When trying to understand personal finance, it is best to understand what personal finance is NOT.
Many people think that accounting and personal finance are the same, but personal finance is not bookkeeping.
At first glance they may seem the same; they both have something to do with money. However, the definitions will help us better understand the differences.
Merriam-Webster’s definition of accounting is “the system for recording and summarizing business and financial transactions and analyzing, verifying and reporting the results.”
Based on this definition, we see that accounting is the process of analyzing and recording what you have already done with your money.
Therefore, having an accountant is usually not enough when it comes to your personal finances.
Accountants generally do not deal with personal finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or coach, at the end of the year he or she will probably just look at what you’ve been doing with your money and provide you with an analysis report.
This report is usually your tax return; it shows what you owe the government or what the government owes you.
Rarely does an accountant give a person a balance sheet, income statement, or statement of assets; these are all extremely useful tools for managing your personal finances effectively.
Personal Finance looks at your finances from a more proactive and goal-oriented perspective. This gives the accountant something to record, verify and analyze. Personal financing
and Public Finance All three relate to generating budgets and managing funds for optimal results.
Personal Finance Simplified
By understanding the definition of ‘finance’ we can break down our ‘personal finance’ into 3 simple activities:-
- The process of raising funds or capital for any kind of expenditure is equivalent to generating an income.
A company makes money by selling its products and services. This is called “turnover” or “turnover”. By investing some of your money, you can also make more money.
A person gets money through a job or a small business (self-employed, sole proprietorship, network marketing, or other small business). The money that comes in can be a salary, hourly wage or commission and is also known as income.
A government gets money through the taxes we pay. This is one of the main ways that the government generates revenue, which is then used to build infrastructure such as roads, bridges, schools, hospitals, etc. for our cities.
- Using our money to make purchases is equivalent to spending money.
How much we spend in relation to how much we earn makes the difference between optimal results in our personal finances. Making good spending decisions is critical to achieving financial wealth, no matter how much you make.
- Getting the best results = keeping as much of our money as possible
It’s not how much you MAKE that matters – it’s how much you LOVE that really matters when it comes to your personal finances.
This is the part of personal finance that pretty much everyone finds the most challenging.
Often times, people with high incomes (six figures or more) also tend to spend just as much (or more), meaning they put themselves in debt and that debt starts to build up interest. Before long, that debt can begin to grow exponentially, destroying any hope they had of acquiring wealth.
Personal finance made easy
Personal finance doesn’t have to be complicated if you keep this simple formula in mind:
What you are left with = income – costs
For optimal results, simply earn more than you spend and spend less than you earn. This leaves more for you and your family!
If you’re not actively working toward optimal results, you’ll get less than optimal results by default.
It really is that simple!
Now that you understand personal finance and what to do, the next step is to learn how to do it!
The best way to get started is by following these 3 simple steps:-
Know what you want to achieve: “If you don’t know where you’re going, any road will take you there” has become a very popular quote, probably because it’s so true. One of the habits that Stephen Covey highlights in his book “7 Habits of Highly Successful People” is to always start with the end in mind. Knowing where you want to go will be a big help in making sure you get there.
Have a plan that you can follow to achieve your goals. Knowing how you are going to achieve your goals in a step-by-step plan is invaluable. Sometimes this is easier with the help of an advisor or a financial coach.
Use tools and resources: These will help you stick to your plan and not get distracted by the things in life that can limit our income and cause us to spend more than we should. Don’t try to work it all out in your head! You will end up with a huge headache and your finances will become one giant dark fog!