What is Personal Finance and how can it help you?
Personal finance is the planning and management of financial activities. These include income generation, spending money, saving, investing and protection. A budget or financial planning is the best way to manage one's personal finances. Sites like Once a Week Blog are great for learning how to manage your finances.
Finance-related areas
We will concentrate on breaking down the most important areas and then explore each in more depth to provide a full understanding of the topic.
Personal finance can be divided into four main areas: income, protection, spending, savings, investing, and saving. Below we'll be discussing each of these areas more in depth.
Income
Income is the source of cash flow an individual receives that they then use to support themselves or their family. It is the base of financial planning.
Common sources are:
- Salaries
- Bonuses
- Hourly earnings
- Pensions
- Dividends
These income streams all produce cash that an individual can use for spending, saving, or investing. This can be considered income as the first stage in our personal finance plan.
Spending
Spending refers to all expenses an individual incurs when buying goods and/or services. All spending falls under one of two categories. Credit is used to pay for purchases with borrowed money or cash. The vast majority of people's income goes towards spending.
These are common sources of expenditure:
- Rent
- Mortgage payments
- Taxes
- Food
- Entertainment
- Travel
- Credit card payments
All the expenses listed here reduce the amount that an individual has for savings and investment. A person has a deficit if their expenses are higher than their income. As important as generating income is managing expenses. In general, people have more control on their discretionary income than their income. Good financial management starts with good spending habits.
Savings
Cash that isn't used for future investments or spending can be called savings. You can use the surplus between what you earn and what you spend to save or invest. Personal finance involves managing your savings.
Common forms of savings are:
- Physical cash
- Savings bank account
- Checking your bank account
- Money market securities
Most people save at most some amount to manage their cashflow, their short-term income gap and their short-term expenses. However, too much savings can be seen to be a bad thing as it does not earn any return relative to investments.
Investing
Investing involves the purchase of assets expected to produce a rate or return. Individuals hope to get more back over time. There are risks involved with investing. Not all assets produce a positive rate. This is the place where we can see the relationship between return and risk.
Common types of investing include:
- Stocks
- Bonds
- Mutual funds
- Real estate
- Private companies
- Commodities
- Art
Investing represents the most difficult area of personal financial planning. However, it is also one of the most popular areas for professional advice. There are vastly different risks and rewards in various investments. Most people seek assistance with this area of financial planning.
Protection
Personal protection includes a number of products that can provide protection against unforseen and adverse events.
Common protection products include the following:
- Life insurance
- The best health insurance
- Estate planning
This area of personal financial planning is often where professional advice is sought. It can also be very complex. It takes a lot of analysis to determine if an individual needs insurance or estate planning.
