SH1663

Managing Personal Finance

I. Money Management Philosophies
A. Money Management Philosophies
• Dave Ramsey’s Envelope System – This system is simple. First, budget each allowance to
the last peso. How much will you use for food, transportation, entertainment, and other
expenses? After you itemized the expenses, label the envelopes and fill each with the pre-
determined amounts. During the course of the time period set, if you spend all the cash in
one of the envelopes, you can’t spend any more money until the next period. Limiting
yourself to a pre-determined amount of cash helps prevent impulse spending and over-
spending.
• Alexa von Tobel’s 50/20/30 System – Alexa von Tobel developed this system for people
who want to work towards their financial goals without depriving themselves entirely. The
basic breakdown is that 50% of your money goes to essentials, like food and transportation,
20% goes to your savings, and 30% goes to everything else, like shopping, travel, and
entertainment.
• Peter Dunn’s “Ideal Budget” – Peter Dunn also uses percentages to break down expenses.
He recommends spending 25% of your income on housing, 15% on transportation, 12% on
groceries and dining out, 10% on savings, 10% on utilities and phone bills, 5% on charity,
5% on clothing, 5% on entertainment, 5% on medical expenses, 5% on holidays and gifts,
and 3% on miscellaneous expenses. Dunn argues that all people can do something to better
manage their financial lives, no matter what the situation and these percentages really help
when you’re looking to set up a clear, concrete budgeting system.

B. Using Technology in Money Management

• Suze Orman – Suze Orman is a personal financial advisor who has developed several online
tools to help individuals better understand and control their finances. Among these are the
“Debt Eliminator,” which gives people an honest look at what they owe and what they need
to do to fix it, and the “Expense Tracker,” which shows a clearer picture of how much
money is coming in and how much money is going out each month. Orman’s tools provide
a useful method for people to begin exploring personal finance without having to commit
to a specific program.
• Budgeting apps – Budgeting apps help the users save money, budget for upcoming
expenses and also avoid late fees. These budgeting apps help turn the user’s devices (such
as phones and computers) into personal finance advisors that can help the user know when
to spend money, prevent wasting money and advice on how to invest money. The personal
finance apps automate much of the budget setting process and help users quickly learn
habits and alert them to costly money mistakes before they happen.

II. Personal Financial Plan

A. Personal financial planning process
• Personal financial planning is the process of managing your money to achieve personal
economic satisfaction. This planning process allows you to control your financial situation.

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• A comprehensive financial plan can enhance the quality of life and increase satisfaction by
reducing uncertainty about future needs and resources. Specific advantages of personal
finance planning include:
o Increased effectiveness in obtaining, using and protecting financial resources
o Increased control of financial affairs by avoiding excessive debt, bankruptcy, and
dependence on others for economic security
o Improved personal relationships resulting from well-planned and effectively
communicated financial decisions
o A sense of freedom from financial worries obtained by looking to the future,
anticipating expenses, and achieving personal economic goals

• The financial planning process is a logical, six-step process:

1. Determine current financial situation – In the first step, the individual must determine
his/her financial situation regarding income, savings, living expenses, and debts.
Preparing a list of current balances and amounts spent for various items gives a
foundation for financial planning activities.
2. Develop financial goals – Individuals should periodically analyze their financial values
and attitudes towards money. Values are the ideas and principles that a person considers
correct, desirable, and important. For example, an individual may believe that it is
wrong to borrow money when purchasing consumer goods, such as expensive clothes.
Because of this, the individual will only shop for clothes once he/she has saved the
money. Analyzing the financial values and goals also helps the individual differentiate
needs from wants.
3. Identify alternative courses of action – Developing alternatives is crucial when making
decisions. Possible courses of actions usually fall under these categories:
 Continue the same course of action – For example, the individual may decide that
the amount s/he saves monthly is still appropriate.
 Expand the current situation – The individual may choose to save a larger amount
each month.
 Change the current situation – The individual may also choose to save using a
current account instead of a savings account.
 Take a new course of action – The individual may decide to use their monthly
savings to pay off debt.
4. Evaluate alternatives – The individual then needs to evaluate the possible courses of
action, taking into consideration his/her current situation, personal values, and current
economic conditions. Each decision closes off alternatives. For example, expanding
savings may mean that the individual cannot take a vacation. Opportunity cost is what
you give up by making a choice. This cost, also known as trade-off cost, cannot always
be measured in terms of money. Uncertainty and risk are also parts of every decision.
It may be difficult to assess risk, but the best way to do it is to gather information based
on experience and use financial planning information sources.
5. Create and implement the financial action plan – This step of the financial planning
process involves developing an action plan that identifies ways to achieve the
individual’s goals. To implement the financial plan, assistance from others may be
needed. Examples of financial planning sources are:

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Print and Media Digital sources

• Books • Websites
• Periodicals • Blogs
• Newsletters • Phone apps
• Television, radio programs • Online videos
• Social media
Financial experts: Seminars/courses Financial institutions: Materials or
with: web sites from:
• Financial planners • Credit unions
• Bankers/accountants • Banks
• Insurance agents • Investment, insurance, real
• Credit counselors estate companies
• Tax service providers

6. Re-evaluate and revise the plan – Financial planning is a dynamic process that does
not end when the individual takes a particular action. He/she needs to regularly assess
financial decisions. It is recommended to have a complete review of your finances at
least once a year.
B. Setting Financial Planning Goals
• Factors influencing financial goals
o Timing of the goals – There are three (3) time frames enumerated: short-term goals,
which are achieved within the next year; intermediate goals, which has a time frame of
one to five years, and long-term goals, which are set more than five (5) years into the
future.
o Goals for different financial needs – A goal of obtaining increased career training is
different from a goal of saving money to pay a car loan. Consumable-product goals
usually occur on a periodic basis and involve items that are used up relatively quickly,
such as food, clothing, and entertainment. Durable-product goals usually involve
infrequently purchased, expensive items such as appliances, cars and sporting
equipment. Finally, there are intangible-purchase goals, which relate to personal
relationships, health, education, and leisure.
• SMART Goals in Personal Finance
o SPECIFIC, to know exactly what the goals are and create a plan designed to achieve
those goals
o MEASURABLE with a specific amount
o ATTAINABLE, providing the basis for the personal financial activities that must be
done
o RELEVANT, involving goals based on the individual’s income and real life situation
o TIME-BASED, indicating a time for achieving the goal. This allows the individual to
measure his/her progress towards financial goals.
C. Influences on Financial Decisions
• Life situation and personal values – People in their 20s spend money differently than those
in their 50s. Personal factors such as age, income, household size, and personal beliefs

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influence spending and saving patterns. The table below shows some of the classifications
and life stages individuals go through.
Age Employment situation
• 18-24 • Full-time student
• 25-34 • Not employed
• 35-44 • Full-time employment or volunteer work
• 45-54 • Part-time employment or volunteer work
• 55-64
• 65 and over
Marital status Number and age of household members
• Single • No other household members
• Married • Preschool children
• Separated/ divorced • Elementary and secondary school children
• Widowed • Post-secondary students
• Dependent adults
• Nondependent adults
The life cycle approach is the idea that the average person goes through four (4) basic stages
in personal finance management:
o Early years (18 – 35) – The focus is on creating an emergency fund, saving for a down
payment on a house or condo, and, if necessary, purchasing life insurance. This is also
the ideal time to think about starting a retirement fund because the earlier one starts, the
less money should be saved later on to catch up.
o Middle years (36 – 55) – the focus is to start building wealth by paying down the
mortgage and increasing savings and investments.
o Middle age (50 – 65) – The focus during this age is to provide an adequate retirement
fund.
o Retirement years – After retirement, the focus is the effective management of
previously managed wealth.
Some common financial goals and activities:
o Obtain appropriate career training
o Create an effective financial recordkeeping system
o Develop regular savings and investment program
o Accumulate an appropriate emergency fund
o Purchase appropriate types and amounts of insurance coverage
o Create and implement a flexible budget
o Evaluate and select appropriate investments
o Establish and implement a plan for retirement goals

• Economic forces – Personal financial decisions are heavily influenced by:

o Consumer prices – Inflation is the rise in the general level of prices. In times of
inflation, the purchasing power (the amount of goods and services money can buy) of
the peso decreases. The main cause of inflation is an increase in demand without a
comparable increase in supply. For example, if people have more money to spend
because of a salary increase but cannot find the products they want to buy, the demand
for those products may cause prices to increase. Inflation is most harmful to those living

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on a fixed income. The increase in prices without a corresponding increase in pay will
cause them to afford fewer goods and services.
o Consumer spending – The total demand for goods and services in the economy
influences employment opportunities and the potential for income. As consumer
spending increases, the financial resources of businesses also increase. This situation
improves the financial condition of many households.
o Interest rates - Interest rates represent the cost of money. When consumer saving and
investment increase the supply of money, interest rates tend to decrease. However, as
consumer, business, government and foreign borrowing increase the demand for
money, interest rates tend to rise.

References:
Benito, P. P., Chan Pao, T. P., & Yumang, K. (2016). Exploring small business and personal finance
in senior high. Quezon City: Phoenix Publishing House.
Meter, M. V. (2015). Which personal finance philosophy is right for you?. Retrieved from Smarty
Cents Website: http://smartycents.com/articles/which-personal-finance-philosophy-is-right-
for-you/
Smith, J. (2017). 11 best budget apps for 2017. Retrieved from Gotta Be Mobile Website:
http://www.gottabemobile.com/best-budget-apps/

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