Why Personal Finance Is Important?

When someone mentions personal finance, you probably think of budgeting and trying to pay off debt.

But it goes beyond that.

Personal finance means managing your money as an individual, typically over an extended period–basically, your whole life.

Personal finance involves assessing your income and financial needs and allocating your money to necessary expenses.

The Importance of Personal Finance

Not understanding how to manage finances has led Americans to accumulate enormous debt.

Personal finance skills are indispensable because, without them, you can spend your entire life working for money but never getting ahead.

Whether saving up for a car or planning for retirement, managing your money is essential to living a self-determined and secure life. The financial decisions you make throughout your life can affect how you live in retirement.

Areas of Personal Finance

We fail to secure our financial well-being because we are unaware of what should be done about it. We normally do what we feel is right, but this might not always be enough. Hence, knowing the key components to focus on while creating a plan for your financial well-being is vital.

The five key areas of personal finance are:

1. Income

This is the starting point of personal finance.

Income refers to the entire amount of cash inflow that you get and can allocate to other areas. Income can include:

• • Hourly wages
  • Salaries
  • Dividends
  • Bonuses
  • Other forms of cash inflow

It’s also imperative to know the difference between gross and net income. The former is the income received before taxes and other deductions are subtracted, while the latter is what is left after taxes and other deductions are subtracted.

2. Spending

This is an outflow of cash, mostly where the bulk of income goes.

Spending is whatever you use your income to purchase.

Expenses can include:

• • Rent or mortgage payments
  • Utility bills
  • Groceries
  • Travel
  • Dining out
  • Hobbies
  • Home repairs/renovations
  • Entertainment

This category develops habits that continually affect how we use, think, or feel about money.

Managing expenses is just as crucial as generating income because spending more than one’s income can lead to debt.

3. Savings

This is left over after spending, or deferred consumption.

You should aim to have savings to cover emergencies or big-ticket purchases.

The need for sudden money can come without knocking. It can be as serious as losing your job or as mundane as a car breakdown. Such emergency events can, however, be dealt with if you have enough savings in an accessible account to cover the need.

You can save money in a:

• • Money market account
  • High-yield savings account
  • Certificate of deposit
  • Individual retirement account
  • Employer-sponsored retirement account

Direct any cash not tied to a spending or emergency account into investments to help it grow, maintain, or increase its value.

4. Investing

This area involves buying assets, typically stocks, bonds, and mutual funds, to get a return on the money invested.

Investing aims to achieve a profit or material gain and increase your wealth beyond the amount you invested.

Not all assets appreciate, however, and you can incur a loss because investing comes with risks.

Investing should involve careful planning, which is why you may need the services of an investment counselor in specific areas of interest.

5. Protection

Protection refers to measures taken to guard a thing against harm caused by outside forces.

With personal finance, this area involves protecting yourself from unexpected events in order to preserve wealth.

Protection can include:

• • Retirement planning
  • Estate planning
  • Auto insurance
  • Homeowner’s Insurance
  • Health and life insurance

Protection is another area of personal finance where you should seek professional advice.

12 Principles of Personal Finance Everyone Must Follow

1. 1. Know your take-home pay before you spend your money
   2. Pay yourself first–set aside money from every paycheck for unexpected emergencies
   3. Start saving early to enjoy the magic of compound interest
   4. Compare interest rates to get the best value for your money
   5. Only borrow what you can repay–be wary of get-rich-quick schemes
   6. Budget your money–this will help you live within your income
   7. Money doubles by the “Rule of 72”–divide the interest rate into 72 to determine how many years it’ll take your money to double
   8. High returns equal high risks
   9. Don’t expect something for anything–if something sounds too good to be true, it probably is
   10. Map your financial future by listing your financial goals and a realistic plan to achieve them.
   11. Your credit past is your credit future–protect your credit score at all costs.
   12. Stay insured to avoid being wiped out by a financial loss.

Personal Finance Education

Personal finance isn’t taught at school, so most people learn it from their parents or learn it themselves.

Luckily, you don’t have to spend a lot of money to learn how to manage it better.

You can learn about personal finance from podcasts, library books, or online.

The most important thing is to find an interesting and engaging resource that works for your learning style. If a book, blog, podcast, or course is dull or difficult to understand, keep trying till you find something that clicks.

“Personal finance isn’t just something to think about occasionally, like when you review your pay slip,” says Gary Isler, Senior Vice President of Investment for David Lerner Associates. “It affects your life on a daily basis.”

Understanding the various aspects of personal finance can help you make informed decisions today and plan for tomorrow.

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Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.