The Best Way to Understand Personal Finance

When trying to understand Personal Finance, the best thing to do is understand what Personal Finance is not.The Best Way to Understand Personal Finance 1

Many people think that accounting and personal finance are the same, but Personal Finance is NOT Accounting.

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 defines accounting as “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.”

Based on this definition, 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 for your 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, they 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, Income Statement, or Net worth statement, or all beneficial tools necessary to manage your finances effectively.

Personal Finance is looking at your finances from a more proactive and goal-oriented perspective. This 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 channeling funds from savers to users in the form of credit, loans, or invested capital through agencies, including nonbank organizations 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 intothree3 simple activities:-

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, 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 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 finances. Making good spending decisions is critical to achieving financial wealth – regardless of how much you drive.

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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 matters when it comes to your 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 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 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 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 three 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 always starting 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 to get you to your goals. Knowing how to 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 stick to your plan and not become distracted by the things in life that could limit your income and make you spend more than you should. Don’t try and work it all out in your head! You will have a massive headache, and your finances will become one gigantic dark fog!

If you are serious about getting your finances on track, I 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 finances!