What is Personal Finance? [Concept and Definition]

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Finance is a term that covers a wide field of knowledge; From corporate finance to personal finance, this is a science that aims to ensure the well-being and economic stability of a person through the adoption of a series of specific techniques and steps.

If, for example, we speak of finances in general terms, we could refer to them as a set of activities related to money or, as the handling of large sums of money and activities related to it, such as loans, credits, budgeting, savings and future projections.

On the other hand, if we mention international finance, then we are talking about the area that deals with the macroeconomic interactions that exist between two or more countries, with the goal of analyzing the dynamics that take place in the monetary system worldwide, the exchange rate and foreign investments.

For its part, corporate finance is focused on the maximum performance of the shares within a company, which is achieved through a short-term plan, offering strategies so that these shareholders receive the greatest benefit.

As you can see, finances occur on an international, governmental, corporate level and, of course, also on a personal level, since the tools available have the ability to help all kinds of people.

Man-with-calculator --- Entrepreneur
Photo: Entrepreneur

What is personal finance?

Personal finances refer to the concept under which the administration or management of money is carried out, through tools such as savings and investment.

Finance also includes the task of preparing budgets, accessing insurance, mortgages, investments, retirement plans, and real estate and tax planning.

In general, finance refers to the industry that provides financial services for individuals or families; Thus, financial advisers play an important role, since they are the ones who develop specific plans in which they offer financial advice and investment opportunities.

The main mission of personal finance is to realize specific financial projects, either short or long term; For example, through finances, the retirement options available to an individual are analyzed, or the savings options for the payment of a university tuition.

In this sense, a person’s annual income, as well as their expenses and lifestyle, will determine all the financial advice they can receive to make the most of their economic potential.

Finance-Personal-image --- Tecnológico-de-Monterrey
Photo: Teccnológico de Monterrey

Why are personal finances essential?

There are compelling reasons to consider personal finances as an essential aspect of a person’s life; it is thanks to them that it is possible to plan a stable economic future, either through investment, savings or the acquisition of plans created specifically to meet the most important needs of individuals.

Here are some reasons that make finances an essential aspect to guarantee the economic stability of any family:

Keeps you out of unmanageable debts

A financial advisor will have as its main task to analyze what are the growth opportunities taking into account factors such as annual earnings, expenses, lifestyle and the specific needs of each home.

It is possible that, either through ignorance or carelessness, some people acquire debts or incur expenses that are far from their budget.

Having a reality-based idea about a person’s income and expenses, as well as the practice of setting a budget, have the ability to keep a person from acquiring debt that is impossible to manage in the long term.

Ensures that you meet your money needs

Personal finances are essential in the sense that it allows the economic resources that a person has to perform optimally. The guidance of a financial advisor could be key to meeting the needs of an individual or a family, either through the guided acquisition of loans or mortgages that are within a short or long term projection.

Knowing what financial aid is required for will allow people not to divert their attention to superfluous expenses or the purchase of material goods that will not add significant value to their financial stability.

Offers family security

The plans financial Personal also have the primary mission of bringing families closer to the most useful tools to find a financial balance. Family security can be found in savings, but also in investment, so plans such as life insurance, health or savings for the payment of school fees can contribute to family security in the most important aspects of people.

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Photo: El Universal

Easily manage your income

An easier way to manage income is through a custom plan; Generally, this is created by an expert in financial advice, who will analyze the budget and manage a spending plan that fits the needs of each individual and their particular lifestyle, always with a strategy in mind that, in most cases, On occasions, it contemplates retirement plans and savings to face any type of medical eventuality, natural disaster, accident or death.

Budget, spending and saving

Having a budget will only be the first step to acquiring a healthy financial culture; By having a limit on income and expenses, people will be able to decide how to spend their money in a way that makes every penny work without deviating from their plans for the future.

Raise your standard of living

Personal finances are a tool that has the ability to improve people’s standard of living; Having a budget can mean the difference between tackling an unexpected expense through prevention or depleting your income for life by not having specific protection for your needs.

Finance-Personal-Concept --- elucabista
Photo: Elucabista

FAQs

In addition to the advantages of having personalized personal finance advice, there are some essential aspects to fully understand the concept:

What does personal finance mean?

The concept of personal finance refers to the administration or management of money, either through personalized plans or personal projects in which tools such as savings and investment generally intervene.

Likewise, personal finances are given the task of preparing budgets, quoting and purchasing insurance of all kinds, applying for mortgages, listing investments and developing personalized plans for retirement.

Finance is also with the objective of providing financial services either for individuals or families; In this type of service, financial advisers are presented as a key factor in developing specific plans that serve as a guide for saving or investing.

The main mission of personal finance is to realize specific financial projects, either short or long term; For example, through finances, the retirement options available to an individual are analyzed, or the savings options for the payment of a university tuition.

What is the example of personal finance?

Let’s say, for example, that a person’s main goal is to plan for retirement; For this, you will need to set aside a specific amount each month to achieve short and long-term goals.

Once you’ve set your goal of saving, you can take steps such as:

  1. Reserve a specific amount that will serve as savings each month and adapt your budget to this decrease in your income, even in times of crisis.
  2. Allocate a portion of your income to establish an emergency fund with a minimum amount of $ 1,000, which must remain active.
  3. Consult with a financial expert, who can create a projection to determine the steps to follow in the pursuit of financial stability.

What is included in personal finances?

The most important aspects that are included in personal finance are:

  1. Evaluation
  2. Goal setting
  3. Developing a plan
  4. Execution of the plan
  5. Monitoring and reassessment

What are the 5 areas of personal finance?

The 5 most important areas of personal finance are:

  1. Income: this includes the flow of money that a person receives, with which they must maintain their most important expenses. The most common sources of income are wages, bonuses, hourly pay, pensions, and dividends.
  2. Expenses: It refers to all the expenses that a person must make, which are not classified as an investment. Expenses can be in cash or through credit, and generally refer to expenses such as food, rent, mortgage payments, travel, entertainment, and credit card payments.
  3. Savings: Savings refer to excess cash that is set aside for future spending or investment plans; These are considered a critical area for a person’s economic well-being.
  4. Investment: It is any purchase of goods that have the potential to generate a return on investment within a specified period; There are different ways to invest, among which are: stocks, bonds, real estate and mutual funds.
  5. Protection: This area focuses on the well-being of individuals, such as health and life insurance.
Finance-Personal-Stock Market-Concept --- Finerio-Connect
Photo: Finerio Connect

conclusion

Personal finances represent the opportunity to create a prosperous future in which most of the expenses are covered; It is not about aggressively reducing the lifestyle that a person leads, but about adapting it to current and future needs to ensure that, in the long term, people can live peacefully, without latently worrying about money .

In addition, personal finances help to deal with unforeseen health events, natural disasters and accidents that could damage health or affect the value of a person’s material assets; thus, the acquisition of health or life insurance becomes a primary step in seeking the financial well-being of an individual.

 

Source: investopedia.com / corporatefinanceinstiitute.com / etmoney.com / yourdictionary.com

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