Managing your personal finances involves managing both short- and long-term aspects of your finances. It also refers to an industry that offers products and services to help individuals manage their finances and investments.
But, if you’re new to personal finance, all that may not mean much to you. So, let’s explain why personal finance is important, its five areas, and its fundamental principles.
Why Is Personal Finance Important?
Financial planning is important for managing your day-to-day needs as well as ensuring your financial security in the future. Generally, people who spend more than they earn or their entire income don’t feel insecure and anxious when their retirement period approaches, but they will feel insecure when they reach retirement.
According to a Mind over Money survey by Capital One and The Decision Lab, more than three in four Americans (77 percent) worry about their financial future. There are a variety of financial concerns, from saving for retirement to paying for a home or education for your child.
In terms of financial concerns, Americans are most concerned about not having enough money for retirement (68 percent), keeping up with the cost of living (56 percent), and managing debt levels (45 percent).
According to respondents, financial stress impacts all aspects of Americans’ lives, causing fatigue (43 percent), difficulty concentrating at work (42 percent), and trouble sleeping (41 percent). And, about a quarter of respondents (25 percent) said their relationships were affected by financial stress.
The purpose of personal finance planning is to handle your finances effectively and to meet your financial goals while making sure that your future is secure.
In personal finance, all aspects of finances are considered, including:
- Budgeting
- Debt
- Estate Planning
- Insurance
- Investments
- Social Security
- Retirement
- Risk Management
- Taxes
- Wealth Management
To live a healthy, happy, and secure life, it is crucial to have basic financial skills. It can make a difference between prosperity or poverty in your life if you understand the fundamentals of budgeting, saving, debt, and investing.
What Are the Five Areas of Personal Finance?
Despite the fact that personal finances cover a wide range of topics, they can all be categorized into five broad categories: income, spending, savings, investing, and protection. After all, developing your financial plan is all about these five things.
#1. Income
A person’s income refers to the amount of money they receive and use to support themselves and their families. As such, the process of financial planning begins here.
There are a variety of income sources, including: