Personal Finance Defined

What is Personal Finance?

The term ‘personal finance’ refers to an application of the basic principles of finance and how those principals should be applied to the monetary decisions of an individual consumer or investor.

Personal finance addresses the particular ways in which individuals (or families) should efficiently apply a budget to their everyday lives. Within this practice, the individual should develop a plan to effectively save their money and spend their resources overtime, in a frugal and intelligent fashion. Personal finance takes into account the various financial risks and future events that are common in life; however, the practice places an emphasis on the importance of shrewdly investing and saving.

The various components of personal finance will include the following categories: checking and savings accounts, investments in stocks, bonds, or other financial instruments, credit cards and consumer loans, retirement plans, social security benefits, income tax management, insurance policies, and the management of an individual’s retirement plan.

Personal finance lumps these categories into one broad classification to deliver an organized and well-structured budget and investment plan to the individual consumer. The goal of the study is to elucidate upon an individual’s ability to effectively manage their finances over the long-term; personal finance does not place an importance on short-term gains or the risk involved in maximizing an individual’s capital over a short period of time.

Personal Finance and Planning:

The key component of personal finance revolves around financial planning. This process requires the delivery of regular evaluations and monitoring of an individual’s finances and their respective long-term plans, goals, and means to obtain their goals. In a general sense, financial planning adheres to give general steps or rules:

Assessment: This step states that an individual’s personal finances can be assessed through the compilation of balance sheets, income statements and tax returns. The personal balance sheet will list the values of the individual’s assets, including their bank accounts, stocks, cars, houses, and other assets.

Additionally, the personal balance sheet will also list the individual’s debts or personal liabilities, including their bank loans, mortgage payments and credit card debts. The personal income statement will provide an individual with a comprehensive list of income figures as well as monthly expenses.

Establishing Goals: This portion of financial planning concerns retirement, purchasing a home, and other financial goals that are common among individual consumers or investors. The ability to retire with a healthy retirement account and the ability to meet mortgage payments without foreclosing are the primary goals of personal finance.

Establishing a Plan: The field of personal finance encourages all individual consumers and investors to establish a long-term financial plan. The financial plan is meant to reduce expenses, increase income, and establish an efficient and diversified investment strategy.

Executing the Plan: To achieve financial goals the investor or consumer must initiate their plan. Typically such plans require discipline and a frugal mindset; to aid an individual in establishing a plan, professional planners can be hired to manage retirement accounts or investment portfolios.

Monitoring the Plan: Once the plan has been developed and initiated, it must be reassessed and perpetually monitored to assure that the plan is efficient and effectively maximizes an individual’s income.

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