Personal Finance: Learn about Personal Finance

Personal finance is a term that covers the management of your money as well as savings and investments. This includes budgeting, banking, insurance, m

When we are trying to understand personal finance, the best thing to do is to understand what personal finance is not.

Many people think that accounting and personal finance are the same, but personal finance accounting is not.

Learn about Personal Finance
Learn about Personal Finance

On the surface they may look alike; They both have something to do with money. However, the definitions will help us understand the differences better.

This is why having an accountant is usually not enough when it comes to your personal finances.

Accountants generally don't concern themselves with personal finance (there are a few exceptions to this rule). Unless your accountant is also a financial advisor or coach, he or she will look at what you did with your money at the end of the year and provide you with a report of their analysis.

This report is usually your tax return; What do you owe the government or what does the government owe you.

Also Read:- Comman Small Business Loan Mistakes to Avoid

Very rarely does an accountant provide a balance sheet or income statement or net worth statement to an individual; All very useful tools that are needed to effectively manage your personal finances.

Personal finance is looking at your finances from a more proactive and goal-oriented approach. This is what provides accountants with something to record, verify, and analyze.

Merriam-Webster's (abbreviated encyclopedia) definition of "finance" is "the process of raising money or capital for any type of expenditure. Consumers, business firms, and governments often do not have the funds they need to make purchases or operate their own." Whereas savers and investors have funds that can earn interest or dividends when put to productive use. Finance, in the form of credit, loans or invested capital to users from savers, commercial banks, savings and is the process of circulating money through agencies, including credit associations, and such non-bank organizations as credit unions and investment companies. Finance can be divided into three broad areas: business finance, personal finance, and public Finance. All three include budgeting and managing money for optimum results".

Personal Finance Simplified

By understanding the definition of "Finance" we can divide our "Personal Finance" into 3 simple activities:-

  1. The process of raising money or capital for any kind of expenditure = generating income.
    A business gets money through the sale of its products and services. It is labeled "revenue" or "income." Some businesses will also invest a portion of their revenue to generate more income (interest income).
    A person gets money through a job, or a small business (self-employed, sole proprietorship, network marketing or other small business venture). The money coming in can be a salary, hourly wage or commission, and is also known as income.
    A government gets money through the taxes we pay. It is one of the main ways that the government generates an income which is used to build infrastructure like roads, bridges, schools, hospitals etc for our cities.
  2. Using our money to make purchases = spending money.
    How much we spend relative to what we earn makes the difference between having optimal results in our personal finances. Making good spending decisions is key to achieving financial wealth – no matter how much you make.

  3. Achieving optimum results = keeping your money as long as possible
    It doesn't matter how much you earn, it matters - it matters how much you keep in terms of your personal finances.

This is the part of personal finance that almost everyone finds most challenging.

Often people who make a large income (six digits or more) spend the same (or more) which means they put themselves in debt and that debt starts charging interest. Before long that debt can start to mount up quickly and destroy any hope they would have had for getting the money.

Personal Finance Made Simple

Personal finance doesn't need to be complicated if you keep this simple formula in mind:

Income - Expenses = What Do You Keep

For optimal results, you just have to make more than you spend and spend less than you make so you can keep more for yourself and your family!

If you are not actively working towards an optimal result, you will by default get less than optimal results.

It really is that simple!

Now that you understand personal finance and what you need to do, the next step is to learn how to do it!

The best way to start is by following these 3 simple steps:-

  1. Know what you want to achieve - "If you don't know where you're going, any road will get you there" has become a very popular quote, probably because it's true. One of the habits that Stephen Covey highlights in his book "7 Habits of Highly Successful People" is to always start with the end in mind. Knowing where you want to go will go a long way in getting you there.
  2. Create a plan - which you can follow that will lead you to your goals. Knowing how you will achieve your goals in a phased plan is invaluable. Sometimes this becomes easier with the help of an advisor or financial coach.
  3. Make use of tools and resources - that will help you stick to your plan and not get distracted by things in life that can limit our income and make us spend more than we should. Don't try and work it all out in your head! You will end up with a huge headache and your finances will become a huge black fog!

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Personal Finance: Learn about Personal Finance
Personal finance is a term that covers the management of your money as well as savings and investments. This includes budgeting, banking, insurance, m
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