What Is Personal Finance? (2024)

Key Takeaways

  • Personal finance refers to how you spend, save, invest, and manage the financial resources you have.
  • Personal finance is important because it determines the type of lifestyle you’re able to enjoy both now and in the future.
  • At its most basic level, personal finance is about spending less than you earn and using what’s left to reach your goals.
  • You can increase your financial literacy by seeking out personal finance podcasts, books, apps, and other resources.

Definition and Examples of Personal Finance

Personal finance is a concept used to define how well you manage your money. It takes a look at how you spend, save, protect, and invest your financial resources to create the type of lifestyle you want to enjoy.

Personal finance covers a range of topics, including:

  • Income generation
  • Budgeting
  • Banking
  • Insurance
  • Loans and mortgages
  • Investments
  • Retirement planning
  • Tax and estate planning

“Personal finance is simply the approach we take to using money,” said Todd Christensen, AFCPE at Debt Reduction Services and author of “Everyday Money for Everyday People.”

According to Christensen, examples of personal finance might include:

  • Planning your monthly spending
  • Balancing your checkbook or debit account
  • Transferring money from your checking account to your savings account
  • Setting up direct deposit for an IRA
  • Taking only the cash you plan to use on groceries into the store so you don't overspend

How Personal Finance Works

You may have heard your grandparents say, “Live below your means and save the rest.” This is the essence of personal finance—making smart decisions with your money now so you have freedom and options later on.

“Personal finance is more than budgeting,” said Lauren Zangardi Haynes, a CFP, CIMA, and CEPA at Spark Financial Advisors. “It’s understanding credit cards, how compound interest works for you (or against you), understanding Roth vs. pre-tax savings, planning for a rainy day, making housing decisions, and saving for college and retirement. It’s interwoven in our daily lives at every corner.”

Zangardi Haynes went on to say that understanding personal finance is key to reducing anxiety around money. You don’t have to be an expert. You just need to know the basics.

How Can You Be Good at Personal Finance?

Being good at personal finance is all about making your money work for you—regardless of how much you have.

“Money touches every aspect of life, and if a person doesn't know how to manage it, then it can lead to a lifetime of headaches and stress,” said Ksenia Yudina, CFA, founder, and CEO of UNest. “Once a person gets a handle on their finances, then they can spend time focusing on the things that matter most in life.”

Here’s how to get good at personal finance.

Set Clear Financial Goals

Everyone has a vision of what financial success looks like to them. Maybe for you, it’s having a credit score over 800, retiring by age 50, or helping your kids avoid the student loan squeeze. For others, it may be driving a luxury car or owning a second home by the beach.

Whatever your goals are, you must create a clear framework for achieving them if you want to be successful. Be SMART about your goals. Make them specific, measurable, achievable, realistic, and time-bound (SMART).

Start Budgeting

Learning to budget is one of the basics of personal finance. It involves tracking your income and expenses so you can see where your money is going each month. When done right, a budget puts you in control of your money. It gives you the freedom to spend more on things you love by spending less on things you don’t. There are a lot of budgeting apps to help you automate the process.

Build an Emergency Fund

If you always feel like you don’t have enough money to pay the bills, an emergency fund could provide some relief. It’s one of the basics of personal finance because it gives you a safety net to fall back on if something unexpected happens (such as your car breaks down or your cat needs an emergency vet visit).

Many financial advisors suggest you keep three to six months of basic expenses in a savings account for your emergency fund. If that seems out of reach, start small with a $1,000 starter fund or one month’s worth of expenses. Anything is better than nothing.

Pay Off Debt

Getting out of debt can be challenging. But there are a lot of reasons why you should do it. Becoming debt-free increases your financial security, gives you more money to spend on things you enjoy, and improves your credit score.

Making a plan to pay off your debt can be one of the best things you do for your personal finances—especially if you have high-interest debt. “Eliminating high-interest debt should be a top priority when it comes to personal finance,” said Yudina. “This type of debt can quickly spiral out of control and derail any financial plan you have in place.”

Start Saving for Retirement

Saving for retirement has all types of benefits—you can deduct contributions from your taxes, you build up a nest egg for the future, and you may get free money if your employer offers matching contributions.

Many financial experts recommend saving 15% of your pre-tax income for retirement. If you’re not saving anything at the moment, contribute at least enough to get the full employer match, if one’s available. After that, consider maxing out a Roth IRA, then going back to your 401(k). (This is a popular retirement savings rule of thumb people follow.)

Stick With It

The goal of personal finance is to spend less so you have more money to save and invest. Although it’s a simple concept to grasp, it can be difficult to stick with it when you’re constantly bombarded with marketing messages telling you to buy more, more, more.

Each time you go to make a purchase, ask yourself, “Does this item bring me one step closer to the life I want to live? Will I enjoy this purchase or am I just buying it to buy it?” By asking yourself questions like these, you align your spending with your values and minimize your chances of wasting money on something that puts you farther away from your goals.

Increase Your Personal Finance Literacy

When you have financial literacy, you understand all the facts, tools, and principles you need to be smart with money. Unfortunately, financial literacy isn’t taught in many U.S. school systems. It’s up to you to seek out this information if you want to be successful with your finances.

Stuck on where to start? Here are three resources you can tap into to increase your personal finance literacy.

Personal Finance Podcasts

Some personal finance topics can be confusing, even dull—especially if you’re new to it. Podcasts that break topics down in clear, inviting ways can help you better visualize how they apply to your life. There’s no shortage of great personal finance podcasts to listen to and learn from.

Personal Finance Books

Reading personal finance books is also a great way to learn how to manage your money better. Books cover all the personal finance basics, including how to invest, pay off debt, change your money mindset, increase your income, and more.

Note

Save money by borrowing personal finance books for free from your local library.

Personal Finance Software

Personal finance software and apps are hands-on tools you can use to manage your money and reach your goals. Some help you budget and track expenses while others help you manage your investments.

What Is Personal Finance? (2024)

FAQs

What is personal finance short answer? ›

According to Investopedia, “Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings and retirement planning.” Understanding these terms can help you better control your funds and prepare for future financial success.

What is personal finance in simple words? ›

Personal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. The process of managing one's personal finances can be summarized in a budget or financial plan.

What is personal finance Quizlet? ›

personal finance refers to all of the decisions and activities of an individual or family regarding their money, including spending, saving, budgeting, etc.

What are the 5 basics of personal finance? ›

Key takeaways

Financial literacy involves concepts like budgeting, building and improving credit, saving, borrowing and repaying debt, and investing.

What do I know about personal finance? ›

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning.

What is personal loan in simple words? ›

Personal Loan is an unsecured credit provided by financial institutions based on criteria like employment history, repayment capacity, income level, profession and credit history. Personal Loan, which is also known as a consumer loan is a multi-purpose loan, which you can use to meet any of your immediate needs.

What is the point of personal finance? ›

Personal finance is more than just a way to track your spending; it's a tool for securing your financial future. Understanding and managing your finances allows you to make smarter choices with your money, leading to greater financial stability and independence.

What is personal finance a plan for? ›

Personal Financial planning aims at ensuring that a household or individual has adequate income or resources to meet current and future expenses and needs. The regular income for a household or individual may come from sources such as profession, salary, business or even investments.

What does a personal finance person do? ›

Personal financial advisors assess the financial needs of individuals and help them with decisions on investments (such as stocks and bonds), tax laws, and insurance. Advisors help clients plan for short- and long-term goals, such as budgeting for education expenses and saving for retirement through investments.

Why is it called personal finance? ›

One can consider that personal finance comprises the entire industry that provides financial services to individuals and advises them about financial and investment opportunities. Personal finance, as a term, covers the concepts of managing your money, saving, and investing.

Who does personal finance? ›

Key Takeaways. Personal financial advisors are professionals who offer tailored financial advice and services to customers. In the U.S., financial advisors hold the FINRA Series 7 and 66 or the Series 65 licenses and may hold various designations, such as Certified Financial Planner (CFP).

Which is the best definition of personal financial planning? ›

Financial planning is the process of taking a comprehensive look at your financial situation and building a specific financial plan to reach your goals. As a result, financial planning often delves into multiple areas of finance, including investing, taxes, savings, retirement, your estate, insurance and more.

What is the #1 rule of personal finance? ›

#1 Don't Spend More Than You Make

When your bank balance is looking healthy after payday, it's easy to overspend and not be as careful. However, there are several issues at play that result in people relying on borrowing money, racking up debt and living way beyond their means.

What is an example of personal finance? ›

When planning personal finances, the individual would take into account the suitability of various banking products (checking accounts, savings accounts, credit cards, and loans), insurance products (health insurance, disability insurance, life insurance, etc.), and investment products (bonds, stocks, real estate, etc. ...

What do you learn in personal finance? ›

Personal finance basics include budgeting, saving, investing, managing debt, and understanding credit. Budgeting involves tracking income and expenses, setting financial goals, and making informed spending decisions.

What are the 5 areas of personal finance? ›

What Are the Five Areas of Personal Finance? Though there are several aspects to personal finance, they easily fit into one of five categories: income, spending, savings, investing and protection. These five areas are critical to shaping your personal financial planning.

What is personal finance Why is it important? ›

Personal finance is about knowing the best ways to manage your finances and becoming more financially disciplined, so you're able to meet the financial goals you set for yourself—from saving for retirement to paying off credit card and student loan debt.

What is short term in personal finance? ›

Short term financial goals are goals you want to achieve in less than a year, such as buying a new phone, saving for a trip, or paying off a small amount of debt. These goals are usually low risk, meaning you are unlikely to lose money or face unexpected costs.

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