What is personal finance and why is it important?

What is personal finance and why is it important?

What is Personal Finance?

Personal finance is a term that covers managing your money as well as saving and investing. These include budgeting, banking, insurance, mortgages, investments and retirement, tax and estate planning. The term often refers to the entire industry that provides financial services to individuals and families and advises them on financial and investment opportunities.

Personal goals and desires and a plan to meet those needs within your financial constraints also affect how you approach the above items. To make the most of your income and savings, being financially savvy is essential to help you distinguish between good and bad advice and make smart financial decisions.

Key takeaways

  • Few schools have courses on managing your money, so it’s important to learn how through free online articles, courses, blogs, podcasts, or books.
  • The main areas of personal finance management include income, spending, savings, investment and conservation.
  • Smart personal finance involves developing strategies that include budgeting, building an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and more.
  • Being disciplined is important, but it’s also good to know when you shouldn’t follow the guidelines.

Importance of Personal Finance

Personal finance is all about meeting your personal financial goals. These goals can be anything – having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It depends on your income, expenses, savings, investments and personal protection (insurance and estate planning).

Not understanding how to manage money or be financially disciplined has led Americans to accumulate huge debt. In August 2022, household debt had increased by $2 trillion since December 2019. In addition, the following balances have increased from the first quarter of 2022 to the second quarter:

  • Credit card balances: up to $46 billion
  • Auto loans: up $33 billion
  • Consumer loans and store cards: up to $25 billion
  • Total non-housing: $103 billion increase
  • Mortgages: An increase of $207 billion

Student loans remained unchanged at about $1.59 trillion.

Americans are taking on ever-increasing amounts of debt to finance purchases, making managing personal finances more complicated than ever, especially when inflation is eroding purchasing power and prices are rising.

Areas of Personal Finance

The five areas of personal finance are income, savings, spending, investing and conservation.


Income is the starting point of personal finance. It is the total amount of cash flow that you receive and can allocate to expenses, savings, investments and protection. Income is all the money you bring in. This includes salaries, wages, dividends and other sources of cash flow.


Expenses are cash outflows and usually where most of the income goes. Expenditure is anything a person uses his income to buy. These include rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel and entertainment.

Being able to manage expenses is an important aspect of personal finance. Individuals should ensure that their expenditure is less than their income; Otherwise, they may not have enough money to cover their expenses or end up in debt. Debt can be financially devastating, especially with high interest rate credit card charges.


Savings is income left over after spending. Everyone should aim to have savings to cover major expenses or emergencies. However, this means not using all of your income, which can be difficult. Regardless of the difficulty, everyone should strive to have at least a portion of savings—somewhere between three and 12 months’ worth of expenses—to meet any fluctuations in income and expenses.

In addition, cash in a savings account becomes inactive as it loses purchasing power to inflation over time. Instead, cash tied up in an emergency or spending account should be put into something that will help it maintain or grow in value, such as an investment.


Investing involves buying assets, usually stocks and bonds, to earn a return on the money invested. An investment objective is more than the amount invested in one’s assets. Investments come with risks, as not all assets appreciate and may suffer losses.

Investing can be difficult for the uninitiated – it helps to take some time to gain insight through reading and studying. If you don’t have the time, you may benefit from hiring a professional to help you invest your money.


Protection refers to the methods people adopt to protect themselves from unexpected events, such as illnesses or accidents, and as a means of protecting wealth. Protection includes life and health insurance and estate and retirement planning.

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