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What is Personal Finance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 July 2014
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Personal finance is the process of effectively managing assets in the possession of an individual or a family. The approach dictates that attention is given to the generation of income for the household, allotting specific amounts of that income to cover all expenses associated with the household, and take action to create reserves of cash and other assets for ongoing financial security. A wide variety of resources can be called upon to aid in the process of personal finance.

Basic to the task of personal finance is having a firm grasp on the flow of income into the household. The income is usually in the form of wages or salary from a job, although other forms on income may apply. Interest earned from investments, alimony or child support payments and other forms of compensation all qualify as income.

Along with identifying the sources and total amount of income, effective personal finance also requires a clear understanding of the fixed and variable expenses associated with the household. Fixed expenses will often include rent or mortgage payments, car payments and any outstanding loans. Variable payments may include food, monthly utility costs or monthly bank service charges.

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Once income and expenses are identified, the next step in a personal finance plan is to establish a budget. To some degree, this is already accomplished by determining how much money is coming into the household and how much must go out in order to meet debt obligations. Above and beyond those line items, there is also the need to set aside some money for expenses that may not recur each month. This may include items such as clothing replacement or auto repairs.

After identifying all current debt obligations and basic living needs, the next step is to assess how much income is remaining. It is from this remainder that it is possible to begin building financial wealth. Part of this remainder may be set aside for entertainment purposes, such as a meal out or a movie. However, this surplus income should also be used to build up a savings account, set aside money for college expenses, purchase life insurance, and fund a retirement plan. Even if there is only a small amount left after meeting all obligations, it is wise to put this small amount aside in some type of interest bearing account. Over the course of a year, that small amount will begin to grow and create more financial stability.

An essential part of personal finance is planning for retirement. Even if people in the household have a retirement plan through the workplace, establishing a personal plan should be one of the goals. Along with planning for retirement, there is also the need to set aside funds that can be invested in bonds, stocks, real estate, and other ventures that are likely to generate more wealth over time.

In the event that taxes are not withheld by an employer, personal finance will dictate learning how to calculate those taxes and submit them to the proper government agency. Making this a priority will help to ensure there is always money on hand to cover taxes as well as other legal obligations.

One important aspect of personal finance is monitoring the efficiency of the budget and making adjustments when necessary. An adjustment may be required due to an increase or loss of income, unexpected events such as a natural disaster or health issue, or the expansion of the family unit through marriages or births. The idea is to always make the most of whatever assets are on hand while planning for future events to the best of your ability.

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Discuss this Article

Sunny27
Post 3

@Bhutan- I think that index funds are a good way to get into the market, but I have always found that the easiest way to continue investing is to set up an automatic monthly draft so that you don’t miss the money and get into the habit of saving.

You can even look at some of the savings calculators online and they can forecast how much you will have in your nest egg over time. It is really motivating.

Bhutan
Post 2

@Sunshine31 - I know what you mean I have to stay out of the stores when I get that urge to splurge.

I just wanted to say that ever since I looked into some personal finance tools online I really watch how I spend my money.

I try to avoid the expensive lattes and the drive thru windows, and I have already saved almost $500. I have also started watching television shows offering personal finance advice and it has made me more confident with my money.

I have even begun investing in mutual funds. I have looked into a few index funds because they cover the whole market. I read somewhere that index funds were actually good funds to invest in because they offered a lot of diversification and the expenses were really low.

sunshine31
Post 1

I think that a budget is a great idea in order to really keep track of what you spend your money on. I notice that for me, the area where I sometimes get into trouble is in my variable expenses. When I purchase things impulsively is when I usually go off my budget.

Sometimes sales are hard to resist, but I try to offset the expense my reducing another variable expense category like entertainment or dining out.

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