Are you rich? Are you poor? Are you okay?
The lowdown on personal finance and why it’s important
So what?
Personal finance can be a touchy and personal topic that you don’t want to discuss or think about. People even go as far as avoiding dealing with personal finance. So, what is personal finance that throw people off their game? And what does getting on top of your personal finance do for you? Here’s a snapshot of what it gets you:
- Letting money work for you;
- Getting ahead in life;
- Family and future security;
- Avoid unmanageable debts; and
- Better standards of living.
Definition
According to Wikipedia, personal finance “is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events”. Simply put, it is how you manage your income, expenses, savings, investments, debts and insurances.
Income
Your main cash inflow is your income if you are an average human being. It can be both earned and unearned. Earned income includes salaries, bonuses, wages and pension. Unearned income includes dividends and interests. Your cash inflow is the source of all monies that you can use to spend, save and/or invest.
Expenses
This category relates to all of your cash outflows for buying goods and services. The key difference between expenses versus savings, investments and insurances is that expenses are monies spent on consumables. Common expenses are rent, mortgage repayments, taxes, food, groceries, entertainment and the dreaded credit card payments.
The one thing that I would like to highlight is that you have more control over your discretionary expenses compared to your income. This means that your spending habits are important for your financial management.
Savings
Do you save or intend to save a certain amount from your each pay check? What you are doing is retaining your income for the future. Whether its purpose is to spend or invest at a later date, savings put you in a strong financial position now and in the future. They are the safest form of putting your money aside as the only financial risk that you are exposed to is the inflation risk as your savings earn little to no return. Savings are cash on hand or money you have in your savings or day to day accounts.
Investments
When you purchase assets that you expect to generate monies, what you are doing is investing. Investing does not have to be in the popular forms such as stocks, bonds and real estates. Investing in yourself, private companies and arts are often overlooked but can net you positive cash flows. Investments are one of the most complicated areas of financial management. You should seek professional advice (perhaps not an ongoing one) if you want to get the most out of your investments.
Insurances
Things can and do happen. Accidents and other unforeseen and unfortunate events could be around the corner waiting to strike. This is why you need personal protection in the form of life and health insurance and income protection. There are a range of products and services that protect your life, health and income which can be complicated and require professional advice.
Debts
The last and least favourite topic of all – debt. Debt is inevitable. You need to take on debt to buy cars or houses. As the ugly cousin of savings, debt is what you promise to pay back in the future. You need to understanding how taking on debt will impact your future before taking any on. Your circumstances can change that impact your ability to pay back the debts you owe.
My experience
As an accountant by practice, I have sound understanding of finance and financial management. Despite this, I didn’t have a good handle on our finances until recently. We earned and saved as well as invested. We did all the right things, or so we thought. After learning more about personal finance through audiobooks and podcasts, it came to my attention that we were lacking attention in our investments and insurances. Even as an accountant, we didn’t see our weakness in our personal finance until we intentionally reviewed our financial position. It goes to show that things can be overlooked even for professionals in the field.
What now?
- Understand what personal finance is.
- Have a think of each of the areas and consider where your strengths and weaknesses are and where you can improve.
- Are you looking to get out of debt? Money: Master the Game by Tony Robbins which is a book endorsed by Oprah Winfrey is a book that you don’t want to miss.