Personal Finance Defined | What is Personal Finance? (2022)

Personal finance incorporates how you manage all aspects of you or your family’s finances – both short-term and long-term. The term is also used to describe an entire industry devoted to the services and products designed to help individuals manage their finances and take advantage of investment opportunities.

Why Is Personal Finance Important?

Personal finance is a vital part of not only managing your day-to-day financial needs but also planning your financial future. The sooner you get a grip on personal finance, the better your long-term financial prospects will be for things like investing or planning for retirement.

By understanding the elements of personal finance, you can better understand opportunities to improve your finances. This understanding can help you budget for current needs while planning for long-term financial goals.

Personal Finance Defined | What is Personal Finance? (1)

What Are the Five Areas of Personal Finance?

Though there are several aspects to personal finance, they easily fit into one of five categories: income, spending, savings, investing and protection. These five areas are critical to shaping your personal financial planning.

Five Aspects of Personal Finance

  • Personal Finance Defined | What is Personal Finance? (2)

    Income

    Income is the foundation of your personal finances and includes all parts of your cash flow – the money you take in from all sources. It includes your salary, pension or Social Security, income from rental properties or investments.

  • Personal Finance Defined | What is Personal Finance? (3)

    Spending

    Spending includes the money for any expenses you have. Controlling the amount of money you spend can allow you to set aside money to grow your financial future.

  • Personal Finance Defined | What is Personal Finance? (4)

    Savings

    Savings includes any money from your income that you do not spend but set aside for the future. It is necessary to provide for potential expenses – planned or unplanned.

  • Personal Finance Defined | What is Personal Finance? (5)

    Investing

    (Video) 6 principles of personal finance and budgeting for 2022

    Investing is different from savings. While savings are what’s left over from your income, investments are purchases that allow you to earn future income or savings. Investments may include purchases of mutual funds, stocks, bonds or real estate that you expect to give you a good rate of return. But investments come with risk.

  • Personal Finance Defined | What is Personal Finance? (6)

    Protection

    Protection from financial risks can be handled through a variety of financial products including annuities, property/casualty insurance, life insurance and health insurance. These can provide financial security or protection from unexpected financial costs.

Advertisement

What Are the Fundamental Principles of Personal Finance?

There are 12 basic principles of successful personal finance, according to the Jump$tart Coalition for Financial Literacy, a nonprofit organization that promotes financial literacy education in U.S. public schools.

Though designed to teach school kids the basics of financial literacy and responsibility, the principles have been used for more than two decades to guide adults toward better personal finance practices as well. And they hold up at any stage of life.

The 12 Principles of Personal Finance

  • Personal Finance Defined | What is Personal Finance? (7)

    Know your take home pay

    Be aware of your income before you commit to any significant spending such as credit card debt, car loans or a mortgage.

  • Personal Finance Defined | What is Personal Finance? (8)

    Pay yourself first

    Set aside money from each paycheck for unexpected emergencies and long-term goals before paying your bills.

  • Personal Finance Defined | What is Personal Finance? (9)

    Start saving now

    Ideally, you should start saving for your future while you’re still young. The longer you save, the more interest your savings will earn.

    (Video) Personal Finance Defined
  • Personal Finance Defined | What is Personal Finance? (10)

    Compare interest rates

    Whether it’s saving for your future or looking for the right credit card, look for the best interest rates first to earn more interest on savings and pay less interest on debt.

  • Personal Finance Defined | What is Personal Finance? (11)

    Remember the “Rule of 72”

    To figure out how many years it will take your savings to double, divide 72 by the interest rate of your savings.

  • Personal Finance Defined | What is Personal Finance? (12)

    Never borrow what you can’t repay

    Make sure you can pay off what you owe. This will improve your credit overall and keep your debt manageable.

  • Personal Finance Defined | What is Personal Finance? (13)

    Create a budget

    Set up an annual budget of income and known expenses. Use this as a roadmap to build your savings while living within your income.

  • Personal Finance Defined | What is Personal Finance? (14)

    Remember that high returns mean high risks

    High return on investment typically means you are going to have to take higher risks. Diversifying your investments can spread that risk around, protecting your investments.

    (Video) Inflation & Your Personal Finances
  • Personal Finance Defined | What is Personal Finance? (15)

    Don’t expect something for nothing

    Be wary of get-rich quick schemes. If they were real, everyone would already be doing them. If it sounds too good to be true, it probably is.

  • Personal Finance Defined | What is Personal Finance? (16)

    Plan your financial future

    Take time to write down your financial goals – both short-term and long-term. Then work out a realistic roadmap to get you to those goals.

  • Personal Finance Defined | What is Personal Finance? (17)

    Your credit past determines your credit future

    Your credit record is kept for years by credit bureaus. If you have trouble paying loans or credit card debt, that record will hurt your chances of getting credit in the future.

  • Personal Finance Defined | What is Personal Finance? (18)

    Buy insurance

    Health, auto, home and life insurance can protect you and your loved ones from financial hardship in the event of accidents or illness.

Personal Finance Defined | What is Personal Finance? (19)

Join Thousands of Other Personal Finance Enthusiasts

(Video) Budgeting. What is a Personal Budget? | Personal finance | Financial education

Because missing out on important news and updates could cost you.

STAY IN THE KNOW

How to Become Better Educated at Personal Finance

There is a wealth of resources available online, from nonprofit organizations and state and local governments for people who want to learn more about personal finance.

In addition, there are online and in-person classes available – often for a fee – from for-profit organizations and educational institutions.

Resources for Learning About Personal Finance

  • Check with your state education department or agency about personal finance classes near you.
  • Contact your local community college, university or continuing education program.
  • The U.S. Consumer Financial Protection Bureau offers tools and other resources ranging from credit cards to debt collection if you have specific questions about personal finance topics.
  • Check your local library or bookstore for books on personal finance topics.
  • Check with your employer’s human resources department about resources that may be available through your job or benefits programs.
  • Talk to a licensed financial advisor or other professional about resources and financial products that can help you with personal finance.

Careers in the Personal Finance Industry

There were more than 275,000 personal financial advisors in the U.S. in 2020, according to the U.S. Bureau of Labor Statistics. That number is expected to grow by about five percent by 2030 and create 12,600 new roles.

Personal financial advisors focus on helping people manage their personal finances and plan their financial futures. They provide guidance on decisions about insurance or annuities, what types of investments to pursue and how tax laws affect their finances.

Many sell financial products to clients.

Products Financial Advisors Sell

  • Annuities
  • Bonds
  • Life insurance
  • Mutual funds
  • Stocks

Those that sell financial products must have a combination of licenses based on the particular type of product or investment advice they provide. They may be regulated by the state where they do business as well as the Securities and Exchange Commission (SEC) – depending on the product.

A personal financial advisor typically has a bachelor’s degree, though some may have a higher degree. Many positions may require professional certification or continuing education. Education, training and salaries are similar to several other financial professions.

Jobs Similar to Personal Financial Advisors

  • Budget analysts who focus on public and private organizations with financial planning.
  • Financial analysts who help businesses and individuals plan spending to maximize profits.
  • Financial managers create reports, develop plans, guide investment decisions and set long-term financial goals for their organization.
  • Insurance agents sell clients one or more types of insurance.
  • Insurance underwriters evaluate insurance applications, estimate risk and decide if a policy should be approved for a client or under what terms.
  • Real estate brokers and agents help clients buy, sell or rent real estate property.
  • Securities, commodities and financial services agents sell these financial products and provide financial services for buyers and sellers in different financial markets.

Private bankers and wealth managers are closely related to personal financial advisors, but their clients tend to have much larger amounts of money to invest and manage. Their clients may be closer in financial scale to companies or large organizations than to the amount of money most people have.

Please seek the advice of a qualified professional before making financial decisions.

Last Modified: August 19, 2022

5 Cited Research Articles

Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. U.S. Consumer Financial Protection Bureau. (n.d.). Ask CFPB. Retrieved from https://www.consumerfinance.gov/ask-cfpb/
  2. U.S. Consumer Financial Protection Bureau. (n.d.). Consumer Resources. Retrieved from https://www.consumerfinance.gov/consumer-tools/
  3. U.S. Consumer Financial Protection Bureau. (n.d.). Credit Cards. Retrieved from https://www.consumerfinance.gov/consumer-tools/credit-cards/
  4. U.S. Department of the Treasury. (n.d.). Personal Finance and Consumer Protection – Steps for Quicker Financial Relief. Retrieved from https://home.treasury.gov/policy-issues/consumer-policy/personal-finance-and-consumer-protection-steps-for-quicker-financial-relief
  5. U.S. Federal Trade Commission. (n.d.). Free Credit Reports. Retrieved from https://www.consumer.ftc.gov/articles/free-credit-reports

FAQs

Whats is personal finance? ›

What Is Personal Finance? Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning.

What is personal finance answers? ›

Personal finance refers to all of the decisions and activities of an individual or family regarding their money, including spending, saving, budgeting, etc..

Why is it called personal finance? ›

In simple words, anything related to money that requires planning and execution can be called personal finance. There was a time when people took the help of financial advisers to manage their wealth.

What is an example of personal finance? ›

An example of personal finance is knowing how to budget, balance a checkbook, obtain funds for major purchases, save for retirement, plan for taxes, purchase insurance and make investments.

What is personal finance and why is it important? ›

Personal finance is a term meant to describe managing your finances through budgeting, spending and savings. This involves long-term planning and considers potential financial risks, retirement and estate planning, investments and how your financial situation evolves over a lifetime.

What are the 5 most important aspects of personal finance? ›

We're discussing the five categories that attribute to personal finance, which are income, spending, savings, investing, and protection. These are critical to shaping your personal financial planning. Income is money received, especially on a regular basis, for work or through investments.

How do you do personal finance? ›

A step-by-step guide to build a personal financial plan
  1. Set financial goals. It's always good to have a clear idea of why you're saving your hard-earned money. ...
  2. Create a budget. ...
  3. Plan for taxes. ...
  4. Build an emergency fund. ...
  5. Manage debt. ...
  6. Protect with insurance. ...
  7. Plan for retirement. ...
  8. Invest beyond your 401(k).

What are the basic principles of personal finance? ›

12 Principles of Personal Finance
  • Know your take home pay. ...
  • Pay yourself first. ...
  • Start saving at young age. ...
  • Compare interest rates. ...
  • Don't borrow what you can't repay. ...
  • Budget your money. ...
  • Money doubles by the "Rule of 72". ...
  • High returns equal high risks.

What are the 4 areas of personal finance? ›

The areas of personal finances are 5. They include savings, Investing, protection, spending, and income.

Who invented personal finance? ›

The earliest known research in personal finance was done in 1920 by Hazel Kyrk. Her dissertation at University of Chicago laid the foundation of consumer economics and family economics.

What are the advantages of personal finance? ›

With a good financial plan, you can save enough money to cover your monthly expenses. The financial plan can help you manage your money when your business has extra sales. This invested, safe amount can then be used to fund your family's expenses in months when your business does not break the profit margin.

Why is personal finance important for students? ›

Personal finance education in high school provides students with the knowledge and skills to manage financial resources effectively for a lifetime of financial well-being.

What is the objective of personal finance? ›

A financial goal is an objective or plan that involves building financial literacy and managing your money. Most often, financial goals involve saving money for a purchase of some kind, but a constructive goal may also involve building credit, investing or even earning more money.

What is the full meaning of finance? ›

Finance is defined as the management of money and includes activities such as investing, borrowing, lending, budgeting, saving, and forecasting.

What are the two main types of finance? ›

External sources of financing fall into two main categories: equity financing, which is funding given in exchange for partial ownership and future profits; and debt financing, which is money that must be repaid, usually with interest.

What are the 7 finance function? ›

The seven popular functions are decisions and control, financial planning, resource allocation, cash flow management, surplus disposal, acquisitions, mergers, and capital budgeting.

What is the most important part of personal finance? ›

One of the most important (and obvious) aspects of personal finance is cash flow management. This is all about how much money is going in, and where that money goes. Getting your cash flow under control is vital before you can do anything else with your money.

What are the 5 basic principles of finance? ›

The five principles are consistency, timeliness, justification, documentation, and certification.

What are the five steps in personal financial planning? ›

Financial Planning Process: 5 Simple Steps
  1. Step One: Know Where You Stand. The first step to creating your financial plan is to understand your current financial situation. ...
  2. Step Two: Set Your Goals. ...
  3. Step Three: Plan for the Future. ...
  4. Step Four: Managing Money. ...
  5. Step Five: Review Your Plan.
12 Feb 2015

What are the six steps for developing a personal financial plan? ›

Financial Planning Process
  • 1) Identify your Financial Situation. ...
  • 2) Determine Financial Goals. ...
  • 3) Identify Alternatives for Investment. ...
  • 4) Evaluate Alternatives. ...
  • 5) Put Together a Financial Plan and Implement. ...
  • 6) Review, Re-evaluate and Monitor The Plan.

How do you use personal finance in a sentence? ›

Personal finance sentence example. She is unique in being able to combine serious knowledge of personal finance with the lightness of touch of a seasoned comedienne. The Financial Ombudsman Service helps consumers resolve complaints about most personal finance matters.

What are the 3 most important factors in personal financial planning? ›

3 important factors of Financial Planning
  • DEVELOP A PLAN. ...
  • Achieving Flexibility: ...
  • Liquidity: ...
  • Tax Minimization: ...
  • The first step.
  • Things to consider.
19 Jan 2016

Why is managing personal finances important? ›

When you start managing your finances, you'll have a better perspective of where and how you're spending your money. This can help you keep within your budget, and even increase your savings. With good personal finance management, you'll also learn to control your money so you can achieve your financial goals.

What are the 4 areas of personal finance? ›

The areas of personal finances are 5. They include savings, Investing, protection, spending, and income.

What are the five 5 main areas of personal finance? ›

We're discussing the five categories that attribute to personal finance, which are income, spending, savings, investing, and protection. These are critical to shaping your personal financial planning. Income is money received, especially on a regular basis, for work or through investments.

What is personal finance for jss3? ›

Personal finance refers to the methods in which an individual manages his money assets and real assets. Examples of money assets are cash and money market instruments. Examples of real assets are land, buildings, furniture's, equipment, etc.

How do you do personal finance? ›

A step-by-step guide to build a personal financial plan
  1. Set financial goals. It's always good to have a clear idea of why you're saving your hard-earned money. ...
  2. Create a budget. ...
  3. Plan for taxes. ...
  4. Build an emergency fund. ...
  5. Manage debt. ...
  6. Protect with insurance. ...
  7. Plan for retirement. ...
  8. Invest beyond your 401(k).

What is the most important part of personal finance? ›

One of the most important (and obvious) aspects of personal finance is cash flow management. This is all about how much money is going in, and where that money goes. Getting your cash flow under control is vital before you can do anything else with your money.

What are the sources of personal finance? ›

1. Personal savings: This comes in the form of money or assets in the bank. 2. Borrowing: Borrowing from friends and relatives is a source of income.

What are the five steps in personal financial planning? ›

Financial Planning Process: 5 Simple Steps
  1. Step One: Know Where You Stand. The first step to creating your financial plan is to understand your current financial situation. ...
  2. Step Two: Set Your Goals. ...
  3. Step Three: Plan for the Future. ...
  4. Step Four: Managing Money. ...
  5. Step Five: Review Your Plan.
12 Feb 2015

What are the advantages of personal finance? ›

With a good financial plan, you can save enough money to cover your monthly expenses. The financial plan can help you manage your money when your business has extra sales. This invested, safe amount can then be used to fund your family's expenses in months when your business does not break the profit margin.

What are the seven principles of good personal financial planning? ›

You adhere to these seven principles:
  • Practice financial positioning. ...
  • Be engaged. ...
  • Align your financial strategies/behaviors with your most important values. ...
  • Define your “why” behind money. ...
  • Protect your life's work. ...
  • Save at least 15% of your income. ...
  • Create an investment policy statement.

What are the main components of personal financial planning? ›

8 Components of a Good Financial Plan
  • Financial goals. ...
  • Net worth statement. ...
  • Budget and cash flow planning. ...
  • Debt management plan. ...
  • Retirement plan. ...
  • Emergency funds. ...
  • Insurance coverage. ...
  • Estate plan.

Why is the study of finance important to you Brainly? ›

Answer: Studying finance can prepare you not only for careers in the financial services sector, but also for tasks in your everyday life. ... And because finance revolves around planning and analysis, studying finance and becoming more financially literate enables people to make better personal financial decisions.

What is trial balance jss3? ›

Trial balance can be defined as the schedule or list that shows the debit and credit balances extracted from the ledgers,to show the arithmetical accuracy of the ledgers. The technique ensure that debit and credit balances as displayed in the ledgers are complied.

What is meant by the term financial planning Brainly? ›

Financial Planning. Explanation. Financial plan can be defined as a document which comprises of the monetary status of an individual and his long term financial plans and also the strategies for achieving the goals.

What are the six steps for developing a personal financial plan? ›

Financial Planning Process
  • 1) Identify your Financial Situation. ...
  • 2) Determine Financial Goals. ...
  • 3) Identify Alternatives for Investment. ...
  • 4) Evaluate Alternatives. ...
  • 5) Put Together a Financial Plan and Implement. ...
  • 6) Review, Re-evaluate and Monitor The Plan.

Videos

1. investing online classes, understanding personal finance, money management
(Business Explained)
2. personal finance 101, learn personal finance basics and best practices
(Business Explained)
3. What to do when your investments are losing money
(Principles Personal Finance)
4. Personal Finance for Beginners (Literacy & Education) Managing Your Money Audiobook - Full Length
(Giovanni Rigters)
5. Introduction to Personal Financial Planning
(Simplus Financial Consultancy)
6. Canadian Personal Finance For Millennials
(Ready Set Life Financial Coaching)

Top Articles

You might also like

Latest Posts

Article information

Author: Roderick King

Last Updated: 10/18/2022

Views: 6447

Rating: 4 / 5 (51 voted)

Reviews: 82% of readers found this page helpful

Author information

Name: Roderick King

Birthday: 1997-10-09

Address: 3782 Madge Knoll, East Dudley, MA 63913

Phone: +2521695290067

Job: Customer Sales Coordinator

Hobby: Gunsmithing, Embroidery, Parkour, Kitesurfing, Rock climbing, Sand art, Beekeeping

Introduction: My name is Roderick King, I am a cute, splendid, excited, perfect, gentle, funny, vivacious person who loves writing and wants to share my knowledge and understanding with you.