What is Personal Finance and Why is it Important?

In modern day society, money is a valuable tool that allows us to achieve life’s greatest objectives. Avoiding personal finance may limit you from being able to buy a home, retire, start a family or go to school. For this reason, personal finance should be considered, including income, spending, saving, investing and debt. In this article, we’ll explore what is personal finance and why is it important. In addition, we’ll cover the basics of personal finance and some tips and tricks to get you started on your journey.

What is personal finance?

Personal finance is a broad term that encompasses the process of managing your own money at the individual or family level. This includes activities like budgeting, earning income, paying for living expenses and debt, building an emergency fund, investing, obtaining insurance coverage, retirement planning and much more. Personal finance can also be defined by the knowledge, tools and tactics utilized to manage your money.

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What is a personal finance statement?

A personal finance statement is a document that communicates a person’s financial position or net worth at a particular point in time. In basic terms, a personal finance statement communicates your assets less your debts. You might create a personal finance statement if you’re applying for financing. Alternatively, you might use a personal finance statement if you’re performing a financial health check. It can be a valuable tool to gain a snapshot of where you are and what you need to do to improve your monetary wellbeing.

Related Reading: Average Canadian Net Worth

Why is personal finance important?

Now that you know what is personal finance, it’s time to explore why it is important. In our modern world, money plays an important role in our lives. Through sufficient monetary management, you can achieve life goals like going to school, buying a house, starting a family or going on a dream vacation. Unfortunately, many of these things are challenging without money. For this reason, attention to personal finance can help us achieve our greater life goals which is why it’s so important.

Let’s check out some other benefits to paying attention to personal finance:

  • Able to achieve life goals. While it might feel frustrating to have such a deep focus on money, think of it as a means to an end. Money is a tool that allows you to live the life you want if you manage it adequately.
  • Stability. If you can comfortably pay your bills and handle unexpected expenses, you’ll likely be able to achieve stability in other areas of your life. For instance, if you can comfortably pay rent each month, you don’t have to worry about eviction and where you’re going to live if you get kicked out. Then, you can focus on your career and other life objectives because your foundation is stable.
  • Financial independence. Many Canadians don’t want to rely on an employer for their pay cheque forever. Through saving and investing, you can achieve financial independence.

Another reason why personal finance is important is that many Canadians feel financially illiterate. According to a recent poll, 50% of Canadians said they’re somewhat financially literate and 30% said they aren’t financially literate. In addition, only 15% consider themselves financially literate when it comes to life insurance, investments and stocks.

Another study in 2022 showed that 38% of Canadians state money is their biggest concern. This outranked other key categories like health, work and relationships. The same study showed that Canadians who took action by consulting a financial advisor felt less concerned than those who didn’t seek help. Even if you took action by paying closer attention to your personal finances rather than finding a financial advisor, you’d probably experience less stress and concern.

Related Reading: How many millionaires are there in Canada?

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What is the most basic goal of personal finance?

The most basic goal of personal finance is to promote financial security and build wealth. By paying attention to personal finance, you can ensure you have monetary stability. This includes not overspending, being able to pay bills on time, and having funds set aside for a rainy day. In addition, building wealth is critical because it’ll allow you to afford the lifestyle you want to lead. Eventually, the wealth you built will allow you to retire. In essence, these are the short and long term objectives of personal finance.

With that said, a very common goal of personal finance is to eliminate debt. Many begin paying attention to their financial health when debts become difficult to manage. Despite this being a common objective, you don’t have to be in debt to start thinking about personal finance. In fact, it’s best if you take a proactive approach with your money!

What are the 5 main components of personal finance?

Generally speaking, there are five main components of personal finance, including income, spending, saving, investing and debt. Let’s take a closer look below:

  • Income: This aspect of personal finance focuses on how you generate income. The more types of income streams you have, the better. This way, if you lose one source of income, you’ll have others to fall back on.
  • Spending: Costs of living and other regular expenditures are important for your personal finances too. Often, spending is planned through a budget. Consider expenditures such as housing, utilities, food and other costs of living. Be sure to leave some room in your budget for fun too!
  • Saving: Saving is important for a few reasons, including setting aside an emergency fund, saving for specific goals and working towards retirement. It’s ideal if you can consistently save a percentage of your income every month.
  • Investing: Once you’ve accumulated some savings, you can begin investing. There are a wide array of investment ideas to choose from, such as real estate, stocks, precious metals and more.
  • Debt: Acquiring, managing and eliminating debt is a critical component of personal finance. In general, it’s best if you keep debts to a minimum and only acquire “good” debt that helps you build wealth. In addition, avoid leaning on financial leverage too much.

Related Reading: How Long to Keep Financial Records in Canada

The Principles of Personal Finance

Now that you know what is personal finance and why it is important, it’s time to explore some basic principles of personal finance. By applying these principles, you can start taking control of your personal finances and reap the benefits!

principles of personal finance infographic
Principles of Personal Finance

Create a financial calendar

A financial calendar summarizes when all of your bills and debt payments are due, as well as when you get paid. It’s wise if you can put savings reminders in your calendar too. Creating a financial calendar can help you visualize your cash flow so you never miss a beat. When you get comfortable with your schedule, you can consider automating it with your banks and vendors.

Focus on earning more money

Let’s face it: cancelling your monthly Netflix subscription is not going to make you wealthy. Furthermore, cutting your small expenses is not going to change your financial situation greatly. However, earning more money can make a difference in your personal finances. Even a couple extra hundred dollars every month can be put towards debt payments and savings. Instead of focusing on cutting small expenses, figure out ways to increase your income. This could be asking for a raise at your job, picking up a side hustle or making a lateral move in your career for more money.

With this said, cutting costs in your budget can be an effective way to take control of your finances. However, it’s only worth your while if you’re able to cut down spending substantially. For instance, if you buy yourself a new outfit every month or go for drinks every Saturday, you could make a drastic change in your finances by cutting down on these expenditures.

Track your net worth

Your net worth is your total assets less your debts. By continuously tracking your net worth, you can stay focused on the big picture. Sometimes narrowing down on the day to day personal finances can lead you astray from what’s really important. By honing in on your net worth, you can stay focused on building wealth and achieving your financial goals. Tracking it every year is a good starting point, perhaps more frequently if you find this a helpful tactic.

Related Reading: What is the Average Net Worth by Age in Canada?

Start saving now

There’s always tomorrow, but the longer you put off saving, the greater the opportunity cost will be — and the opportunity at stake is your future! Start saving today, no matter how much you can afford to put aside. Sometimes people think saving has to be tons and tons of money for it to be worth it, but that’s not true! Even a little bit of savings can go a long way. Get started right now!

Consider going all cash

Do you struggle to keep your credit card debt under control? If you find yourself overspending with plastic, consider switching to cash only. A number of studies have shown that people spend more when using credit as opposed to cash. The reason? The idea of “I’ll owe this later” encourages us to spend more. Whereas with cash, the feeling of losing it is immediate and makes us think twice about spending.

How to Become More Savvy in Personal Finance

By the end of this article, you should have a better understanding of what is personal finance and why it is important. Becoming savvier with your personal finances will take time, but with a little effort and conscious thought every day, you can make immense strides. Remember, personal finance is a journey, it’s not about the destination!

Read More: 5 Steps to Transforming Your Relationship with Money

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