What is Personal Finance And What Are The Five Foundations of Personal Finance

What is Personal Finance And What Are The Five Foundations of Personal Finance

What is Personal Finance

Personal Finance is managing an individual or family's financial decisions about Income, Spending, Savings, Investing money, and achieving financial goals. This term includes all aspects related to personal finance management such as taxes, mortgages, banking, retirement plans, and real estate guidance. In many cases, personal finance refers to the industry or persons that offer financial services to individuals, families, or businesses regarding investing money into potential financial opportunities to achieve financial goals and in return charges consultancy fees. 

Five Foundations of Personal Finance

Why is Personal Finance Dependent Upon Your Behavior? The Influence of Psychology on Financial Decisions. 

Personal finance and your behavior are deeply interwoven. Our beliefs, attitudes, and emotions about money greatly influence our financial decisions even if we may not realize it.

Understanding personal finance is important to make intelligent decisions. 

An intelligent decision regarding personal finance is a decision that makes well-informed financial decisions, avoids bad decisions, and saves from common pitfalls like insufficient savings for emergencies, overspending, or lack of sufficient income streams.

It will help to make intelligent decisions to achieve financial goals.

Why Personal Finance Matters More Than Ever

Personal finance is the fulfillment of desires and goals. Each individual has own short-term and long-term financial goals within his financial constraints. 

Such goals include retirement planning, starting or expanding a business, a child's college fee, paying off debt such as credit card debt or student loans, or saving for major purchases like a home and car. Building an emergency fund to meet unforeseen circumstances is also an example of personal finance.

So, a financially disciplined individual can achieve any goals in financial terms These goals's achievement widely depends upon the person; 's entity condition, budgeted activities, or long-term goals. These financial goals must be specific, measurable, achievable, relevant, and time-bounded (SMART) as it will increase the likelihood of financial freedom.  

A lack of understanding of personal finance could lead to debt accumulation. According to the Federal Reserve Report in February 2024, In the fourth quarter of (Q3) 2023, the aggregate household debt balances increased by $212 billion, or 1.2 percent, from the previous quarter(2023Q3). Balances currently stand at $17.50 trillion. 

Further, some key findings during the Q42023 as compared to Q32023 increased as  are here:

• Mortgage Balances on Credit Card Reports Increased by: $112 billion
• Credit Card Balances is increased by $50 billion (4.6%).
• Auto Loan Balance is increased by $12 billion
• Non-housing Total Balance is increased by $89 billion
• Balances on home equity lines of credit (HELOC) grew by $11 billion
• Student Loan Balances with a $2 billion increase

This report shows that there is an ever-increasing borrowing trend in Americans. So, that's why personal finance matters more than ever otherwise inflations, high interest rates or other financial challenges will eat away at their purchasing power.

What Are The Five Foundations of Personal Finance

The five key foundations of personal finance are the fundamental principles that serve as a foundation for the building structure of personal finance. 

The whole building structure is based on the five basics of personal finance. These key areas of personal finance surround financial planning and financial management including Budgeting, Savings, Investing, Debt Management, and Insurance Plans.

    1) Budgeting:

A budget is a management of income and expenses. Personal finance starts with income. Income is the total cash inflow of salary & its perquisites, rental incomes, profits on debts, and income from partnership business or personal business and all other income streams.

 All investments, expenses, or savings for protection of financial risk are the aggregate total of income. 

Spending is the outflow of income. Typically, it includes all actions where an individual spends money for personal or business uses. This encompasses groceries, rent, credit card interest, shopping, medical expenses, food, refreshments, and travel expenses and includes all types of outflows of money where there is no financial benefit in the future.

A budget consists of controlled activities to achieve financial goals. So, creating and sticking to a budget is essential for managing income and expenses effectively and efficiently. A budget ensures expense traceability, and prioritizing financial goals. It helps the individuals that they are living within their means and their financial constraints. 

    2) Savings: 

The remaining share of income after spending is the savings. Savings tips aim at preparing for future expenses. It acts as a safety net for emergencies or unforeseen expenses. 

Everyone must save a specific portion of their income as savings. There is a famous 70/30 budgeting rule. It suggests that 70 % of all income should be spent and 30 % of the remaining income should be allocated for Savings and other financial goals. This rule prioritizes income and expense jointly ensuring that an individual has enough to cover essential needs.

Idle money or cash depreciates its value as time passes. Money decreases its value if not invested. A time value of money(TVM) is a financial concept, that advocates a dollar today is worth more than a dollar in the future. 

Idle cash has the potential to earn interest or returns over time. A dollar received today is valuable whereas a dollar receivable in the future loses purchasing power and is subject to inflation. So, instead, idle money not invested should be invested to maintain its value and to grow investments.

    3) Investing:

Investing includes putting money into financial assets like stocks, bonds, short-term savings, real estate, and mutual funds. 

The aim of investing is the expectation of earning returns on investments. Before committing money, it should be noted that investments may also come with loss. So, it is important to research and design a diversified portfolio to mitigate the risk level. Investing wisely helps to achieve financial goals. 

    4) Debt Management:

Only borrow when there is an ability to pay it. Debt management is essential for financial stability. Debt management includes avoiding excessive debts, loan terms and conditions, and timely debt repayment.

 Taking loans in severe need and purchasing a financial asset like stocks can be advantageous. Debt repayment on time could prevent late fees and high rates of interest. It improves the credit score and achieves financial freedom. Different debts have their interest rate and repayment schedules. 

All loans are not equally and timely paid off. So, there is a need to prioritize debt repayment to prevent late fees make early payments of debts with high interest rates, and then make repayments of the other debts. 

    5) Insurance:

Insurance provides protection against different financial risks. Insurance refers to the methods people adopt such as health, auto, life, fire, and house insurance. It helps people from risks like fire, car accidents, illness, or house damage. Life insurance provides health benefits.

By focusing on these five foundations of personal finance, people can maintain a strong monetary balance, reduce financial pressure, and work towards accomplishing their financial objectives.

Personal Finance Services

Different financial institutions or professionals provide personalized guidance to their customers under the five foundations of personal finance as earlier discussed above. 

These personal finance services include:

    1) Personalized Financial Planning Services:

It provides a piece of personalized advice on retirement planning, budgeting, and savings.

    2) Tax Planning and Preparing Tax Returns:

 Tax is prepared at the end of the year and paid on specific dates. Tax professional helps individuals to prepare tax returns and submit returns on a timely basis. It helps in tax planning by maximizing tax refunds and achieving tax return compliance.

    3) Estate Management Services: 

Professionals help their clients in creating wills, deeds, trusts, and all legal documentation.

    4) Insurance Services: 

Insurance agents offer appropriate insurance types with insurance plans. that suits the individuals. Insurance service includes renewals, insurance claims, reinsurance ways, and administrative functions of insurance.

    5) Credit Card Counseling: 

Credit card counselor provides financial advice at a personalized level to their clients. It includes credit card debt management and helps to improve credit scores and avoid debt accumulation by achieving economic stability.

    6) Financial Education and Practical Training: 

Subject matter experts provide personalized training to their clients on financial education and try to make them familiar with the financial world with practical exposure.

    7) Wealth Management Service:

 It is the complete financial management of financial assets. It is suitable for high-profile clients. It helps them to grow wealth and be stable in the long run.

    8) Retirement Accounts Management Service: 

They manage retirement accounts. It includes 401(k) plans and IRAs.Online Brokrege Service: It provides platforms and access to financial markets. Individuals can buy and sell stocks, bonds, and other financial assets from the financial markets.

Frequently Asked Questions (FAQs)

    ★What is personal finance?

Personal Finance is managing an individual or family's financial decisions about Income, Spending, Savings, Investing money, and achieving financial goals. This term includes all aspects related to personal finance management such as taxes, mortgages, banking, retirement plans, and real estate guidance.

    ★What are the 5 basics of personal finance?

The whole building structure is based on the five basics of personal finance. These key areas of personal finance surround financial planning and financial management including Budgeting, Savings, Investing, Debt Management, and Insurance Plans.

    ★How to learn personal finances?

Learning personal finances could be challenging if not familiar with financial knowledge. Learning new skills, doing self-research, and seeking guidance from financial professionals, attorneys, and accountants are great sources of learning about personal finances.

★What is an example of personal finance?

Typically, it includes all actions where an individual spends money for personal or business uses. This encompasses groceries, rent, credit card interest, shopping, medical expenses, food, refreshments, and travel expenses and includes all types of outflows of money where there is no financial benefit in the future.