“Money is a terrible master but an excellent servant.— PT Barnum.
Personal finance is the branch of finance concerned with the finances of the individual. It deals with how you earn, spend, invest, and manage your debt, especially for the pursuit of financial freedom.
“Pay attention to small expenses. A small leak will sink a great ship“, Benjamin Franklin once said. Thus, at the heart of personal finance is budgeting, that is, the art of financial planning.
When people talk about personal finance, they’re talking about the important areas — earning, spending, saving, and investing — where they need to manage their money. They talk about how, like PT Barnum echoing this, they can make money their servant and not their master.
Here we will soon discuss exactly that.
The starting point is gain. Earning provides income, the cash flow you spend, save, and invest. In fact, without it, there is no personal finance, no financial planning, and certainly no budgeting. After all, you can only plan what lies ahead.
Earnings come in the form of wages, salaries, allowances, pensions or any other type of income. Often, to win, you have to produce.
In everyday life, you incur expenses. Like you to win through the goods or services you produce for others, you also pay for the goods and services that others produce and use.
The goods and services you pay for can be sorted by Needs and wanna. The needs are housing, food, transportation, insurance, health care and utilities. Needs, on the other hand, are personal care, entertainment, hobbies, and subscriptions—that is, expenses that you can basically do without. You pay for your needs and wants on credit or in cash.
It is considered a virtue to save. In the classic personal finance book, The richest man in Babylon, the author, George Samuel Clason, wrote; “I found my way to riches when I decided that part of everything I earned belonged to me.”
It is economy, and it can aim at different targets. Among these objectives, there is savings to spend, invest or for emergency purchases. Savings may or may not earn interest. This can be physical cash, savings or checking bank accounts, or a certificate of deposit (CD).
You want to get to the point where you are financially secure enough to stop working. While many have to work until age 70 before they can retire, you may want to retire early and young. Either way, you have to invest. When you invest, you buy assets which generate a regular return.
While you are still actively working, you could even reinvest the returns. Generally, the assets in which individuals invest include actions, obligations, mutual fund, exchange-traded funds (ETFs), real estateand merchandise.
Without the required knowledge, investing can easily go wrong. Therefore, before trying it, it is recommended to seek professional help.
Finally, another area covered by personal finance concerns protection that includes products (for example, insurance) used to mitigate the negative effects of unforeseen life events.