What is Personal Finance And its Importance

Personal finance is a part of everyone’s life. As you grow older and once you start earning money, you will have various expenses and responsibilities, such as paying rent, bills, shopping, etc. You must plan your finances effectively to fulfill all your needs and responsibilities. Along with planning your finances, you will also need to save and invest money to meet your financial goals, such as buying a car, buying a house, paying for marriage expenses, etc. 

What is Personal Finance?

Personal finance means managing your and your family’s finances, i.e. managing your money in such a way that you can save and make investments to meet your life’s financial goals, along with having money for spending on necessities and luxuries. It includes budgeting, assessing your current financial position, setting goals, planning and making investment decisions to meet your goals, saving for emergencies and retirement planning. 

Personal finance helps you secure your financial life by enlightening you with investment opportunities, cutting down on unnecessary expenses, making a personal budget to manage your household expenses and becoming financially savvy to make intelligent financial decisions to avoid losses.

Personal Finance in a Nutshell

In a nutshell, personal finance helps individuals develop strategies to manage their income or money, which results in leading a good life without worrying about finances. In brief, personal finance covers the following financial aspects of a person’s life:

• Budgeting 
• Banking 
• Insurance 
• Loans and mortgages 
• Investments 
• Retirement planning
• Tax saving 
• Estate planning
• Emergency planning
• Credit cards

Importance of Personal Finance

Personal finance is an important aspect of a person’s life as it helps him/her to meet personal goals through budgeting. It encompasses spending, investing, saving, and personal protection (estate planning and insurance). The goals can be short-term, long-term or retirement planning.

Also, when your personal finances are not under control and are unplanned, it can land you in trouble when you meet an unforeseen crisis such as illness, unexpected job loss, pandemic situation, etc.

Personal finance also includes personal protection, such as insurance and emergency funds, that will keep you secure in any situation. Managing personal finance becomes essential to handle expenses and purchases in this era of rising costs and inflation.

Personal Finance Focus Areas

Personal finance focuses primarily on these areas:

Income

Income is the first focus area of personal finance. Income is the money a person earns, and it is essential to plan and make a budget for the income earned to manage finances. Finance planning includes allocating money from your income for expenses, purchases, savings and investments. 

Spending

The bulk of income goes into spending for purchases and expenses, such as rent, loan EMI, groceries, subscriptions, home repairs, travel and entertainment. Being able to manage spending is a critical aspect of personal finance. For proper management of personal finance, spending less than the income is essential; otherwise, it will increase debts and lead to mismanagement of finances. 

Savings

Savings are the income left after deducting all the spending. Although it may be tough to have savings, you must aim to have money for savings since they help during emergencies and to achieve goals. To have savings, you may have to cut down on unnecessary spending and allocate the remaining amount for savings. 

Investing

The savings amount should be placed in such a place where it grows rather than staying idle. When money grows, it increases purchasing power to beat inflation over time. Investments help money to grow and create wealth. Investing in various instruments, such as stocks, mutual funds, bonds, fixed deposits, post office savings schemes, etc., helps to earn a return on money and increase wealth beyond the principal invested amount. However, you should maintain caution while investing since there may be a loss at times in some risky investments.

Protection

Protection means keeping some savings aside in such plans, which protect you from unexpected events, such as accidents or illnesses. Protection plans include insurance, emergency funds that provide a return and allow you to take out money anytime and pension plans for retirement.

The personal finance focus areas summarise the financial plan and management that will help a person secure his/her financial position and lead a good life.

How Does Personal Finance Help An Individual?

Personal finance helps you manage your monthly or daily expenses properly, have savings and make investments to achieve goals, set aside money for emergencies and retirement, and also have money for travel and entertainment.

Understanding how to manage your finances is a crucial life-planning tool that can help you lead a life without debt, gain control of financial stresses and manage the expensive surprises that life can throw at you.

The sooner you start financial planning, the better since it helps you achieve your goals and give yourself and your family financial freedom and security. Personal finance management is something you learn from your family members or on your own through your mistakes at times. You can also learn a lot about managing your salary or income by reading online articles, blogs or books.