When considering what is personal finance, a person may think that personal finance is the household income and expenses. While this may be a very basic definition of personal finance, it fails to include many important aspects of personal finance. What is the definition of personal finance?
During times of economic peril, Americans tend to develop a narrow focus when it comes to personal finance. When living paycheck to paycheck and coping with stress from job insecurity and changes in income, people have difficulty examining the larger picture of personal finance. This is an understandable reaction to financial constraints, but people should regularly consider more functions of personal finance than income and expenses.
Personal finance not only includes the dollar amounts for income and expenses, but also whether or not the current income is sufficient for meeting the current and future demands. If the income from work, unemployment, investments, disability, and other sources is totaled, is that monthly amount more than enough to pay the expenses that the person has now? Is there a regular amount that is left for savings, investing, and future expenses?
By honest examination of household finances, the family members may be able to take necessary steps towards building a more secure financial future. Many people do not like to look at their finances when they are stressed about them. However, writing an honest budget and looking for ways to cut monthly expenses can allow a family to save and invest money.
Spending habits are part of personal finance. The family may not be aware of some of the spending habits that are stopping them from being able to save money. Many financial professionals encourage people to keep a log of all money that is spent for a month to show where any money is spent unnecessarily. People are often surprised about how much money is being wasted without their knowledge. Saving even small amounts every month can add up to big savings at the end of the year.
Another part of personal finance that is often overlooked until late in life is how the family would function with the loss of a member of the family. In addition to changes in income due to a death, the economy, unemployment, disability, and poor investment growth can dramatically impact a family’s income. Part of personal finance is having a plan in place that would compensate for such losses. Financial estate planning for passing assets to the next generations is also part of personal finance.