In this article, we shall be answering the question: what is personal finance, and why it is important? Personal finance is that aspect of finance that identifies all financial activities of an individual or household, which includes income, expenditure, savings, budgeting as well as investing.
These activities all bores down to having a concrete knowledge of financial management, which helps an individual in the effective utilization of overall finances.
Different areas of personal finance
From the definition of personal finance above, we understand that it comprises different categories or unit, which includes:
Income
Income comprises cash that flows into an individual’s pause. This cash comes in various ways like salaries, allowances, overtime, gifts, pensions, grants, and disbursements. All money transactions that serve as earnings are meant to be used for personal or family welfare.
Income is the chief or principal process that coordinates another aspect of personal finance activities. Those various means of income are the ways cash is generated. Thus without income personal finance may be dead.
Expenditure
This unit includes every spending an individual makes. It ranges from payments made on goods and services, to interest paid on borrowed loans, various tax payments, bank consumable goods, payment of bills, gifts, mortgage payments, and travels. Consequently, Spending can only take place with the existence of income.
However, we need to understand that as these expenses occur the individual should as well be mindful of his spending.
The individual needs to be calculative so that expenditure does not exceed income but if this happens, it may lead to borrowing which is a deficit.
Savings
When there is enough or excess income, the individual retains the surplus for future expenses, which includes investing. Savings is mainly visible when after an individual’s spending more cash is still available. Then the need to invest will arise.
In some cases depending on the means or nature of income and the degree to which it flows. The individual may be compelled to manage income when making expenditures in other to have savings, no matter the sum.
Again, people might prefer not to save much as saving might not bring more income. Therefore, they may prefer to invest the excess in yielding huge income. Savings includes all Bank savings and physical cash.
Investing
Investing is part of the income used to acquire assets that will generate more income, which includes the principal capital as well as profits. An individual can invest in the following: commodities, bonds, real estate, stocks, mutual funds, etc.
It is very important to note that before an individual could invest in any of these there is the need to seek advice from experts. This is because one disadvantage of investing is the aspect of risk.
The individual takes the risk knowing it may turn out either positive or negative. The positive or negative outcome of every risk usually paves way for future success. The negative will give you the experience to learn from your mistakes while the positive will encourage you to continue.
Protection/security
This refers to extra caution an individual takes in other to safeguard against unwanted future occurrences. This may include health and life insurance. It also includes any plan made to secure future financial freedom.
What is personal finance: an overview
In every spare of life human needs, desires, and wants are what stimulate the act of spending. It becomes obvious that spending may not avail without the action of income. To this effect, it appears to be true that you cannot give what you do not have.
Now when these wants becomes enormous the dying need to gain more money in possession becomes necessary. That is how humans begin to think of ways to acquire more wealth. This then calls for the need for investing.
It also demands the knowledge to spend the income wisely to achieve a balance of income and expenditure. Other aspects that could help to achieve a successful financial management goal could be in planning to save, budgeting, and managing taxes.
Why is personal finance Important
- It creates financial literacy: Personal finance creates awareness and paves the way to understanding what being financially literate is. The dying need to manage your financial resource triggers the urge to seek knowledge on how best to handle those resources.
2. It creates the ideology of financial technology: The impact of financial literacy on personal finance could help an individual develop strategies for the use of other financial technologies. For instance, the use of credit card debt cards, planning for retirement, and acquiring loan facilities are all expertise strategies
3. Helps to improve learning: Due to the importance of personal finance schools presently offer a course that covers an area of financial management. This is the concept of managing your money.
4. To create global awareness: The need to educate individuals and households has further made it possible to extend courses online on blogs and media.
5. Educate individuals on financial management: Personal finance helps us to understand how important it is to manage the available money at our disposal.
6. Help you to manage debt: An individual can easily get into debt without a single knowledge of how to opt-out. This could lead to being unable to coup will various bill payments but with personal finance, an individual can manage debt.
7. It enhances financial freedom: Personal finance could help you attain the goal of financial freedom by understanding the various areas and putting them into practice.
8. Another importance of personal finance is that it will avail you the knowledge on how to meet your long-term as well as short-term demands. These, which may not necessary, mean a request for a loan.
9. It helps an individual to gain foresight about risk and have foreknowledge in risk management.
10. With personal finance, an individual can make a budget that corresponds with their income.
11. In times of inflation, we could use personal finance knowledge as the best option to eliminate difficult issues. For instance, an individual who understands his daily or monthly income will establish a scale of preference. Take the pressing needs first, monitor spending, and make a budget for wise investments.
12. Personal finance aids in providing financial security: With this knowledge, you will be able to save, invest, and carry out the best investment methods.
Personal finance management
The aspect of managing your finance may seem less tedious but it remains a sensitive aspect of personal finance goals. Poor financial management may result in a deficit.
These deficits may occur in the absence of planning and budgeting when excess cash is available. Again, making a wise budget before acquiring a loan is necessary. This could make it easier to direct the fund immediately to the appropriate channel.
Understanding your personal finance
Having a concrete knowledge of your income flow could help you make better use of it you could be able to plan and make a wise budget of your expenditures. Now once you can understand all activities that revolve around your personal finance you could able to control your fund.
These activities involve savings, budgeting, spending, insurance, and future planning (retirement). It is essential to understand how your personal or household income flows.
Knowing the various channels that bring in money could help you ascertain your overall income. With this knowledge, you could be able to make a budget for expenses.
You will also determine what aspect of cash inflow should be channeled to savings and others to investments. Therefore, investment is necessary to keep a steady cash inflow.
