What Is Personal Finance

Personal finance is the application or the process of successfully managing assets of an individual or a family unit.  It addresses the way in which a family, or individual, generate income for the household and reserve a specific amount of that income to cover all expenses associated within the household.  The ultimate goal is to create reserves of cash and other assets in order to create ongoing financial security.

Financial planning is essential when it comes to personal finance because it gives you an overview on the flow of income, which can either come into the household or leave the household.  You might ask, “What is income?” Well, income is your wages or salary from your job, but there are other forms of income that might apply.  For example, interest earned from investments, alimony or child support payments and other forms of compensation all qualify as income.

Now that you have a little knowledge on what income is, you must also learn how to identify and understand what fixed and variable expenses associated with the household are.

Examples of Fixed Expenses are:

  1. Rent/Mortgage payment
  2. Car payments
  3. Any outstanding loans

Examples of Variable Expenses are:

  1. Food
  2. Monthly utility costs
  3. Monthly bank service charges

Once you are able to identify your income and expenses, the next step is to set up a budget for your personal finance plan.  For the most part you have done some of the work by simply indentifying what your income and expenses are. Next, you must also take into consideration those expenses that do not occur every month, such as clothing and auto repairs.  You want to make sure that an unexpected car breakdown doesn’t take a big chunk of your spending money.

Now that you have subtracted all your expenses from your income that is flowing in, you must learn how to evaluate the income that is left over.  It is from this left over money that you can begin to build your financial wealth.  Remember that part of the left over money will be used for entertainment. By that I mean your occasional going out to the movies or going out for a meal.  Just do not go overboard!  This excess income should also be used to build up a savings account, a college fund,  life insurance, or set aside a retirement fund.  Do not get discouraged if you only have a little left over, it is still wise to set aside some income.

Learning how to monitor the efficiency of your budget and learning how to make the appropriate adjustments is an important aspect of personal finance.  You never know when a natural disaster or an unexpected health issue will arise.  Maybe there will be an addition to your family through a birth, you never know what can arise.  Having a proper financial plan in place will let you adjust to most financial issues that might arise in you household.