6 Key Areas of Personal Finance

Personal Finance is the term used in managing individual’s money to meet a certain financial goal. In managing our money, there are 6 key areas we should look into.

1. Income

Income refers to the cash flowing in to our pockets that we can then use to support our needs and wants. It is the starting point as we have no money to manage if we don’t have income. The first step in achieving your financial goals is by earning income.

This includes:

  • Salaries
  • Allowances
  • Bonuses
  • Business Profits
  • Dividends
  • Royalty

For the complete list of Income types, please see 7 types of Income.

 

2. Expenses

Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (i.e., not an investment). All spending falls into two categories: cash (paid for with cash on hand) and credit (paid for by borrowing money). The majority of most people’s income is allocated to spending.

Common sources of expenses are:

  • Home
  • Food
  • Utilities
  • Personal Education
  • Communication
  • Insurance
  • Entertainment
  • Travel
  • Credit card payments
  • Taxes

For the complete lists of Personal Expense types, please see 19 Personal Expense types.

The expenses listed above all reduce the amount of cash an individual has available for saving and investing. If expenses are greater than income, the individual has a deficit. Managing expenses is just as important as generating income, and typically people have more control over their discretionary expenses than their income. Good spending habits are critical for good personal finance management.

 

3. Savings

Savings refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns and what they spend, the difference can be directed towards savings or investments. Managing savings is a critical area of personal finance.

Common forms of savings include:

  • Physical cash
  • Savings bank account
  • Virtual wallet savings
  • Money market securities

 

To keep it separated from investments, savings is supposed to be available immediately anytime it is needed. Most people keep at least some savings to manage their cash flow and the short-term difference between their income and expenses. Having too much savings, however, can actually be viewed as a bad thing since it earns little to no return compared to investments.

 

4. Investments

Investing relates to the purchase of assets that are expected to generate money in return in exchange for the risk that comes with it. Over time, the individual will receive back more money than they originally invested. Investing carries risk, and not all assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return.

Common forms of investing include:

  • Stocks
  • Bonds
  • Mutual funds
  • Real estate
  • Private companies
  • Commodities

 

Investing is the most complicated area of personal finance and is one of the areas where people get the most professional advice. There are vast differences in risk and reward between different investments, and most people seek help with this area of their financial plan.

 

5. Debts

Debts are money owed or due. These are the loans or credits that we acquired for expenses to be paid later.

Common forms of debts include:

  • Mortgage Loan
  • Personal Loan
  • Credit Card Debts
  • Car Loan
  • Student Loan
  • Peer Loan

Debts is also a complicated area. Most individuals fall into debt traps mainly due to poor understanding of debts. It is often seen as negative when acquiring debts as it usually leads to debt spiral. However, we can only achieve higher stages of wealth faster with the help of Other People’s Money which is through borrowing.

 

6. Risks

Personal protection refers to a wide range of products that can be used to guard against an unforeseen and adverse event.

Common protection products include:

  • Life insurance
  • Health insurance
  • Estate planning

 

This is another area of personal finance where people typically seek professional advice and which can become quite complicated. There is a whole series of analysis that needs to be done to properly assess an individual’s insurance and estate planning needs.

Published by Cash Heaven

Excel Expert and Financial Analyst Excel / Google Sheets / Financial Modelling, Valuation and Analysis Effective communicator / High quality / Affordable / Reliable / Quick Turnover I've successfully completed over 200 financial modelling, valuation and analysis projects with start-up stage and corporate companies over the past 4 years. I love to solve problems, have an eye for design, and have built business excel templates. I fix Excel formulas in 10 minutes.

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