If you’ve been a reader here on our website for any amount of time you know that we specialize in personal finance advice of all types. Many of our readers are quite new to personal finance and, with that in mind, we’ve put together a blog today that talks about what exactly the term ‘personal finance’ means and some of the terms that it includes. If you’re new to personal finance this information should be very enlightening. Enjoy.
Frankly, the subject of personal finance is quite broad. In its simplest form personal finance is anything and everything that has to do with the finances of either a single adult or a family. In order to fully understand personal-finance however, it’s better to break it down into a number of specific topics that all fall under its umbrella.
Personal finance, at its core, is about record-keeping. Simply put, if you keep good records of everything that you do financially you will build a sturdy financial foundation on which to further build and increase your wealth. There are a multitude of tasks that are included in record-keeping including tracking what you earn, what you spend, where you put money for savings, and many more.
When it comes to record-keeping, there are generally two types of consumer. The first keeps track of every dime earned, saved and spent on a regular, if not daily basis. On the other end of the spectrum are the people who keep their receipts in a shoebox.
Research has shown again and again that people who are organized and keep track of their finances well are almost always the ones that are financially successful. Now, when we say financially successful were not talking about millionaires (although there are plenty) but consumers who, for example, have their home paid off, have no credit card debt and have a credit score of 750 or higher. These are the people that also, generally speaking, have better and smarter investments, savings for emergencies and max their 401(k) and IRA accounts every year.
Anyone can do this but it takes well-kept records to be successful at it.
One of the main reasons that record keeping is so important is that, when you know exactly how much money you have coming in and going out, you can set up a budget to make sure that what’s going out is never greater than what’s coming in. Frankly, there is absolutely no chance that you’ll be able to save money, set up a retirement fund or save for your children’s college if what you spend is more than what you earn.
That’s why record-keeping and a budget go hand-in-hand. If you keep excellent records you can easily determine where to cut back, what’s doing well as far as your investments are concerned and what your next financial move(s) should be. With a budget it’s much easier to save money, even if you don’t believe that you have a whole lot left over at the end of the month. As far as being financially healthy, having an excellent budget and keeping good records are like super vitamins. Definitely take a healthy dose of them on a daily basis.
Another key to healthy finances is to know your financial position. Along with your record-keeping and budgeting, knowing exactly where you stand financially will be key in meeting your financial goals. To determine your financial position you simply need to fully document your assets and your liabilities. (When you’re younger you probably will have a surplus of liabilities.) Knowing this gives you an excellent starting point to determine what types of major financial decisions you need to make in order to free yourself from all debt by the time you retire (or sooner, if you’re really good) .
You can’t talk about personal finance without talking about credit and personal debt. This is a very broad topic but, suffice to say that it’s almost impossible to go through life today without using credit and having debt at some point in your life. Whether it’s a mortgage for your new home, a loan to buy a car, student loans or even payday advances when you’re short on cash, almost everyone will have some type of debt during their lifetime.
We could spend the next 10 pages talking about how important it is to safeguard your credit and avoid going deeply into debt. We’re not going to do that but instead just note that, if you always want to make sure that your personal finances are healthy, you should learn about how credit and debt work and how, in some cases, they can even be put to work to make you more money.
Saving and investing your hard earned money also fall under the heading of personal finance and for good reason. Taking the money that you earn and using it to make more money is one of the smartest financial decisions you can make. Even if it doesn’t earn a lot of interest, putting money aside for emergencies, your children’s education or even that long-awaited vacation will ease the financial blow if an emergency arises and when your child goes off to college.
Investing and saving are both broad topics in and of themselves and, as with credit and personal debt, today we’re just going to advise that you educate yourself about both subjects and use that information well.
There are a number of other things that fall under personal finance including;
- Retirement planning
- Estate planning
All of these are important in one way or another to your financial health and thus are part of personal finances. As you can see, it’s quite a complicated subject but, if you take the time to learn a little bit about it every day, before long you’ll realize that you know quite a bit. Speaking of which, we hope that today’s blog has been educational and, if you have any questions, please let us know what the team with some answers ASAP.