What is Personal Finances?

Persoonlijke Financiën encompasses the financial planning that an individual or family unit performs to budget, save and spend monetary resources over time, taking into account various financial risks and future life events. Specifically, it includes the use of banking products (checking accounts, savings accounts and credit cards), insurance products (health and disability insurance, homeowners and auto insurance), mortgages, investments and retirement, tax and estate planning.

The most important components of personal finance are income, spending and saving. Ideally, income should exceed spending and allow for savings and investment activities. Spending should include only those items needed to sustain a comfortable lifestyle, such as housing and utilities, food and clothing. Discretionary spending should not exceed 30% of take-home income. Savings should be used to meet unforeseen expenses, long-term financial goals and to pay down debt. Investing is another critical component of personal finance and typically involves seeking professional advice because of the large differences in risk and reward among different investments.

Understanding the Basics: Explaining Money

A good way to gauge your current financial situation is to calculate your net worth, which is equal to your total assets minus your total liabilities. Ideally, your net worth should be positive and increasing over time. This can be accomplished by adding up all of your assets, such as checking and savings accounts, stocks, mutual funds and real estate, as well as subtracting your debts, such as mortgages, student loans and credit card balances. If you’d like to learn how to manage your money wisely, I highly recommend Financial Peace University (FPU). It teaches all the basics of personal finance without the confusing financial jargon everyone else is talking about.