Personal Finance
Lesson 1
4 min

What is personal finance and why does it matter?

Personal finance is about managing your money - your steady income and creating a budget for how and where you spend money.

  • Personal finance is about managing your money to meet your personal financial goals

  • Managing your money is necessary to living a self-determined and secure life

  • Personal finance involves evaluating your income, your financial needs and allocating your money to necessary expenses

  • Keeping track of your income and how you save and spend your money is called budgeting

In this lesson, you are going to learn why personal finance is important and what it means to be on top of your personal finances.

What is personal finance?

Personal finance is about managing your money to meet your personal financial goals, usually over a long period of time – basically your whole life. 

Managing your money is necessary for living a self-determined and secure life, whether you are planning for your retirement fund or saving up for a car. Personal finance involves evaluating your income, your financial needs and allocating your money to necessary expenses on a regular basis. The main goal is to have a clear picture of your expenses in order to set money aside for saving and investing.

Money makes the world go round 

From something as insignificant to buying your morning coffee to taking out a mortgage, every single day we are faced with financial decisions. Therefore, it is important to learn money management skills from early on and to regularly analyse your personal finances.

Studies have indicated that their personal finances are among the main causes of stress for adults. Even wealthy people deal with money problems and financial stress - it is something that everybody can relate to. So it is not only a matter of how much you earn, save or invest, but also how you come to a state where you are content with what you have.

What is budgeting?

One part of managing your personal finances is budgeting - the creation of a structured plan outlining income and expenses. The basic idea is to put you in a position where you do not spend more money than you earn.

The definition of a budget is keeping track of your income and how much of your income you save and spend. Basically, a budget involves allocating the amounts of money you need to sustain your cost of living, your wants, plus any unforeseen “emergency” expenses, as well as setting aside money for investing.

Personal finance involves assessing your income, your financial needs and allocating your money to necessary expenses on a regular basis. 

The importance of budgeting

Budgeting is absolutely essential for financial freedom and security. Budgeting helps you to focus on your long-term financial goals and to keep track of your saving and spending. It can also show you where you need more control over your spending habits, such as impulse purchases - things you did not plan on buying but decided to buy at the spur of a moment.

Having a budget in place allows you to make better choices and, as a consequence, worry less about overspending and debts. Note that a household budget is useful no matter what your life or household situation looks like. For someone who earns little money, it is useful for making ends meet each month. It is also good for someone who earns a lot. Remember: It is not about how much you earn but how much you save and investing is important on your way to financial freedom.

Spreadsheets

You have several options to keep track of your personal budgeting. You could set up a digital spreadsheet in Excel. Another way is to write your plan down in a notebook. However, you can also research and select among plenty of free templates online for your needs.


Mobile apps 

Alternatively, there are great budgeting apps that help you set up a budget and stick to it, such as Pocket Guard, which shows you how much spending money you have left in your budget, or Wally, where you can budget to suit your needs. You can find more apps for budgeting listed in this article.

Techniques 

One of the most common and effective budgeting techniques used frequently in personal finance is the 50 - 30 - 20 rule. Sounds complicated? Well, it is actually very simple.

 
 
 
 

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In this example, 50% of your monthly income should go towards necessities such as bills, housing and groceries. Twenty percent should go to your savings, budget plan, your emergency savings and investing. Thirty percent of your income should be allocated to your wants, such as clothes shopping and going out for dinner.

Budgeting helps you to focus on your long-term financial goals and to keep track of your saving and spending.

There are variations to this percentage rule and you can change it depending on your income or preferences. For example, you could save less if you do not earn enough to save 20%. Or crank up savings to 30, 40 or even 50% if your income allows it.

The bottom line is, one budgeting technique does not work for everyone and you need a solid plan in place, not only in order to achieve your financial goals, but also to reduce financial stress.

In our next lesson, you will learn about assets and liabilities and why it is important to understand the difference between them before you start investing. 

FURTHER READING 

BOOKS

  • Cagan, Michele CPA - Budgeting 101: From Getting Out of Debt and Tracking Expenses to Setting Financial Goals and Building Your Savings

  • Kobliner, Beth - Get a Financial Life: Personal Finance in Your Twenties and Thirties

You will destroy yourself financially if you save

5 Reasons Personal Finance Should Be Taught In School

6 Reasons why you need a budget

The 10 best financial rules of thumb

How inflation affects your savings

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