A Simple Guide: What is Personal Finance?

Have you ever complained about why school doesn’t teach you “important life skills” such as how to save, how to pay your taxes, or how to invest? If you answered “yes” to this question then trust me, you are not the only one. Although school does prepare you for the real world, sometimes it leaves out the most relevant content needed for you to succeed. 

First let’s start with: What is Finance?

According to the Corporate Finance Institute, finance is defined as “the management of money and it includes activities such as investing, borrowing, lending, budgeting, saving and forecasting”. There are also 3 types of finance: personal, corporate and public or government finance. 

To put it simply: 

  • Personal finance is about managing your own money. 
  • Corporate finance is how companies manage their money, including investments and shares.
  • Public or Government finance is about managing a nation’s money, their revenues, expenditures and their debt. 

The full definitions of these terms are quite complex, but today let’s expand to clarify what personal finance is all about.

Personal Finance – Involves you and your money. It’s about meeting your personal financial goals; this could be having enough money for a trip in 2 years, being able to pay off your student loan in 3-5 years or even planning for your retirement. 

This field also involves the tools needed for adulthood: budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. It teaches how you can manage your income and expenses based on your lifestyle and individual goals, as well as how to make smart decisions when it comes to saving and investing.

Of course, many personal finance strategies exist to successfully achieve your goals. However, in my opinion, the 3 most important ones are the following:

  • Create a budget for yourself: a budget ensures that you are able to live within your means while allowing you to save enough for your long-term goals. The most common budget rule to follow is the “50/30/20 Rule”: from your net income – income after deductions – allocate 50% for your needs (rent, utilities, groceries), 30% for your wants (shopping, a night out with friends) and 20% for your savings. 
  • Have an emergency fund – it is crucial to have a “safety net”, usually between 3-6 months worth of your living expenses, to be able to use for an emergency at any point in time. As we cannot predict when an emergency such as unexpected medical bills, a pandemic, or getting laid off, will occur it is fundamental that you do this.
  • Limit your debt – the key concept here is “do not spend more than you earn”. Although it is true that sometimes borrowing from a bank is essential to pay for groceries or other basic necessities, you should always limit yourself from doing so if you don’t have enough to pay back. However, sometimes going into debt to buy assets gives you an advantage, but make sure that these assets allow you to make some returns to help pay off your liabilities. 

Now that you understand what personal finance is all about I encourage you to learn more about this topic. Financial literacy is the key to success in both business and in life. Therefore, take advantage of insightful courses offered by high schools, universities and many organizations. For instance, McGill University and its partners, RBC and The Globe and Mail, created Personal Finance Essentials, a free course for all students that register for their sessions. This is only one example of the thousands of resources that exist, so make sure to do some research and keep an open mind. This way you will be able to grow and further develop the skills you will need throughout your career. 

Sources:

McGill Personal Finance Course Link: https://www.mcgillpersonalfinance.com/ 

https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-finance-definition/

https://www.investopedia.com/terms/p/personalfinance.asp

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