The Best Way to Understand Personal Finance

Once we are trying to understand Personal Finance, the best thing to do is to understand what Personal Finance is NOT.

Many people think that accounting and unique finance are the same, but Personal Finance is NOT Accounting.

On the surface they may seem the same; they both have an issue to do with money. However , the definitions will help us better understand the differences.

Merriam-Webster's definition of accounting is actually "the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting end result. "

Based on this definition, we see that accounting is the process of analysing and recording what you have already done with your cash.

This is why having an accountant is usually not enough when it comes to your personal finances.

Accountants generally don't concern themselves with your own finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or discipline, he or she will likely just look at what you have done with your money at the end of the year and provide you with a report health of their analysis.

This report is usually your tax return; what you owe the government or what the government owes you.

Very infrequently does the accountant provide an individual with a Balance Sheet or Income Statement or a Net worth statement; just about all very helpful tools that are necessary to effectively manage your personal finances.

Personal Finance is looking at your finances from a more pro-active and goal oriented perspective. This is what provides the accountants with something to record, verify and analyze.

The Merriam-Webster's (Concise Encyclopedia) definition of "Finance" is the "process of raising funds or capital for any kind of expenditure. Clients, business firms, and governments often do not have the funds they need to make purchases or conduct their operations, while savers and investors have funds that could earn interest or dividends if put to productive use. Finance is a process of channeling funds from savers to users in the form of credit, loans, or invested capital through agencies which include COMMERCIAL BANKS, SAVINGS AND LOAN ASSOCIATIONS, and such non-bank organizations as CREDIT UNIONS and investment agencies. Finance can be divided into three broad areas: BUSINESS FINANCE, PERSONAL FINANCE, and public finance. All a few involve generating budgets and managing funds for the optimum results".

Personal Finance Simplified

By understanding the definition with "finance" we can break our "personal finance" down into 3 simple activities: -

1 . The process of raising monies or capital for any kind of expenditure = Generating an Income.

A Business gets money through the sale of their products and services. It's labeled "revenue" or "income". Some businesses will also invest a portion of their revenue to generate more income (interest income).

People gets money through a job, or a small business (self employment, sole proprietorship, network marketing or other small business venture). The cash coming in can be a salary, hourly wage, or commission, and is also referred to as income.

A Government gets money through duty that we pay. This is one of the main ways that the government generates an income that is then used to build infrastructure like roads, links, schools, hospitals etc for our cities.

2 . Using our money to make purchases = Spending Money.

How much we invest relative to how much we make is what makes the difference between having optimum results in our personal finances. Producing good spending decisions is critical to achieving financial wealth - regardless of how much you make.

3. Getting maximum results = Keeping as much of our money as possible

It's not how much you MAKE that matters - its the amount of you KEEP that really matters when it comes to your personal finances.

This is the part of personal finance that virtually everyone finds the most tricky.

Often people who make large incomes (six figures or more) also tend to spend just as much (or more) which translates to mean they put themselves in debt and that debt starts to accrue interest. Before long that debt can start to grow greatly and can destroy any hope they would have had to achieving wealth.

Personal Finance made simple

Personal Finance fails to need to be complicated if you keep this simple formula in mind:

INCOME - SPENDING = WHAT YOU KEEP

For Best possible Results you simply have to make more than what you spend and spend less than what you make so you can keep more for your needs and your family!

If you are not actively working towards an optimal result you will by default get less than optimal outcomes

It really is that simple!

Now that you understand personal finance and WHAT you need to do, the next step is learning HOW to do this!

The best way to start is normally by following these 3 simple steps: -

1 . Know what you want to achieve - "if you don't know where you are intending, any road will take you there" has become a very popular quote, probably because it is so true. One of the habits that Stephen Covey highlights in his book "7 Habits of Highly Successful People", is to always start with the end in your mind. Knowing where you want to go will be a big help in ensuring you get there.

2 . Have a plan - that you can stick to that will get you to your goals. Knowing how you will achieve your goals in a step by step plan is invaluable. Sometimes it's easier with the help of an advisor or a financial coach.

3. Use tools and resources - that will help you to stay on your plan and not become distracted by the things in life that could limit our incomes and make people spend more than we should. Don't try and work it all out in your head! You will end up with a massive headache and your finances may become one gigantic dark fog!