Personal finance is the management of individual or family resources to achieve financial security and other goals. Personal finance includes five basic activities: BUDGETING, SAVING, INVESTMENT, retirement planning, and estate planning. Most Americans engage in only a few personal financial- planning activities, leaving themselves and their dependents vulnerable to risks and surprises. Personal finance begins with budgeting, which involves analyzing how one’s INCOME is being spent and making decisions on how to control and allocate it. A typical budget will include allocations for housing, utilities, food, transportation, health care, clothing, INSURANCE, taxes, entertainment, and savings. When first analyzing current expenditures, many people are surprised to find how much of their income is already committed to recurring expenses. Families in financial difficulty may learn they are committed to spending in excess of current income. The CONSUMER CREDIT COUNSELING SERVICE is a banking industry–run service assisting individuals and families who are heavily in debt. Frequently households become overextended through the use of CREDIT CARDS. Until about 1980, credit cards were not aggressively marketed and not issued to individuals who did not have good credit history or a strong personal finance situation. The proliferation of credit cards in subsequent years has facilitated credit PURCHASING but also tested the personal financial management of many families. The second part of personal financial planning is making provision for saving, which is needed for unexpected expenses (the proverbial “rainy day” fund), to provide for replacement of durable goods (items that are used for over a year before being replaced), for uncertainties such as loss of job, and for retirement. Collectively, Americans are terrible savers who often lack the discipline necessary to saving. Most personal financial advisors recommend families have an amount equal to 3–6 months’ average expenditures set aside for emergencies and uncertainty. They also recommend setting aside a percentage of monthly income as part of a personal financial plan. The third part of personal financial management is investing. Investment by individuals and households can have multiple objectives and involve a variety of ASSETS. Typically households invest to earn CAPITAL GAINs from the increase in value of stocks or real estate, or to provide income to support a certain lifestyle and spending pattern. An ever-popular investment question is, “How long will it take for my money to double?” or “How long will it take for the account to double?” The RULE OF 72 estimates with a surprising degree of precision how long it will take for a sum to double at some given rate of interest, compounded annually. The number 72 is the numerator and the denominator is the rate of interest applicable to the situation in question. For example, at 10 percent interest compounded annually, it will take approximately 72/10 = 7.2 years for a sum to double. At 7 percent interest compounded annually, the sum will double in approximately 72/7 = 10 years. The major investment for most Americans is their homes. The U.S. personal income-tax system encourages the purchase of homes by allowing taxpayers to deduct home MORTGAGE interest as an expense if they itemize their tax deductions. Depending on the marginal tax rate a taxpayer is subject to, the deductibility of mortgage interest can reduce the effective long-term interest cost of home ownership. A second area of investment for most Americans is through their RETIREMENT PLANS. Many companies provide matching programs, whereby employees set aside a percentage of their income, which is matched by their employer. Although these programs have restrictions, they effectively double the employees’ investments. When considering investment as part of a personal financial plan, individuals should also consider liquidity and effective rate of return. Liquidity is how easily an asset can be turned into MONEY. Company retirement programs are generally nonliquid investments. As the employees of Enron learned, when the company’s stock went down, their retirement accounts went into a blackout period during which the company was changing retirement-plan administrators. They also found their STOCK OPTIONS and company stock payments into their retirement investments had become worthless. While the U.S. STOCK MARKET, over longer periods of time, has yielded approximately an 8 percent rate of return, the effective yield will be lower, depending on taxes and expenses. During the stock market boom of the late 1990s, many individuals borrowed heavily to invest in the market, often earning significant returns. In recent years, average stock market yields have been considerably lower than those in the 1990s, making paying off credit-card debt secured at high INTEREST RATES an attractive alternative to stock market investment. Another personal investment option is MUTUAL FUNDS. Organized as CORPORATIONs and regulated by the SECURITIES AND EXCHANGE COMMISSION, mutual funds are major FINANCIAL INTERMEDIARIES in today’s world. They accept funds from savers by selling them shares and then use the proceeds to invest in various financial securities ranging from short-term debt instruments to long-term BONDS and stocks. In order to meet the needs and desires of the various savers, each mutual fund specializes in investing in a particular type or a unique mix of securities. Generally there are income funds, growth funds, and mutual funds made up of a mix of income and growth funds. Money-market mutual funds invest only in short term securities and operate like interest-bearing checking accounts for the savers. Insurance should be considered as part of personal financial budgets, retirement options, and estate planning. Insurance is primarily designed to protect individuals and families against the risk of losses or significant expense. Most households use insurance to protect the value of their investment in their home and other PERSONAL PROPERTY, to protect against medical expenses, and to compensate for the death of family members who contributed to the household’s welfare and expenses. Insurance products such as GUARANTEED INVESTMENT CONTRACTs (GICs) are sometimes used as part of a retirement income plan. Life insurance is also used as part of estate planning. Wealthy individuals purchase life insurance to pay estate taxes, allowing inheritors to retain other valuable family assets. In addition to using insurance as part of estate planning, personal finance management includes wills, TRUSTs, and power of attorney documents to facilitate the transfer of assets from one generation to the next. Many family conflicts have arisen over the failure to execute clear estate plans. The FINANCIAL PLANNING ASSOCIATION (FPA) is an organization that trains and certifies people to assist with personal finance. Financial planning is the process of establishing personal financial goals and allocating resources to obtain those goals. The FPA was created in 2000 through a merger of the Institute of Certified Financial Planners and the International Association for Financial Planning.