other account is a no-fee account but I don’t get any of those perks. It’s mostly only online and telephone banking. Cheques are free though.

Make sure you hide your pin when using an ATM, as well as use your branches ATM’s to avoid fees of convenience ATMs in malls and such.

Question: Can someone explain to me how municipal bonds work?
I recently took a personal finance class in school and I think I’m misinformed about this. I know municipal bonds have no taxes. I was taught that for example, if you put out 10,000 with 4%, you get 4% interest every year until maturity but that’s a lot, and it makes no sense. I think that percent might be given over the whole maturity of the bond? But then the coupon which I think is like dividend or payment to you every year? I’m confused.

Answer: The only thing that is tax free is the interest payments, and there are exceptions to that rule. Most states have a personal income tax. The interest payments from Muni bonds issued in another state may be taxable. It depends on the individual state. However if you live in a state with an income tax, income from bonds issued in your own state are usually not taxable. Again, there are exceptions.

Generally, Bonds pay periodic interest payments, usually twice a year. These are known as the “coupon” payments. When a bond is issued, the coupon rate is determined based on various factors and once set, it never changes. Also, the overwhelming majority of bonds issued in the USA have a “Par” value of $1,000.00 and that coupon rate is based on that one thousand dollar par. So if you “put out” or purchased ten thousand dollars you would be buying 10 individual $1000 face value bonds that are paying (in your example) a 4% coupon. That amounts to $40.00 per year divided into two equal payments of $20 made 6 months apart. If you had ten of them, you would get $400 per year.

A bond with a 4% coupon pays 4% on an annual basis. It pays 4% every year until the maturity date at which point it is redeemed by the issuer and the holder gets $1000.00 back for each bond he owns. The coupon is an interest payment. Dividends are different. Stocks pay dividends. Bonds pay interest.

Question: Why is it bad to discuss personal finances with colleagues?
And anybody else besides close family and friends?

Answer: Well, with colleagues it becomes an ethical issue at work. People each have their own rights to privacy, and a lot of fights get started at work over who is getting paid more than who.

With other people in general, its a very touchy subject. I have found that people who have money come off like they are bragging. Other people have less money and they don’t want you to feel sorry or have pity on them. And surprisingly the amount of money you have can have a large impact on what others think about you, and some people just don’t want to get into that kind of drama.

Question: Need a spread sheet for personal finances. How and where do I start?

Answer: Mint.com is a very good website for personal financial management. It can detect what money is spent on your debit/credit cards and show you graphs about spending. Quicken Online is also very good or just make it yourself in Excel/Open Office. It’s actually brutally easy.

Question: What’s the difference between online personal finance software and desktop personal finance software?

Answer: Desktop software is something you install on your local hard drive.

On-line software is something you ACCESS through a web browser. It MIGHT download temporary applets to run on your computer, but those get deleted when you exit the program.

Online financial software actually has many advantages over desktop software. But, if storing your data on an online provider’s server makes you nervous, then desktop is the way to go as long as you take the appropriate measures to secure your data (back up, anti-virus and firewall software).

Question: Most important personal finance number – personal net worth or credit score?

Answer: Net Worth. Credit score is useful when you want to borrow money, but a person with a great credit score can buy lots of stuff he can’t afford. With a high net worth you can liquidate assets and buy what you like. However, a good credit score is more important when borrowing money.

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