The Best Method to Understand Personal Finance

Once we are trying to understand Personal Finance, a very important thing to do would be to know what Personal Finance is NOT.

Many individuals think that accounting and personal finance are the exact same, but Personal Finance is NOT Accounting.

On the surface they may seem the exact same; they both have something to do with money. However, the definitions can help us better understand the differences.

Merriam-Webster's definition of Personal finance is "the device of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results."

Based with this definition, we see that accounting is the method of analysing and recording what you have finished with your money.

For this reason having an accountant is generally not enough when it comes to your individual finances.

Accountants generally don't concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant can be an economic advisor or coach, he or she will more than likely just look at everything you have completed with your hard earned money at the end of the season and give you a report of their analysis.

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

Very rarely does the accountant provide an individual with a Balance Sheet or Income Statement or even a Net worth statement; all beneficial tools which are essential to effectively manage your personal finances.

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

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

Personal Finance Simplified

By understanding this is of "finance" we are able to break our "personal finance" on to 3 simple activities:-

1. The method of raising funds or capital for almost any expenditure = Generating an Income.
A Business gets money through the sale of their products and services. This really is labeled "revenue" or "income ".Some businesses will even invest some of these 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). The amount of money arriving could be a salary, hourly wage, or commission, and is also called income.

A Government gets money through taxes that people pay. This is one of many main ways that the us government generates an income that's then used to create infrastructure like roads, bridges, schools, hospitals etc for our cities.

2. Using our money to make purchases = Spending Money.
Just how much we spend relative to simply 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 that you can
It's not simply how much you MAKE that matters - its how much you KEEP that actually matters as it pertains to your own personal finances.