Personal financing  

There are various reasons for people to require finance ranging from the simple need of survival to the long-term goal of providing for retirement. To meet personal needs, finances can be categorised into six main sectors shown here:

 

 

 

 

 

 

 

Survival:  Survival is the need for food, water and shelter in order to stay alive. In developed countries, these necessities are primarily purchased from traders, where money from earnings or gifts is used to finance these essentials. In less developed countries, a majority of people spend all their energy on this aspect of personal financing.

 

Education: Education is vital in our constantly changing society. It is a type of life-long learning and can take many forms such as learning about hobby interests or completing tertiary education courses. Education is a component that needs financing by each individual throughout their life time.

 

Health: Health is an issue due to the ageing population in developed countries. It is important to take care of one’s health to ensure quality of life hence there is a need to consider preventative health measures. In Australia, Medicare is a compulsory insurance cover for health, funded through the tax system. As well, there are various private health-insurance schemes available for specialist and private hospital cover.

Purchase of major assets: The common types of assets individuals purchase are cars, houses, computers and electronic equipment. These assets vary considerably in price and durability.

 

Purchase of major assets: The majority of the types of assests individuals purchase are cars, houses, computers and electronic equipment. These assets vary from price and durability, ranging from expensive but long-lasting (e.g. houses), to less expensive assets with shorter life span (e.g. computers). 

 

Wealth creation: Wealth creation is the process where individuals save some of their earnings for future needs. These savings are invested in places such as financial institutions, shares or property where interest is earned, dividend or rent or create capital gain. Income gained through knowledge can provide an individual with the opportunity to earn addition wealth. For instance, a person may have knowledge about the share market that allows them to implement profitable investment strategies.

 

Leisure activities: There are a variety of different leisure activities in which individuals may spend their time on such as travel, arts, volunteer work or sports. The finances required for each of these activities vary depending on the extent of the participation, time involved and equipment needed. 

 

Investment

 

A regualr income is important for both current expenditure and saving for the future. Thus, people make investments for a variety of reasons such as,

• maintaining or improving their current lifestyle

• becoming or remaining financially independent

• educating themselves or their dependants

• meeting emergencies

• living in retirement

• generating an income if they become unable to work

• accumulating wealth for children, relatives or for others to inherit.

Each of these aims can be achieved through either capital growth or income generation. 

 

The purpose of your investment can be ascertained by answering the following

questions:

• Is security of your investment the major aim?

• Do you need an income from your investment?

• Are you interested in getting capital growth rather than an income from your

investment?

• Is quick access to the funds important?

• Is tax effectiveness on any distributions received from your investments an

important factor?

 

 

 

(Source: Accounting Concepts and Applications 4th edition, Phillipa Greig, Joan Mackay, Stacey Beaumont, Rosette Sanger, 2008)