What Is Personal Finance and Why Does It Matter?
What is Personal Finance?
Personal Finance refers to managing your money, saving, and investing. It covers budgeting, banking, insurance, mortgages, investments, and retirement planning. This term is often used to describe the entire financial services industry, which provides financial advice to households and individuals about investment and economic opportunities.
How you approach these items will depend on your individual goals and financial plans. It is essential to be financially savvy to make the most out of your savings and income. This will allow you to distinguish between good advice and poor and help you make intelligent financial decisions.
Personal Finance: The Importance of Personal Finance
Personal Finance is all about achieving your financial goals. This could include having enough money to cover your short-term financial needs or planning for retirement. It all depends on your income, how much you spend, how much you save, how well you invest, and what personal protection (insurance or estate planning) you have.
Americans have accumulated enormous debt because they need to learn how to manage their finances and are not financially disciplined. Since December 2019, household debt has increased by $2 trillion in August 2022. The following balances also increased between the first and second quarters of 2022:
- Credit card balances – Up to $46 billion
- Auto loans up to $33 billion
- Store cards and consumer loans: up to $25 billion
- Total non-housing – Up to $103 billion
- Mortgages – Up to $207 Billion
Financial Planning
Personal Finance can be divided into five categories: income, savings, spending, investing, and protection.
Income
Personal Finance starts with income. It’s the total cash flow you have that you can use to pay expenses, save money, invest, or protect your assets. All the money you earn is income. This includes wages, salaries, dividends, or any other cash flow.
Spending
Spending is an outflow and usually where the majority of income goes. The amount of money an individual spends on their purchases is called spending. This includes rent, mortgages, groceries, hobbies, and eating out.
Personal Finance is all about being able to control your spending. Individuals must ensure that their spending does not exceed their income. They will either have less money to pay their bills or fall into debt if they don’t. High-interest credit card rates and debt can lead to financial ruin.
Savings
The income that is left after spending is called savings. Everybody should have enough savings to cover significant expenses and unexpected costs. This means that you should use only some of your income. No matter how difficult it may be, everyone should aim to save at least some of their income to cover fluctuations in income or spending. This should be between three to twelve months’ worth of expenses.
Cash sitting idle in savings accounts is a wasteful practice that loses its purchasing power due to inflation. Cash should not be kept in an emergency fund or spending account. Instead, it should be invested in something that will grow its value and help it to maintain or grow.
Investing
Investing is the purchase of assets such as stocks or bonds to make a return on your investment. Investing is intended to increase wealth beyond what was invested. There are risks involved in investing. Not all assets appreciate equally and may lose their value.
It cannot be obvious to invest. If you are unfamiliar with the subject, it is worth taking time to learn through reading and studying. It is helpful to hire a professional to help with your investments.
Protection
Protection is a way to safeguard yourself from unanticipated events such as illness or accidents and to preserve your wealth. Protecting your life and health and planning for retirement are all part of protection.