When we are trying to understand Personal Finance, the best thing to do is understand what Personal Finance is not.
Many people think that accounting and personal finance are the same, but Personal Finance is NOT Accounting.
On the surface, they may seem the same; they both have something to do with money. However, the definitions will help us better understand the differences.
Merriam-Webster’s definition of accounting is “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.”
Based on this definition, we see that accounting is the process of analyzing and recording what you have already done with your money.
This is why having an accountant is usually not enough when it comes to your personal finances.
Accountants generally don’t concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or coach, he or she will likely look at what you have done with your money at the end of the year and provide you with a report of their analysis.
This report is usually your tax return, what you owe the government, or what the government owes you.
The accountant rarely provides an individual with a Balance Sheet or Income Statement, or a Net worth statement; all beneficial tools necessary to manage your personal finances effectively.
Personal Finance is looking at your finances from a more pro-active and goal-oriented perspective. This is what provides the accountants with something to record, verify and analyze.
The Merriam-Webster’s (Concise Encyclopedia) definition of “Finance” is the “process of raising funds or capital for any expenditure. Consumers, business firms, and governments often do not have the funds they need to make purchases or conduct their operations. In contrast, savers and investors have funds that could earn interest or dividends if put to productive use. Finance is the process of channeling funds from savers to users in the form of credit, loans, or invested capital through agencies including and such nonbank organizations as and investment companies. Finance can be divided into three broad areas: public finance. All three involve generating budgets and managing funds for the optimum results”.
Personal Finance Simplified
By understanding the definition of “finance,” we can break our “personal finance” down into 3 simple activities:-
The process of raising funds or capital for any expenditure = Generating an Income.
A Business gets money through the sale of its products and services. This is labeled “revenue” or “income.” Some businesses will also invest a portion of their 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 money coming in can be a salary, hourly wage, or commission, and is also referred to as income.
A Government gets money through taxes that we pay. This is one of the main ways that the government generates an income that is then used to build infrastructure like roads, bridges, schools, hospitals, etc., for our cities.
2. Using our money to make purchases = Spending Money.
How much we spend relative to how much we make is 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.
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3. Getting optimum results = Keeping as much of our money as possible
It’s not how much you make that matters – it’s how much you keep that really matters when it comes to your personal finances.
This is the part of personal finance that virtually everyone finds the most challenging.
Often people who make large incomes (six figures or more) also tend to spend just as much (or more), which means they put themselves in debt, and that debt starts to accrue interest. Before long, that debt can start to grow exponentially and destroy any hope they would have had to achieve wealth.
Personal Finance is made simple.
Personal Finance doesn’t need to be complicated if you keep this simple formula in mind:
For Optimal Results, you simply have to make more than what you spend and spend less than what you make so you can keep more for yourself and your family!
If you are not actively working towards an optimal result, you will, by default, get less than optimal results.
It really is that simple!
Now that you understand personal finance and WHAT you need to do, the next step is learning HOW to do this!
The best way to start is by following these 3 simple steps:-
Know what you want to achieve – “if you don’t know where you are going, any road will take you there” has become a trendy quote, probably because it is so true. One of the habits that Stephen Covey highlights in his book “7 Habits of Highly Successful People” is to always start with the end in mind. Knowing where you want to go will be a big help in ensuring you get there.
Have a plan – that you can follow that will get you to your goals. Knowing how you will achieve your goals in a step by step plan is invaluable. Sometimes this is easier with the help of an advisor or a financial coach.
Use tools and resources – that will help you to stick to your plan and not become distracted by the things in life that could limit your incomes and make us spend more than we should. Don’t try and work it all out in your head! You will end up with a massive headache, and your finances will become one gigantic dark fog!
If you are serious about getting your personal finances on track, I will encourage you to take advantage of our free “We Are Talking Dollars 7 Day Money Makeover” at [http://wearetalkingdollars.com/free-report]. It will take you through 7 simple action steps that will get you started on optimizing YOUR personal finances!