When 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 personal finance are the same, but Personal Finance is NOT Accounting.
On the surface they may seem the same; they both have something to do with money. However, the definitions will help us better understand the differences.
Based on this definition, we see that accounting is the process of analyzing and recording what you have already done with your money.
Personal Finance is looking at your finances from a more proactive and goal-oriented perspective. This is what provides the accountants with something to record, verify and analyze.
Personal Finance Simplified
By understanding the definition of "finance" we can break our "personal finance" down into 3 simple activities: -
1. The process of raising funds or capital for any kind of expenditure = Generating an Income.
A Business gets money through the sale of its products and services. This is labeled "revenue" or "income". Some businesses will also invest a portion of their revenue to generate more income (interest income).
A Person gets money through a job, or a small business (self-employment, sole proprietorship, network marketing, or other small business venture).
2. Using our money to make purchases = Spending Money.
How much we spend relative to how much we make is what makes the difference between having optimum results in our personal finances. Making good spending decisions is critical to achieving financial wealth - regardless of how much you make.
3. Getting optimum results = Keeping as much of our money as possible
It's not how much you MAKE that matters – it’s how much you KEEP that really matters when it comes to your personal finances.
Often people who make large incomes (six figures or more) also tend to spend just as much (or more) which means they put themselves in debt and that debt starts to accrue interest. Before long that debt can start to grow exponentially and can destroy any hope, they would have had to achieve wealth.
The best way to start is by following these 3 simple steps: -
- Know what you want to achieve - "if you don't know where you are going, 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 mind.
- Have a plan - that you can follow that will get you to your goals. Knowing how you will achieve your goals in a step-by-step plan is invaluable. Sometimes this is easier with the help of an advisor or a financial coach.
- Use tools and resources - that will help you to stick to your plan and not become distracted by the things in life that could limit our incomes and make us spend more than we should.