Personal Finance Definition
Personal finance is a slice of financial knowledge of educational and practical importance for anyone who wants to manage personal or family money effectively. This section of finance brings together topics such as financial statements, planning, accounting, money management, and investing. The purpose of personal finance education is to improve money handling skills.
Today, one of the reasons why personal finance is important is a large number of ways to spend, borrow, or invest money. The share of electronic transactions is growing every day as well as the number of financial accounts, credit and debit cards, so it becomes harder to control personal money flows. More and more often we hear the question: « where did the money go? »
The main tasks for personal finances are to help people get the right financial education, reduce unnecessary expenses, increase return on investment, manage money responsibly, and learn how to plan and correctly make complex and large purchases.
Personal Finance Statements
The income statement is one of the most common reports in personal finance. It consists of two parts: money inflows (salary, interests, and dividends) and personal expenses (shopping, food, rent, etc.). Sometimes it is called profit & loss. Income statement serves to an individual as a report which can be used for analysis, personal financial planning, and money management. Institutions generally use it to make a loan decision.
Analyzing personal income statement banks can determine a client’s financial position and measure the risks associated with a loan. This report can be simple and contain data for a specific period, or it can be extended with the time intervals and plan/actual analysis.
A balance sheet is another important personal finance statement. This report is divided into two parts. The first is for assets such as cash, cars, houses, savings, investments, etc. The second is for financials; it shows the sources of funding for the asset. It includes personal retained earnings and liabilities like credit cards, car loans, and mortgages. Balance, as well as an income statement, can be used by individuals or institutions for analysis, financial forecasts, and other needs.
These personal financial statements are the basics for money management and investing. They used for analysis and budgeting of different types of personal finance but have a strong relation to each other. For example, the more debt is in the balance sheet, the higher the interest expenses are in the income statement. This relation works in both sides because earnings in the income statement are sources of funds for assets in the balance.
Personal Finance and Investing
Investing is one of the parts of personal finance. The main difference between investment and spending is that the first is the allocation of funds in order to earn a good return. As part of personal finance, education spending can also be called an investment. But you have to understand that return on this kind of investment is reflected in salary or other categories of personal income. It does not have direct inflow, but it can affect other aspects of life and financials. That is one of the reasons to manage money wisely and think about return on personal investments.
The most classic forms of personal finance investments are savings accounts and marketable securities. Savings accounts allow keeping money for future spending. Examples of these are retirement and deposit accounts. They are mostly low risk, which means high safety. At the same time, they are low income. Marketable securities allow investors to get higher return, but they also provide more risk. There are many good books about financial management and relation between risk and return. The most common advice in personal finance investments is to keep portfolio diversified.
Personal Finance Software
Managing personal finance is a diligent mathematic job with numbers. For many years people were using simple tools, such as the abacus, pen, and paper. Then abacus has been replaced by electronic calculators. But real changes in finance management have occurred since the beginning of the use of PCs and Macs. Efficiency, speed, and accuracy of calculations have increased many times. But financial software has been and remains focused primarily on the corporate sector. Many programs are not suitable for personal use and quite expensive. The most popular and affordable personal finance software today is Excel. However, this program is not that simple and requires special training.
With the development of smartphones, personal finance apps began to gain popularity. Unlike corporate financial software, apps are targeting a wide audience, taking into account several features, and trying to find a balance between simplicity and efficiency. The biggest challenge for finance apps is mobile screen size. These apps have to be able to display large datasets of personal financials, but they cannot use desktop spreadsheets, because of the last look too small on mobile. In these conditions, the bet is on small tables and data visualization. Personal finance apps generally provide users with charts and analytics solutions.
