What Is Personal Finance
What Is Personal Finance - Managing your money well is what personal finance is all about. Saving, spending, and investing are the three basic concepts of finance that you need to understand. If you can do that, then you’re on your way to being good at personal finance!
Money is a big part of everyone's life. When you don't know how to handle it well, it can lead to lots of stress and problems. But when you understand personal finance, you can achieve freedom, happiness, and security. Here's how to get started.
Definition and Examples of Personal Finance
Personal finance is a way to describe how good or bad you are at handling your money. It includes figuring out how you spend, save, protect, and invest your money to create the kind of lifestyle you want.
What is Personal Finance?
Personal finance is the process of organizing and managing personal finances. This includes activities such as income generation, spending, saving, investing, and protection.
Managing personal finances can be done by creating a budget or financial plan. In this guide, we will discuss the most important aspects of individual finance management.
Personal finance consists of a variety of different topics, including:
- Income generation
- Budgeting
- Banking
- Insurance
- Loans and mortgages
- Investments
- Retirement planning
- Tax and estate planning
There's no one-size-fits-all answer when it comes to personal finance, according to Todd Christensen, AFCPE at Debt Reduction Services and author of "Everyday Money for Everyday People."
According to Christensen, examples of personal finance might include:
- Planning your monthly spending
- Balancing your checkbook or debit account
- Transferring money from your checking account to your savings account is a great way to save up for a rainy day.
- Setting up direct deposit for an IRA
Areas of financial planning
This guide will focus on personal finance and breaking down the most important areas. We will explore each area in more detail so you have a comprehensive understanding of the topic.
There are five main areas of personal finance: income, spending, saving, investing, and protection. This article will explore each of these areas in more detail.
#1 Income
Everyone's life revolves around money in one way or another. Income is what we use to support ourselves and our families. It is the genesis of our financial planning process.
Common sources of income are:
- Salaries
- Bonuses
- Hourly wages
- Pensions
- Dividends
Sources of income are a key part of personal finance. They provide the cash that lets us do things like spend, save, and invest. So income is the first step on our roadmap to financial success.
#2 Spending
Spending is any money an individual spends on anything, whether it’s goods, services, or consumables. It can be divided into two categories: cash (paid for with cash) and credit (paid for by borrowing money). Most people’s income is put towards spending.
Common sources of spending are:
- Rent
- Mortgage payments
- Taxes
- Food
- Entertainment
- Travel
- Credit card payments
Managing expenses is just as important as generating income. Typically, people have more control over their discretionary expenses than their income. This means that good spending habits are critical for good personal finance management.
#3 Saving
Saving refers to the act of setting money aside for future investments or spending. If a person earns more money than they spend, they can choose to save the difference or invest it. It is important to manage your savings responsibly in order to make the most of your money.
Common forms of savings include:
- Physical cash
- Savings bank account
- Checking bank account
- Money market securities
Most people keep some savings to cover their expenses when their income is low. Having too much money saved, however, is not a good thing because it doesn't earn much money compared to investments.
#4 Investing
Investing is the purchase of an asset that is expected to generate a rate of return. Unfortunately, not all investments produce a positive return. This is where we see the relationship between risk and return. All investors should be aware of the risks associated with any investment they make before signing up.
Common forms of investing include:
- Stocks
- Bonds
- Mutual funds
- Real estate
- Private companies
- Commodities
- Art
Most people seek professional help when it comes to investing because there are vast differences in risk and reward between different investments. Investing can be a complicated area of personal finance, and it's important to make smart choices when it comes to your money.
#5 Protection
Personal protection refers to a variety of products that can be used to guard against an unforeseen event.
Common protection products include:
- Life insurance
- Health insurance
- Estate planning
This is another topic in personal finance where people often seek professional help. It can get pretty complicated. There is a whole series of analysis that needs to be done to properly assess an individual’s insurance and estate planning needs.
How Personal Finance Works
Living below your means and saving money is the key to good personal finance. This advice may seem old-fashioned, but it still holds true today. By making wise choices with your money, you'll have more freedom and options down the road.
There's more to personal finance than budgeting, according to Lauren Zangardi Haynes, a CFP, CIMA, and CEPA at Spark Financial Advisors. "It's understanding credit cards, how compound interest works for you (or against you), understanding Roth vs. pre-tax savings, planning for a rainy day, making housing decisions, and saving for college and retirement," she said. "It's interwoven in our daily lives at every corner."
Zangardi Haynes believes that understanding personal finance is key to reducing anxiety around money. She says that you don’t need to be an expert, you just need to know the basics.
How Can You Be Good at Personal Finance?
Good personal finance skills are essential, no matter how much money you have. You need to make your money work for you to be successful.
Money is a critical part of life, and if someone doesn't know how to manage it properly, they can end up with a lot of stress and headaches. Ksenia Yudina, CFA, founder, and CEO of UNest says that once you get your finances in order, you can focus on the things that matter most to you.
Set Clear Financial Goals
Everyone has a different vision of what financial success looks like. Maybe for you, it’s having a credit score over 800, retiring by age 50, or helping your kids avoid the student loan squeeze. Or maybe you dream of driving a luxury car or owning a second home by the beach.
Whatever your goals may be, you must have a plan in place to achieve them if you want to be successful. Make sure your goals are SMART: Specific, Measurable, Achievable, Realistic, and Time-bound.
Start Budgeting
Budgeting is one of the most important skills when it comes to personal finance. It allows you to track your income and expenses so you can see where your money is going each month.
When done right, budgeting gives you more control over your finances and lets you spend more on what you love while spending less on what you don’t need. There are a lot of great budgeting apps that can help automate the process for you.
Build an Emergency Fund
If you're always struggling to pay your bills, an emergency fund could provide some relief. It's one of the basics of personal finance and can help cushion you if something unexpected happens (like your car breaking down or your cat needing emergency vet care).
Many financial advisors recommend you keep three to six months of basic expenses in a savings account for your emergency fund. If that seems out of reach, start small with a $1,000 starter fund or one month’s worth of expenses. Anything is better than nothing.
Pay Off Debt
Debt can be a challenge to get out of, but there are many reasons why you should do it. Good financial health starts with being debt-free. When you don’t have any debts, you increase your financial security, have more money to spend on things you enjoy, and improve your credit score.
Reducing your debt is one of the smartest things you can do for your financial future. “Eliminating high-interest debt should be a top priority when it comes to personal finance,” said Yudina. “This type of debt can quickly spiral out of control and derail any financial plan you have in place.”
Start Saving for Retirement
Saving for retirement is definitely a smart move. You can get tax breaks for contributing, you’ll have a cushion for when you stop working, and your employer might even give you free money to save!
Saving for retirement is important, and there are a few steps you can take to get started. First, contribute enough to your employer’s retirement plan to get the full match, if one is available. After that, consider maxing out a Roth IRA. Once you’ve done that, you can go back to saving in your 401(k). Following this rule of thumb will help you save for retirement.
Stick With It
The goal of personal finance is to spend less so you can save and invest more money. It can be difficult to stick to this concept when you’re constantly bombarded with marketing messages telling you to buy more.
Make sure you ask yourself if the purchase aligns with your values and brings you closer to the life you want. Will you enjoy the purchase or are you just buying it to buy it? These questions will help minimize your chances of wasting money on something that puts you farther away from your goals.
Increase Your Personal Finance Literacy
Basic financial literacy isn’t taught in most U.S. school systems. However, if you want to be successful with your finances, it’s important that you seek out this information. Financial literacy includes understanding the facts, tools, and principles related to money.
If you want to start improving your personal finance literacy but don't know where to start, here are three great resources. Each one will give you a different perspective on managing your money.
Personal Finance Podcasts
Personal finance can seem confusing and boring to newcomers, but with the right podcasts, it’s easier to see how it applies to your life. There are a lot of great personal finance podcasts out there that will teach you everything you need to know.
Personal Finance Books
There are many great personal finance books that can teach you how to better manage your money. These books will cover topics such as investing, paying off debt, changing your money mindset, and increasing your income.
Tip: You can save money by borrowing personal finance books for free from your local library.
Personal Finance Software
Personal finance software and apps are tools you can use to manage your money. They come in many different varieties, but all offer a hands-on way for you to take charge of your finances. Some focus on budgeting and tracking expenses, while others help you manage your investments. Whatever your needs, there’s likely a personal finance tool out there to fit the bill.
| Key Takeaways |
- Personal finance is all about how you use your money. You may need to think about how to save money, invest money, and spend money wisely.
- Personal finance is important because it affects the lifestyle you can afford now and in the future.
- Personal finance is all about spending less than you earn and using your savings to reach your goals.
- You can improve your financial literacy by looking for personal finance podcasts, books, apps, and other resources. Podcasts, books, and apps are great ways to learn about different aspects of financial literacy. You can also find other resources on the internet or in your community.