Finance means raising money or capital. It could be for business or individual use. The focus here is on the latter, individual use.
All the activities and processes used when planning how to earn or use personal funds describes Personal finance. Personal finance deals with how to manage your money. And managing your money includes how you save it, budget it, and invest it, among other things.
Major Components Of Personal Finance
Before establishing the varied importance of personal finance, it is essential to know its components:
Income is any source that increases the amount of money you have or your total cash inflow. It is the beginning of personal finance because, without income, there’s nothing to manage. Income accrues from various means asides from a salary or sales of goods and services. Profit from investments, monetary gifts, and inheritance, are also income.
It is necessary to know your income and all the channels they come from. Being intentional about your income sponsors proper planning on how to use it. It also helps you be aware of your financial capabilities.
Savings is the amount of money set aside from your income. Savings are supposed to remain untouched, except for their targeted purpose. Some people describe it as leftover income, after spending. However, savings should be intentional and not an afterthought. Just as you would decide on an amount for buying new clothes, be decisive about the amount you would save.
All items you spend your money on is known as an expenditure. They are outflows of any kind that reduce income. The ability to control expenditure is a personal finance skill. As humans with wants and needs that cannot be completely satisfied, we may spend recklessly. Managing your spending is therefore very vital.
Expenditure should always be less than income and you should spend on things you can afford. To determine what you can afford, think of the possibility of buying that item two or three times over. If it won’t be convenient, you probably can’t afford it. Try to practice restricted spending.
This is a compulsory fee from the government, imposed on income. They impose taxes on individuals, businesses, and companies. For most individuals in Nigeria, Value added tax is placed on goods, and the salary earner’s tax is deducted from monthly income, stamp duties, or tenement rates.
You have to factor in the deductible tax on your income as evading tax is a punishable offense by law. Budgeting should be done on income after tax.
An investment is any venture that involves using an amount of money to purchase valuable assets, in hopes of interest or returns. Investment is a means of keeping an amount of money intact with chances of earning a profit on it. People invest in company shares, stock, cryptocurrency, land, mutual fund, etc. When there is an increase in the market value of the asset you buy, the make profit on your capital.
Why Is Personal Finance Important?
To avoid working your entire life just to survive, it is necessary to gain knowledge of personal finance. Personal finance encourages responsibility, security, and control of financial strength in the long run. With good practices in personal finance, you can become successful in meeting all your financial goals.
A lack of personal financial discipline is the easiest way to incur debts and misuse money. A 2022 survey revealed that Americans accumulate a lot of debt due to poor financial management. From December 2019 to August 2022, household debt increased by $2 trillion. Balance on Credit cards increased by $46 million, and auto loans by $33 billion.
In Nigeria, the Central bank of Nigeria reported that consumer loans rose by 31% – from N1.93 trillion in June 2022 to N2.55 trillion – in July 2022. The Nigerian Bureau of Statistics (NBS) also reported that since 2021, Private Debt is at least 12.23% of Nominal GDP and public debt has risen to 44.06 trillion. When Finance management is flawed, debts continue to increase. Managing personal finance is more vital than it may seem. It will keep you away from a lifestyle of debt.
Working long hours to earn money is already a lot of work for most of us. Hence, imbibing good personal finance skills is not easy. This is where automated personal finance comes in to relieve some of the burdens. An initiative like the EverydayMoney app does the bulk work in managing your finance. The user-friendly features will carry you along in making personalized choices for your money. Spending budgets and savings budgets towards selected financial goals can be created with the app.
Personal finance will keep you aware of your income, nudge you to live by budgets, and assess costs and benefits before making decisions. It will also help you pay attention to your needs, and restrain spending on wants to ensure adequate planning for the future.
Other components of personal finance include budgeting, banking, insurance, mortgages, and retirement. Having an understanding of the components and importance of personal finance will improve your judgment on how you want to manage your money.