What is Personal Finance?
Personal finance is a financial management process wherein an individual manages his/her financial resources while considering various factors such as his/her personal activities, needs and wants, expenses for utilities, and the risks that are associated with any of these.Simply stated, personal finance means managing one’s money for future benefits.
With the intense marketing efforts of various companies, a person is tempted to buy their products either because he wants to follow what is currently popular or because he wants to catch up with his peers.
However, because his money is limited, he cannot have the freedom to use it to buy anything he wants and to do whatever he wishes to do. Instead, he has the responsibility to manage it and to decide on what to buy and what to do.
This makes personal finance one of the most challenging tasks that a person must take.Personal finance, according to the Financial Planning Standards Board, involves four key areas:Financial condition financial condition refers to the overall financial position of a person.
Knowing his financial condition is important so that he will know what to change in his spending behavior depending on how better or worse his position is.If his income is greater than his expenses, then he is on a surplus.
He can increase his spending because he has sufficient money to settle his expenses. On the other hand, if his expenses are greater than his income, then he is on the other hand, if his expenses are greater than his income, then he is on a deficit.
He must either reduce his spending or increase his income to avoid enlarging his deficit.Risk protectionRisk protection refers to the overall provision that a person has against the different risks that he may take. These risks include illness, death, properties and liabilities.
This is important in personal finance because without adequate provision, a person will end up using more money to counter these risks. Illness and death risks can be backed up by insurance policies.
However, property and liability risks can be backed up only by their payment.
InvestmentsInvestments refer to the process of growing money for making large purchases in the future, such as buying a car, paying for expenses on education, planning for a family trip, starting a company, or saving for retirement.
This is important in personal finance because managing someone’s money does not only mean reducing expenses; it also means allotting a part of it as savings for investment reasons.
Estate planning estate planning refers to the preparation of all the wealth of a person for distribution to his heirs after his death. This is also important in personal finance because there are laws that require a person to allot a part of his estate for succession.
Along with the management of his financial resources, he must allot some of his money to his heirs.