When we try to understand Personal Finance its best to understand what Personal Financial is NOT.
Many think accounting and personal finance are the same but personal finance is NOT accounting.
On the surface they may seem the same. they both have something to do with money. But the definitions help us to better understand the differences.
Merriam Websters definition of accounting is the system for registration and summary of business and financial transactions and analysis verification and reporting of results.
Based on this definition we see that accounting is the process of analyzing and recording what you have already done with your money.
Thats why having an accountant is usually not enough when it comes to your personal finances.
Accountants usually do not get rid of personal finance there are some exceptions to this rule. Unless your accountant is a financial advisor he or she will probably only look at what you have done with your money by the end of the year and give you a report on their analysis.
This report is usually your return. what you owe the government or what the government owes you.
Very rarely the auditor gives a person a balance sheet or income statement or net worth statement. All very useful tools that are necessary to effectively manage your personal finances.
Personal Finance looks at your finances from a more proactive and goal oriented perspective. This gives the auditors something to register verify and analyze.
MerriaWebster Concise Encyclopedia The definition of Finance is the process of collecting money or capital for all types of expenses. Consumers companies and governments often do not have the means they need to make purchases or conduct business while savers and investors have funds that can earn interest or dividends if used for productive use. Finance is the process of channeling funds from savers to users in the form of credit loans or invested capital through agencies including COMMERCIAL BANKS SAFETY AND LOAN COMPANIES and such nobanking organizations such as CREDIT UNIONS and investment companies. The financing can be divided into three major areas. BUSINESS FINANCE PERSONAL FINANCE and public finances. All three involve generating budgets and managing funds for optimal results.
Personal economy simplified
By understanding the definition of finance we can break our personal finances into three simple activities.
The process of collecting money or capital for any kind of expenses Create an income.
A company gets money through the sale of its products and services. This is labeled income or income. Some companies will also invest a portion of their revenue to generate more income interest income.
A person gets money through a job or a small business selemployed lonely network marketing or other small businesses. The money that comes in may be a salary hourly wage or commission and is also called income.
A government gets money through taxes we pay. This is one of the most important ways the government generates income that is then used to build infrastructure such as roads bridges schools hospitals etc for our cities.
How much we spend in relation to how much we do is what makes the difference between having optimal results in our personal finances. Making good spending decisions is crucial to achieving financial wealth no matter how much you do.
Its not how much you make that matter thats how much you keep that really matters when it comes to your personal finances.
This is the part of personal finance that almost everyone thinks most challenging.
Often people who earn big income six digits or more tend to spend as much or more which means they are in debt and that the debt starts to interest. For too long the debt can begin to grow exponentially and can destroy any hope they would have had to gain wealth.
Personal finances made it easy
Personal finances need not be complicated if you keep this simple formula in mind.
INCOME EXPENDITURE WHAT YOU KEEP
For optimal results you only need to do more than you spend and spend less than you do so that you can keep more for yourself and your family.
If you do not work actively for optimal results you will get less than optimal results by default
Its really that simple.
Now that you understand your personal finances and what you need to do you learn the next step how to do this.