What is Personal Finance?

What is Personal Finance?

Personal finance covers the concepts of managing your money to achieve financial goals, which include saving and investing. It also deals with banking, budgeting, mortgages, investments, insurance, retirement planning, debt reduction, and tax planning.

Personal finance is all about financial planning. Mostly, it depends on your income, expenses, living requirements, and fulfilling personal goals within your financial constraints.

Why is Personal Finance important?

Personal finance is important to become financially literate. A financially literate person can distinguish between good and bad advice and make smart decisions.

We at income control divided personal finance into four parts.

1. Income

2. Spending or fulfilling needs

3. Saving

4. Investing & wealth creation and

5. Financial Protection

1. Income: Income is the Cash flow generated by an individual/Family/Organization. It is the starting point for the financial planning process.

Common sources of income :

• Salaries or Wages

• Bonuses

• Pensions

• Dividends

Cash generated through different sources of income by an individual can be used to either spend, save, or invest. So, income can be thought of as the first step in personal finance.

2. Spending or fulfilling needs: Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (other than investments)

Spending can be divided into two categories:

1. cash (paid for with cash on hand) and

2. credit (paid for by borrowing the money)

Common sources of spending are:

• Rent

• Mortgage payments

• Taxes

• Food

• Entertainment

• Travel

• Credit card payments

Expenses reduce the amount of cash an individual has generated. Managing expenses is just as important as generating income. Increased expenses eat up your income available for saving and investing. Good spending habits are essential for good personal finance management.

3. SAVINGS: Savings refers to the money that a person has leftover after their consumer spending from their disposable income over a given time period.

Common forms of savings include:

• Physical cash

• Savings bank account

• Checking bank account

• Money market securities

Saving money is important because it helps protect you in the event of a financial emergency. Additionally, saving money can help you pay for large purchases, avoid debt, reduce your financial stress, leave a financial legacy, and provide you with a greater sense of financial freedom.

4. INVESTING & WEALTH CREATION:

Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit to create wealth. Investing carries risk, and not all assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return.

Common forms of investing include:

• Stocks

• Bonds

• Mutual funds

• Real estate

• Commodities

Investing & Wealth is the most complicated area of personal finance and is one of the areas where people get the most professional advice.

5. Financial Protection: Protection refers to a wide range of products that can be used to guard against an unforeseen and adverse event.

Common protection products include:

• Life insurance

• Health insurance

• Estate planning

Insurance is part of Personal finance management. We might weave several dreams in life and create investment plans to turn those dreams into reality. But unless we protect them with a safety net, the same can turn into a liability. That safety net is insurance.