Everyone needs to learn how to handle money. You may be able to skate by for a while, saving a little money here and there, but without some sort of strategy or management system fueling your financial decisions, you’ll eventually find yourself in over your head.
Perhaps that’s why “What is personal finance” is the most-searched personal finance query on Google, according to data from the search giant from the past year. It’s also the third-most-searched finance question.
What personal finance is, in a nutshell: how we use money, and the thought processes used to determine a financial course of action.
Personal Finance: A Definition
Personal finance has two key components, which are money management and personal decision-making.
Money management involves things like spending, saving, and investing—it’s the concrete actions we take with our cash, debit cards, or credit cards. For example, you may save 10 percent of a paycheck in a savings account, and decide to spend the rest on rent, groceries, and a new Xbox One.
Personal decision-making, on the other hand, has to do with the thought processes that lead us to take those actions. It’s the “why” behind your decision to buy a new Xbox One versus contribute more to your savings account, or pay a plumber to fix your broken sink.
Billy Hensley, the president and CEO of the National Endowment for Financial Education (NEFE), says that a lot of our financial decision-making is affected by our upbringing and surroundings.
“What values drive your decision-making?” Hensley asks. “[We’re] getting at the root of that. It really drives a lot of our behaviors around money.”
It’s important to understand both components—and how they interplay—to help you make smarter financial decisions and work toward goals.
The Core Concepts of Personal Finance
Though personal finance, at its core, involves money management and decision-making, the scope can be expanded to include a number of other important concepts as well.
“It would include things like money management…borrowing and understanding the use of credit, earning power, investing, understanding financial services, and insurance, or managing risk,” says Hensley.
Each one of these concepts can quickly land you in the weeds, and there are entire industries and specialists who’ve developed careers around them. But on a very broad level, they all fall under the personal finance umbrella.
“When you’re managing your financial life on a day-to-day basis,” he says, “those are the key principles.”
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April 3, 2019