What is Personal Finance?

  • Personal finance is a very important subject to understand in order to run a financially sound household, however, many people do not possess enough knowledge about it. What is personal finance? Personal finance is the application of financial principles to individuals’ and families’ monetary decisions. It is used to evaluate and determine how an individual or family generates, budgets, saves, and spends money. Personal finance also includes identifying and planning for future financial risks and life events.

    Key Areas

    The Financial Planning Standards Board has named six key areas of personal finance. They are: evaluating the personal financial position, securing adequate protection against risks, tax planning, setting investment and accumulation goals, retirement planning, and estate planning.

    Planning

    Personal financial planning is the process used to accomplish personal financial goals. The first step, assessment, personal balance sheets and income statements are generated. The personal balance sheet takes into consideration all assets, such as savings and property, and compares them to liabilities, such as loans and other debt. This allows the monitoring and evaluation of the net worth of the individual or family.
    The income statement shows compares personal income to expenses to determine cash flow. The second step is goal setting, where the individual or family sets goals to reach. Common examples of such goals include paying off student and/or credit card debt and investing for retirement. After goals have been set the next step is to create a financial plan to meet those goals. Financial plans vary greatly depending on the goals and financial situation of each individual or family. Finally, after a plan has been created, it must be executed. Constant monitoring and reevaluation is then required to account for new information or circumstances and ensure that the executed plan is on pace to meet the set goals.