- What do you mean by Personal Finance?
- What are the five areas of Personal Finance?
- What is Personal Finance, and why is it important?
Since childhood, I have been a part of several conversations where people talk about making money. It can be starting a new business, joining a job, creating a product, or anything else.
But very few times, I have heard people talking about managing their money. Schools have not taught us enough about this.
But why is something so important not a part of the curriculum? Why do we not talk about it?
I think that this is something we do not get to learn by default as a part of the growing-up process, which ideally we should. Hence, The more we read and learn about personal finance, the better we can identify whether a financial product is worth my money or not.
It took me three decades to understand that making money is only 20% of the wealth creation process. Rest 80% is spending it, saving it, investing it, and securing it.
This brings me to today’s topic that I want to discuss with you, i.e., Personal Finance.
What is Personal Finance?
Personal Finance is the process of managing your money. From a business point of view, it is the whole industry that provides financial management services to individuals.
Personal Finance address several issues for individuals such as:
- Amount and types of income
- Spending money and budgeting expenses
- Saving money
- Investing money
- Protecting money (i.e., Insurance)
As we have an understanding of Personal Finance, let us now understand its components.
Components of Personal Finance
Components of Personal Finance can be classified as follows:
Income can be defined as anything you earn as part of your daily activity, whether by selling goods or services, selling any asset such as property or jewelry, etc.
You can earn income from several sources. The sources from which someone can earn income are classified as follows:
- Salary Income
- Business Income or Profit Income
- Professional Income
- Rental Income from Real Estate
- Capital Gain Income
- Dividend Income
- Interest Income
- Royalty Income
To read more about income and its various types, you may read 8 Different Types of Income Source.
Spending or Budgeting
A plan for spending your money is known as a budget. Therefore, budgeting can be termed as the process of creating a plan for spending money.
A spending plan helps you identify your critical and essential expenses, i.e., important payments to make a decent living. Expenses such as groceries, electricity bills, cell phone bills, and internet bills can be covered under these basic expenses.
Examples of expenses for an average individual are as follows:
- Food Expenses
- Travel Expenses
- Electricity Bill
- Internet Bill
- Cell Phone Bill
- Entertainment Expenses
Proper budgeting would help you differentiate between expenses that must be done to make a living and expenses for leisure activities. By this, you would be able to control your expenses in a better manner.
These expenses are paid out from your income or your accumulated assets. Thus, in short, expenses reduce your wealth.
Savings can be termed as an excess of income over expenses. If a person’s expenses are lower than his income, he would be able to save a part of his earned income.
Savings = Income – Expenses
Thus, saved money can be kept aside or invested in an asset to grow in value.
In case a person wants to keep this saved income liquid (i.e., readily available to be spent) and does not want to invest in further, then this money can be held in the following forms:
- Cash in hand (Physical Cash)
- Savings bank account balance
- Money Market Securities
- Liquid Mutual Funds
Part of savings that are not readily required can be invested further to grow in value.
A part of savings can be further invested for the purchase of assets. These new assets can provide a return to you.
For example, you can:
- Purchase a house and let it out for rental income
- Purchase shares in a company and earn dividend income on it
- Purchase equity-oriented mutual funds and earn dividend income on it
- Lend this money to someone and earn interest income on it
However, every investment has an inherent risk in it which may lead to loss of money. The higher the risk in an investment, the higher will be the expected return on that investment. This is known as the risk-reward relationship.
Investing is the most important part of wealth generation. Almost all the significant opportunities of growing wealth are interconnected with the process of investing.
Unfortunately, this is the most ignored part of the Personal Finance domain. Earning income and investing it for increased returns is important. However, protecting your wealth from unforeseen circumstances is as important as any other activity of managing your money.
The most important part of your wealth is you. And therefore, protection of your wealth also includes protecting the value of your life. Thus, it includes Life insurance.
Various types of insurances that can be taken to protect your assets is as follow:
- Life Insurance
- Health Insurance
- Fire Insurance
- Car Insurance, etc.
I understand that any individual irrespective of his or her age, background, or location, should learn about Personal Finance. It is one of the most essential skills of living a comfortable life.
You can learn more about personal finance by reading Personal Finance Blogs like Wealth Imperio and reading good personal finance books. With slow and steady progress, anyone can become financially literate.
I hope you understood that earning money is important but managing your earned money is as essential.
I hope that this article helped you get an insight into personal[AM1] finance and its importance. Wealth Imperio attempts to make you more Money Fit by educating you about money and wealth basic and much-needed concepts.
[AM1]In the published article you have written – “I hope this article would have helped you in providing an insight into personal finance and its importance” Remove this and rephrase or replace it with the edited version
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Please note that this is not financial advice, and we are not financial advisors. Please connect with your financial advisor and Do Your Research (DYOR) before making any financial decision.