Understanding Finance - What is Personal Finance

The first step to understanding how personal finance will affect your life and what you need to do, is to understand exactly what personal finance is. This guide is part of a series that is intended to provide you with the information you need to understand how finance affects your life, and to be able to make informed decisions concerning your financial affairs.

Simply put, Personal Finance is how you manage your income and expenditures, but in real-life circumstances it is much more. Very much more, and there is nothing simple about it.

When you are young and living for today, life seems simple, and so do your personal finances. You have a job with a paycheck, (income), and a few bills, (expenditures), and whatever is left over seems like free money.

As your life progresses and becomes more complex, so do your personal finances. You realize you need to plan for your future, not just the weekend, and intelligently managing your personal finances becomes much more important ... and complicated.

To give you an idea of what is in store for you, here is what Wikipedia has to say about realistic management of your personal finances:

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. Components of personal finance might include checking and savings accounts, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.

Get it now? All of a sudden you have to think about a lot more than just paying the rent and car payment.

Later in this series you will learn about the need for financial advisers and consultants to help you with your financial planning, but first you need to build a foundation of knowledge and understanding of finance so you will able to make better informed decisions. You might even consider enrolling in some financial planning courses, but for now - here are the basic components of personal finance.

Revenue: This is your source, (or sources), of income. It might include:

• Paycheck(s)
• Side jobs
• Sales of stuff you own or make
• Inheritance or Annuity
• Interest from savings or investments

To state the obvious - you always want to maximize your revenue income.

Expenditures: These are things you have to pay for out of your income revenue. They generally fall into three basic categories:

1. Fixed liabilities - These would include any fixed debt payments that you make on a regular on-going basis, like; rent or mortgage payments, car payments, school loans, bank loans, credit card payments*, insurance premiums, etc. Fixed liabilities could also include future retirement plan savings payments. In short; any set-amount payments you have to make on a regular schedule for any period of time.
2. Non-Fixed - These are expenses that you can control, and may or may not occur each month. Such as; food, utilities**, dental appointments, clothing expenses, etc.
   
3. Daily living expenses: To wit: the food you eat, gas for your car, entertainment expenses, Star Buck's Latte's, work lunches, or anything else that you spend everyday in your daily life. These are considered variable and controllable expenses. For instance; broke today? No lunch or latte for you.

* credit card payments should be a controllable variable expense, but too often poor financial management, or necessity, turns your credit card payment into a fixed liability!

** Utilities actually fit better in a subset of fixed expenses, known as variable fixed expenses., but there will be more on that later in the series.

And what's left is ...

Your cash flow, or disposable income. After you have paid all your bills and expenses, anything left is called your disposable income. That is supposed to mean you can spend it however you want.

As you build your knowledge and understanding of finance, in general, and personal finance specifically, you are working towards your goal of:

Present and future financial security and prosperity!

Once you understand the basics you will be better prepared to start on the real work of personal finance - securing and increasing your wealth by controlling your expenditures and making your present revenue work harder and smarter for you.

At this point in the series, and well before you can use tips and advice, and before you can even consider financial advisers and financial courses, you need to determine your financial health.

Of course you have an idea of your financial health. You know whether you have paid your bills and whether or not you have any money left at the end of the month. But now it's time to sit down and take an honest look at things. Write down your net income, categorize your debts, and think about where you want to go with your personal finance.

It's time for the next step.

• Personal Finance - Determine Your Financial Health:
  

This guide will help you sit down and make a list to categorize your income and expenses so that you will be able to identify areas you need to focus on.

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