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.”
"Your level of understanding around the fundamentals of budgeting, saving, debt and investing will impact every part of your life and can mean the difference between prosperity or poverty.
Why bother with personal finance?
1 - Money touches everything.
Whether it's where we eat, what we buy, traveling, going out with friends or negotiating prices, every day we are faced with financial decisions. Even the causes that are of so much value to us such as charity, religious beliefs, environmental sustainability etc all embody a component of finances so we cannot get away from discussing the topic. A significant portion of the population especially young adults lack the experience and education to make these decisions - big or small.
2 - Lack of financial knowledge has painful consequences
Finances are understandably one of the major causes of stress for adults. Everyone can relate to this stress; even the wealthiest people have felt financial pains at one time or another. Debt and/or a lack of savings can cause considerable hardship on a person’s life.
Broad components of personal finance;
The definition above covers all the core principals in personal finance and to better understand it I am going to break it down into the different components so that you understand why it is so important and why personal finance basics should be a basic need for everyone.
A) Budgeting;
Budgeting teaches awareness and responsibility. It's all about actualising personal financial objectives whether it is adequate savings for short-terms financial demands, retirement planning, savings for kid’s education, etc. It completely relies on one’s income, expenditures, living expenses and requirements, essential demands, the individual targets along with the decisions made for meeting these targets within financial confinements.
B) Saving and spending financial resources:
These two are intertwined that if one is not well managed it steals from the other. Determining the appropriate split is tough for many people but if you are out of control with your spending, you could end up in a situation with serious financial problems with a lot of insecurity.
Spending your entire income (or the biggest part of it) is quite negative for you because you won’t have money aside to cover for unexpected expenses or unforeseen activities or investment opportunities.
The worst case is if you start to accumulate debt because of your spending habits. Then you have a serious problem that needs to be addressed with a strict budget but also personal support.
C) Financial risks:
Research clearly shows the biggest investment risk actually lies with the investor – their knowledge, their experience and their mindset. Many financial advisors agree that personal finance is 20% knowledge and 80% behaviour so to manage risks (which is a given in life), an individual has to ensure they have the correct balance of these two aligned with their ambitions in life.
This is a brief overview of this very broad topic, over time we are going to thoroughly review it so that we get fully equipped on what this important topic entails and why this knowledge is a must have.
