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Financing

Personal finance is the art of managing your money. How much to save, where to invest and how to budget. None of us are born knowing how to put together a smart, simple financial plan. That’s why we’re here.

Overview

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. This guide will analyze the most common and important aspects of individual financial management.

In this guide, we are going to focus on breaking down the most important areas of personal finance and explore each of them in more detail so you have a comprehensive understanding of the topic. As shown below, the main areas of personal finance are income, spending, saving, investing, and protection. Each of these areas will be examined in more detail below.



#1 Income

Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their family. It is the starting point for our financial planning process.

  • Salaries
  • Bonuses
  • Hourly wages
  • Pensions
  • Dividends

#2 Spending

Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (i.e., not an investment). All spending falls into two categories: cash (paid for with cash on hand) and credit (paid for by borrowing money). The majority of most people’s income is allocated to spending.

  • Rent
  • Mortgage payments
  • Taxes
  • Food
  • Entertainment
  • Travel
  • Credit card payments

#3 Saving

Saving refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings or investments. Managing savings is a critical area of personal finance. Common forms of savings include:

  • Physical cash
  • Savings bank account
  • Checking bank account
  • Money market securities

Most people keep at least some savings to manage their cash flow and the short-term difference between their income and expenses. Having too much savings, however, can actually be viewed as a bad thing since it earns little to no return compared to investments.

#4 Investing

Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back more money than they originally invested. Investing carries risk, and not all assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return.


Common forms of investing include:

  • Stocks
  • Bonds
  • Mutual funds
  • Real estate
  • Private companies
  • Commodities

Investing is the most complicated area of personal finance and is one of the areas where people get the most professional advice. There are vast differences in risk and reward between different investments, and most people seek help with this area of their financial plan.