Updated: Jan 26
“Money is a terrible master but an excellent servant.”— P.T Barnum.
Personal finance is the branch of finance concerned with the finance of the individual. It deals with how you earn, spend, invest, and manage your debt, especially for the pursuit of your financial freedom.
“Beware of little expenses. A small leak will sink a great ship,” Benjamin Franklin once said. Thus, at the core of personal finance is budgeting, that is, the art of financial planning.
When people talk about personal finance, they talk about the important areas – earning, spending, saving, and investing - in which they need to manage money. They talk about how, as P.T Barnum echoed, they can make money their servant and not their master.
Here, we discuss exactly that.
The starting point is earning. Earning provides the income, the cash inflow that you spend, save, and invest. As a matter of fact, without it, there is no personal finance, no financial planning, and definitely no budgeting. After all, you can only plan on what comes in for you.
Earning comes in the forms of salaries, wages, allowances, pension, or any other income type. Often, to earn, you have to produce.
In the day-to-day life, you incur expenses. As you earn through the goods or services you produce for others, so do you pay for goods and services others produce and that you use.
Those goods and services you pay for can be sorted into needs and wants. Needs are housing, food, transport, insurance, health care, and utilities. Wants, on the other hand, are personal care, entertainment, hobbies, and subscriptions, that is, expenses you can essentially do without. You pay for your needs and wants by credit or cash.
It is considered a virtue to save. In the classic personal finance book, The Richest Man in Babylon, the author, George Samuel Clason, wrote; “I found the road to wealth when I decided that a part of all I earned was mine to keep.”
That is saving, and it can be aimed at different targets. Amidst those targets are saving to spend, invest, or for emergency purchases. Savings can earn interest or not. They can be physical cash, savings or checking bank accounts, or certificate of deposit (CD).
You want to get to the stage whereby you are financially secure enough to stop working. While many have to work until they are 70 before they can retire, you might want to retire early and young. Either way, you have to invest. When you invest, you buy assets that generate a steady return.
While you are still actively working, you could even be re-investing the returns. Typically, assets individuals invest in include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and commodities.
Without the requisite knowledge, investing can easily go wrong. That is why, before it is dabbled into, it is recommended to seek professional help.
Finally, another area covered under personal finance has to do with protection which includes products (e.g., insurance) used to mitigate the negative effects of unforeseen life events.
Hope this was useful for you! If so, hit the like button to make me feel good. Please note that the above content is not an investment advise and shall be considered only for informative purpose.
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