There are five major areas of personal finance. These include income, saving, spending, investing and planning or protection. Let’s delve into a little details of the areas.
- Income
Income is the preliminary point of personal finance. This refers to the total income of the cash flow that you receive every month and allocate savings, expenses, investments followed by planning and protection. All the money that you make every month or annually is income. These include daily wages, monthly salaries, dividends and other sources.
- Spending or Expenses
Spending refers to the outflow of cash and typically where majority of the income goes away. Spending is whatever an individual uses their income to buy certain products. These often include rent, monthly groceries, movies or eating out, home furnishings and repair, loans and even travel.
Spending is an integral part of personal finance. To be able to manage spending properly has a huge impact on one’s personal finance management arena. Individuals must ensure that their spending is less than the income; otherwise they will never have enough money to bear their expenses or it can even lead them to be in debt. Needless to say, debt can be financially devastating, particularly with the high-interest rates credit card charges.
- Savings
Savings refers to the income that is left after spending. Savings is something that everyone should consider to cover large expenses, emergencies and even as a strong support during one’s retired life. This of course implies not using up all your income. It might be somewhat challenging but savings is an absolutely essential part of personal finance management. Regardless of the difficulty, everyone should strive to accumulate and save an amount of money that can help them sustain for any kind of fluctuations between saving and spending.
- Investing
Investing is an essential part of personal finance management. Investing is the process of putting your money in an asset class with an objective to grow the same within a stipulated period of time. Investment ideally refers to increasing the value of your money over time. Investing aims at increasing an individual’s wealth beyond the amount they invested. But, investing does come with its risks as not asset classes always appreciate. Some can even incur losses.
Investing can be difficult to fathom for those who are unfamiliar with it. It helps to devote some time to gain an understanding through research and studying. If you don’t have time, you might benefit from hiring a professional to help you in your investment journey.
- Protection or Planning
Protection refers to methods adapted by people to shield them from uncalled for circumstances such as accidents or medical emergency. It is also seen as a means to preserve wealth. These essentially include insurance plans – mainly life and health, retire planning and even estate planning.
Understanding how to manage your finances is an essential part of one’s life and when done right, can help one lead a stress-free and peaceful life.
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