Personal Finance

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Personal Finance?

Personal finance comprises investment, budgeting, savings, risk allocation, mortgages, and personal banking. It is financial management pertaining to an individual or household. It focuses on individual financial objectives. Achieving financial goals requires some level of financial literacy—knowledge of tax laws, investment opportunities, interest rates, etc.

Financial growth at the individual level involves reducing debtsDebtsDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or more, reducing credit card reliance, avoiding impulsive buys, and long-term planning. Everyone needs to save up for retirement and emergencies. In addition, individuals must possess knowledge of credit scores to maintain their creditworthinessCreditworthinessCreditworthiness is a measure of judging the loan repayment history of borrowers to ascertain their worth as a debtor who should be extended a future credit or not. For instance, a defaulter’s creditworthiness is not very promising, so the lenders may avoid such a debtor out of the fear of losing their money. Creditworthiness applies to people, sovereign states, securities, and other entities whereby the creditors will analyze your creditworthiness before getting a new more.

Key Takeaways

  • Personal finance deals with an individual or household’s income, spending, and savings.
  • The five fundamental focus areas of personal finance are income, spending, savings, investing, and protection.
  • Understanding a country’s tax system can help individuals save a lot of money. This requires proper tax planning. Tax avoidance is a legal method of saving money by paying fewer taxes—by claiming various tax deductions and credits.

Personal Finance

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Basics of Personal Finance Explained

Personal finance can be understood as the art of managing money. It deals with an individual’s or household’s earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other more, savings, and expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising more—based on needs and preferences. Individuals who plan their finances have a better shot at reaching their financial goals. Even with limited earnings, they can afford a decent standard of living and future financial security.

Everyone should possess basic finance know-how. But, in the end, finance boils down to personal discipline and control over unnecessary expenses. Further, everyone needs to learn the difference between needs and wants. Once individuals narrow down on a financial goal, they can start saving. In addition, they can invest in suitable opportunities and create multiple sources of income.

Foundation of Personal Finance

The following areas act as the foundation for personal finance:


The principles of personal finance are as follows.

  1. Prioritization: Decide your priorities before spending—segregate all the unavoidable expenses from the ones that can wait. 
  2. Assessment: Before investing, analyze the costs and benefits of each financial product, investment opportunity, or business idea.
  3. Restraint: The 30-day savings rule is highly recommended. Before spending your money on something you want but don’t need, stop and think for 30 days. This financial technique protects individuals from impulse buying.
  4. Knowledge: Develop an interest in financial management—better knowledge of finance and markets lead to better decision-making.


Financial planningFinancial PlanningFinancial planning is a structured approach to understanding your current and future financial goals and then taking the necessary measures to accomplish them. Because this does not begin and end in a specific time frame, it is referred to as an ongoing more at the individual level comprises the following:

Personal Finance Tips

Following are some strategies for efficient personal finance management:


Let us consider a fictional example to understand the practical application of personal finance.

Arthur and Brendan work in XYZ Bank as Probation Officers. In a month, they earn $4000 each. Both are married and have a child. While Arthur is keen on personal finance, Brendan does not plan his finances. Thus, for a family of 3, their spendings are as follows:

ExpensesArthur ($)Brendan ($)
House Rent20001900
Child’s Education600600
Debt Repayment100200

Note: Miscellaneous expenses include outings, leisure, and entertainment.

From the above table, it is evident that Brendan spent $100 more than he’s earning using his credit card. This is on top of the $200 debt repayment for past borrowings. Also, he does not have any savings or investments. Clearly, Brendan had no financial planning.

On the contrary, Arthur plans, budgets, and tracks his finances. As a result, he invests $100 and saves $200 every month. The differences between planned and unplanned finances add up over time.

Frequently Asked Questions (FAQs)

What are the main sources of personal finance?

Following are the various ways through which an individual or household generates income:
• Salary/Business/Professional income;
• Rental income from leasing or renting premises;
• Interest received on savings or fixed deposit account;
• Dividends and interests received on other investments like securities, bonds, and debentures;
• Accumulated savings;
• Proceeds from mortgage loans;
• Borrowing from peers and family members.

What is the 30-day rule?

The rule applies to purchases that an individual wants but does not really need. So, the 30-day rule recommends waiting 30 days before spending. After 30 days of pondering, if the individual still fancies, they can go ahead with the purchase. This financial management technique protects individuals from impulse buying.

How to plan your finance?

Personal finance planning  involves the following steps:
• Making a budget of income and expenses;
• Deciding a financial goal;
• Listing out the inevitable expenses:
• Limiting unnecessary spending;
• Investing in suitable opportunities;
• Retirement planning:
• Insurance Saving for emergencies.

This has been a guide to What is Personal Finance & its Meaning. Here we discuss personal finance budget, planning, examples types, principles, and strategies. You can learn more about it from the following articles –

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