What Is Personal Finance?

Updated: Feb 19


Personal finance is the technique of planning, managing, and tracking your personal financial activities. Activities range from; protection, saving, investing, spending, and income generation. Having a budget or financial plan can aid in the management of personal finances.

Achieving long financial stability requires a much more holistic approach to planning for how to manage your finances.

This guide will scrutinize the most critical and everyday aspects of personal finance management.

Aspects of Personal Finance

Spending

Expenses related to consumer goods purchasing and services lie underspending. In the 21st century, payment has evolved to either credit cards or cash payments. Spending takes the cake from the vast majority of people’s income.

Expense management is as good as income generation, and if you can master and have control over both, a financial crisis will be folklore.

The most common channels being;

  • Food

  • Taxes

  • Travel

  • Rent

  • Entertainment

  • Mortgage Payments

  • Credit Card payments.

Income

The income you are bound to get from their source of cash flow; it determines how you will plan for your finances for short and long term goals. The money can either be spent, invested, or saved. Focus on creating multiple streams of income rather than just one source of cash.

The most common channels being;

  • Salaries

  • Hourly wages

  • Pension

  • Dividends

  • Bonuses

Saving

The excess cash after covering your expenses can be your savings. You can channel it into investments in the future. Savings can also act as collateral for emergencies. When setting saving goals, be specific about your plan to get there. It’s easy to say, ‘I’m going to save $5000 this for retirement this year ’, but you need to define your tactics for pursuing your goals. Sub-goals such as a monthly savings target of $500 are achievable by increasing your income or trimming down your expenses.

These mile markers can help you access how realistic your goals are and help you monitor progress.

The most common forms being;

  • Savings bank account

  • Physical cash

  • Money market securities

  • Checking bank account

Investing


Investments come in the form of assets set to generate returns, with the hope that over a long period, you will receive more than the original investment. Investing can, at times, prove to be risky, whereby instead of the said asset upscaling, it boils down to a loss.

Therefore, before investing, it’s crucial to seek help from financial experts. Professionals who have been in the business of investing for a long, coupled with vast knowledge and connections to make your money worthwhile.

The most common forms include;

  • Mutual funds

  • Real estate

  • Bonds

  • Stocks

  • Private companies

  • Art

  • Commodities

How to achieve Personal financial freedom?

Budgeting


Coming up with a financial plan or a budget is the initial step towards financial freedom. Following the said budget to the letter is where the task underlies, and it takes a high level of discipline and self-control to achieve it. Below are a few principles that, if followed, money management will be easier for you.

Avoid Debt


Avoid high-interest debts and loans for items that could lose value quickly. However, there are healthy debts such as education loans, business loans, and low-interest mortgage loans that, in the long term, prove to be substantial to your well-being and that of your family. Healthy debts improve your credit scores if only done on time. Debt with interest rates higher than 5% are a guaranteed loss in the future, especially credit card debt. It is going into debt for items such as jewelry, boats, and other luxury goods that lose value over time, leading to bankruptcy and seizure of assets.


Reduce Taxable Income

Find ways to pay fewer taxes for the money you make. How? Many people would argue. By receiving payment in a tax-exempt form, meaning, get compensated in a way that is not taxable. Employers have benefits that allow you to set aside untaxed income through;

  • Healthcare

  • Education

  • Childcare

  • Transportation

  • Retirement

You can also opt to defer taxes by contributing to a traditional IRA or 401(k). These retirement accounts allow you to pay taxes only when you withdraw your money in retirement when your tax rate is low.

Avoid insurances for expenses you can afford to pay in cash.


Premiums for basic electronics and other smaller valuables can be foregone if you can easily replace them.


Invest for retirement

Investing can help grow your money over time. Compound interests earn your interests that lead to exponential growth. Asset invested in your younger years pay off during retirement. For example, an investment in multifamily property through mortgage. By the time you retire, you will have completed your mortgage payments, and you can now enjoy the benefits.

For more tips on budgeting you can listen to the Rich State of Mind Podcast Episode 6: Envelope System Budget Strategy Explained (Every Dollar Has A Place): https://anchor.fm/anthane-richie/episodes/Episode-6-Envelope-System-Budget-Strategy-Explained-Every-Dollar-Has-A-Place-ehdjab


Great books to read on managing your personal finances are below: