What is a Personal Finance?
Personal finance is a category of finance that deals mainly with an individual. When discussing personal finance class, we must strictly exclude public and corporate finance schemes. How an individual sources his funds and how he had to spend it or what he spent it on. Many people get businesses running to acquire money to take care of themselves and meet their dad to day fundamental needs and wants. Shelter, food, and clothing are the three basic needs of man that he can live without unless attained.
To get all these done, an individual found himself engaging in many finance work to get money. He can get money through investment which has its reward as profit. The personal finance class deals with individual income (revenue) and output (expenditure). How an individual holds his money either for speculative reasons (to hold money to buy goods and services when their value reduces), precautionary motive (for unforeseen circumstances), and Transaction motive (held for day-to-day transactions) are all studied under personal finance.
READ: Differentiate types of Finance – Personal, Public & Corporate
An individual’s net worth is calculated by subtracting the total assets from the total liabilities. According to the English dictionary, an asset is any property or object of value that one possesses. At the same time, liabilities are the amount of money owed to someone that must be paid back to the lender in the future, such as tax, debt, interest, and mortgage. Personal finance PDF involves all decisions that affect the individual and household financially.
Why is Personal financing necessary?
Personal finance class practices the habit of earning, investing, saving, and spending. The matters faced by personal finance are the purchases of financial products like credit cards, mortgages, home insurance, life assurance, burglary insurance, and various types of investments like buying shares in a big or small corporation, investing in a vehicle, and investing in land. Personal finance also includes banking.
Personal finance has a purview of an individual or household’s financial activities. It studies how households generate their income and also spend it. Personal finance helps an individual to have a financial plan which involves the position of the individual financial status, the long-term needs of the individual as well as his short-term needs, and how plans are executed within the individual financial constraint.
Some essential aspects of personal finance are the expected cash flow assessment, getting or paying for insurance, savings, and investment, which is always there either for speculative, precautionary, or transaction motives and retirement planning.
How do you plan your personal finance?
Here are some examples of personal finance concepts:
- Budgeting: Creating and sticking to a budget is a fundamental concept of personal finance. A budget is a plan that outlines how an individual will spend their income. For example, if an individual’s monthly income is $4,000, they may allocate $2,000 for housing, $1,000 for food, $500 for transportation, and $500 for entertainment. By creating and sticking to a budget, individuals can make sure they don’t overspend and can reach their financial goals.
- Saving: Saving is another important concept of personal finance. Individuals can save money by putting a portion of their income into a savings or investment account. For example, an individual may save 20% of their income, which equates to $800 per month, to build an emergency fund or save for a down payment on a house.
- Investing: Investing is another important concept of personal finance. Investing involves purchasing assets that are expected to increase in value over time. For example, an individual may invest in stocks, bonds, mutual funds, or real estate. By investing, an individual can earn a higher return rate on their money than they would by keeping their money in a savings account.
- Borrowing and managing debt: Money is sometimes necessary to achieve specific financial goals, such as buying a home or paying for college. However, managing debt and not accumulating too much debt is essential. Individuals can manage debt by making sure they make their payments on time and pay down debt as quickly as possible to minimize interest charges.
In conclusion, personal finance is a broad topic that covers a wide range of financial activities. Individuals can optimize their financial position and achieve their financial goals by implementing sound personal finance practices.
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