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What is Personal Finance? Importance, Types, Process, and Strategies

  • Neelam Tyagi
  • Nov 08, 2020
  • Updated on: Mar 22, 2024
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Let’s begin with defining Finance, “It is a comprehensive phrase that fully specifies explicit activities linked with banking, leverage or debt, credit, capital markets and investments, basically, it reflects the entire money management and the procedure of obtaining money according to requirement. However, Finance comprises monetary learning, and the study of banking, credit, investment, equities, and liabilities that entirely build the financial structure.”


Finance is an extremely important aspect in everybody life, but do you want to know how it is manageable and doable at a corporeal grade, or simply at the personal stage, probably, you would say "yes". So, Without further delaying, voyaging the Personal Finance monarchy



Table of Content


  1. Introduction to Personal Finance
  2. Importance of Personal Finance
  3. Types & Examples
  4. Process & Strategies 



Introduction to Personal Finance


A generic definition of personal finance is, “maintaining your own money throughout your life.” However, the authentic interpretation incorporates all the features and aspects of managing the income including various strategies and status of risk for distinct facets of life and different amounts of investments. 


In simple words, “It involves the understanding of the facts like how everyday spending affects our accounts, the utility of credit cards, how varying interest rates could make or break our portfolios”. These fundamental concepts assist in framing a picture of how stable an individual is financially and more importantly how to raise that stability in the future.


“Personal Finance is made up of various parts, but can be summarized as budgeting, setting spending and saving priorities, cash flow planning, and efficiently maximizing benefits through rewards programs.” – Anthony G. Lanza, Spectra Investment Management


It's all about actualising personal financial objectives whether it is adequate savings for short-terms financial demands, retirement planning, savings for kid’s education, etc. It completely relies on one’s income, expenditures, living expenses and requirements, essential demands, the individual targets along with the decisions made for meeting these targets within financial confinements. 


Some practical examples of personal finance are;


  • Learning how to budget, balance a cheque book, secure funds for important purchases, saving for retirement, planning for taxes, insurance purchasing and making efforts for investments.

  • Planning with the family on how the total income could be divided for mortgage or kid’s education, medical expenses, etc.

  • Deciding or debating whether to save or not a particular amount on some expenditures or save it for the future.


According to the definition provided by Investopedia, “Personal finance explains all the financial decisions and actions accounted by an individual or household that comprise budgeting, insurance, mortgage planning, savings and retirement planning.” 


Primarily, personal finance deals with

  • Family budgets,
  • Personal savings and investments, and
  • The utilization of credit cards.


Most of the Individuals certainly get mortgages from commercial banks, savings and loan associations in order to purchase their own homes, while financing the purchase of consumer items such as automobiles or appliances can be collected from banks and finance firms. 


Additionally, charge accounts and credit cards are other significant modes by virtue of which most banks and businesses render short-term credits to consumers. 


(Recommended blog: 5 Key Elements of Financial Analysis)


Personal Finance Terms


Budget: While managing personal finances, budget is important in maintaining the record of spending patterns, it helps in planning how one could go with spending according to the income each month. It basically tells where is your money is going, when and where you can save, and how can you manage expenditures.


Insurance: In terms of managing personal finances, taking up the insurance is another part. One can protect itself via purchasing health insurance, life-term insurance, car insurance, etc, from risk and providing securities to material things also.


Savings: In our 20’s we just learn about personal savings, but with the entering in our 30’s we start planning about managing our funds, seek ways to invest correctly and save for retirement or old ages. Hence, it becomes necessary to make emergency savings funds to mask any financial discomforts and retirement saving plans to aid in future. 



Importance of Personal Finance


Personal Finance has become an integral part of human life, and in the present COVID-19 world, it has become more necessary than ever before. (Click here to understand the concept of how COVID-19 is impacting Financial Markets)


Below are some of the imperative aspects of finance at a personal level;


  1. Personal Finance has a great role in determining the direction and essence of human life in the prevailing economic and social circumstances.


  1. For personal growth of an individual and his family, personal finance plays a key role by looking at the opportunities and keeping upgraded across the globe through keeping aware of any sort of risks. 


  1. It has become more crucial to enrich the financially literate in order to acquire most of the income and needed savings where the study of personal finance assists in distinguishing amid favourable and cheap financial decisions and also help in making savvy conclusions.


  1. Some of the seminaries are providing classes about managing money, therefore, it is important to have basic knowledge through free online courses, articles, blogs and podcasts.


  1. In addition to that, a novel concept, small personal finance incorporates augmenting strategies, these strategies consist of budgeting, preparing emergency funds, clearing off debt, carefully leveraged credit cards, saving for retirement, and etc.


In addition to that, knowing the fundamentals of personal finance from savings accounts to budgeting can help us in constructing a better future by eliminating the various risks.


(Related blog: An Introduction to Financial Analysis)


What are the Personal Finance Principles?


When a person thinks to manage his/her money, one of the finest approaches is “saving”, it can be strictly followed, “more you save, more you have”. However, principles that help to maintain success in business are discussed below;


  • Prioritization: By examining our finance, we can determine what forces the money streaming in, and making efforts to be assured and focused.


  • Assessment: The key requirement for professionals that resist them spreading too much. However, enthusiastic persons have always listed various ideas and ways that touch their financial needs, either it is a side business or investment idea at the appropriate time.  


  • Restraint: For instance, if a person is sending too much then his annual income it is not a good approach towards managing his financial goals as it won’t let him do better.


Understating to restraint expenditure on non-profitable assets until a person has secured his monthly savings or debt-reduction aims is important in keeping net worth. Restraint is simply the way of managing a successful business, applied to personal finance as well.


(Recommend blog: Fundamental Analysis Guide)


Besides that, one should follow the saying, “never work for money, make your money works for you”, therefore, produce multiple, but legitimate, ways to have more source of income. Also, it is advisable to make you educated with financial terms and keep updating yourself to have a precise understanding of your financial matters and make accurate decisions for yourself.



What are the Types of Personal Finance?


Some types of personal finance can be accomplished as;


  • Banking, that depicts the fundamental banking functionalities of managing accounts and transactions assistance.


  • Investment, that is made by judging the entire alternatives and picking out the suitable path which provides the acceptance of a specific measure of risk, like the investment in real estate, stock market, fixed deposit, etc.


  • Mortgages and loans, that signifies the assistance and services letting a person leverage and obtain an asset for getting its objective. For example, acquiring a home loan or education loan for fulfilling his aspirations.


  • Expert advice or counselling, that can be gained for analyzing the exact picture and getting the actual perspective of the situation to catch. Along with this, it serves as a guiding tool and the latest outlook. 


Process of Personal Finance


Simply, the process of personal finance can be explained as follows;


  1. Studying the current condition: Figuring out the exact existing conditions in terms of where we stand, how the current situation is being handled in order to acquire a precise knowledge of the strengths and weaknesses.


  1. Preparing up doable goals: Setting up objectives according to the preferences is necessary for deciding in which direction the next step should be placed, or where an individual should move forward in future.


  1. Determining all courses of actions: Pinpointing the required plan and process should be captured in the current scenario and analysing the time-frame work, expenses, and opportunities interconnected with each and every individual subject of actions.


  1. Checking out the alternatives: Deciding the full recognized alternatives and checking the pros and cons provided the inadequacy of resources. Also, selecting the alternative through moderating the perils to a satisfactory level.  


  1. Applying a suitable area of action: It is a high time to seize an action, making the investments and performing the conventionalities.


  1. Following up is pivotal: The necessary step is to follow up. Since the conditions are altering elementary and in the terms of changing environment, one should be dynamic adequately and should analyze the options from time to time in order to obtain the best results.    


Personal Finance Strategies


The key strategies for protecting your assets include obtaining various types of insurance, such as health, life, property, and liability insurance. It also involves investing in retirement accounts (like 401(k)s, IRAs, and pension plans) and structuring assets separately (through trusts, limited liability entities, joint ownership, and homestead exemptions). 


Diversifying investments and engaging in estate planning are also important. Regular review and updates to your asset protection plan, along with professional advice, ensure effectiveness in securing financial stability and minimizing risks.


Some top-notch personal finance strategies to follow;


  1. Planning for a budget is a very important task and evaluating how much amount should be spent on which activities. For example, some fraction of total income must be expended on essential activities like rent, groceries, and how much should be spent on convenience and savings.  


  1. With the holding of a credit card, one can get spur-of-the-moment purchases that yield in trapping in its own frame. Therefore, wisely implementation of credit cards is imperative in order to avoid ample troubles.


  1. In addition to that, the conceptual knowledge of credit score is important. One should maintain a satisfactory credit score that supports in sustaining high-grade creditworthiness.


  1. One of the important viewpoints is mitigating the debt, this is considered as the best approach in propelling a step ahead.


  1. Considering the factor of retirement policy and planning is worthy. Initiating by implanting or investing appropriately and making scopes or expenses for retirement.


  1. Understanding and acquiring the tax system of an individual’s country could aid in a vast portion of savings by making correct tax planning, expert advice is also beneficial to the regard.


  1. Having suited insurance is a key ingredient in case of emergency and to avoid unexpected loss and concussions.


  1. The last but most important strategy is having savings for emergency conditions including medical bills, a big loss like accidents etc. (In reference with

(Also check: Financial Analysis: Types, Examples and Techniques)




In today’s environment, financial management has turned out to be the utmost significance. There are plenty of options available to professionally manage all personal finances and banking, even most of the banks are rendering such services where they can manage money successfully. 


Presently, personal finance is a very broad realm in itself. It can be concluded that Personal finance could be addressed as the management of money and financial decisions for an individual or for a family covering budgeting, retirement planning and investments.


“Being promoted to a top position in your organization, or even being elected to public office, does not suddenly endow you with financial literacy, if you did not acquire and develop it, earlier in your life.” – Strive Masiyiwa, founder of Econet Wireless


In spite of all the reliable resources, it is advisable to account for a worthwhile personal finance approach. One should be prudent enough to obtain finance literary knowledge in order to make acceptable decisions in this direction while maintaining money adequate.

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