What is Personal Finance and Why is it Important?

Personal finance is the management of one’s economic resources, that is, the money that a person earns, spends, saves and invests during his or her life.

Knowing how to manage family finances is a necessity today, considering the context of only slightly declining inflation, high energy bills and rather low salaries. Furthermore, if you want to invest your money in pension funds or other assets and manage your savings, it becomes really essential to know methods and techniques for effectively organizing personal finance.

In fact, every day, economic decisions are made regarding tax payments or loan installments, calculating the resources available for possible short, medium or long-term investments, money to be allocated to savings.

To make the best choice based on your needs, it is really important to know what is personal finance. Below is a guide.

Personal finance: what is it?

Personal finance is the branch of finance that deals with the management of the economic resources of an individual or family.

In short, it is a fundamental process that allows people to check the status of their finances and evaluate whether there are areas for improvement in management.

Full control of incoming and outgoing flows, in fact, allows savers to become aware of their financial condition and, if necessary, to intervene to correct the course and defend themselves from potential future risks.

What are the areas of personal finance management?

There are five areas that, observing the principles of personal finance, an individual should constantly monitor:

• income;
• expenses;
• savings;
• investments;
• tools to protect your finances.

Income – the source of income of a person or a family unit – is the first item in the financial planning process: it is the salary, pension or dividends that are used to buy goods or services, save or invest.

Part of the income – or in some cases all of it – is generally used to cover expenses: some essential, such as rent, mortgage or food, and others optional, such as travel and entertainment.

The leftovers constitute people’s savings, and can be kept in cash or "parked" in a bank account. Sometimes, however, savings are invested – for example in the bond or stock market – in an attempt to increase one’s sources of income.

The latter, if necessary, can then be protected by using some tools, such as health or life insurance.

In short, when we talk about personal finance, we mean all the activities related to:

• income (salary, investment income, etc.);
• expenses (bills, rent, purchases, etc.);
• savings (set aside for future goals);
• investments (stocks, bonds, real estate, etc.);
• debt management (mortgages, loans, credit cards);
• financial planning (for goals such as retirement, buying a house or educating children)

How does personal finance work and how to manage it?

Personal finance, therefore, is the management and planning of financial activities and allows you to monitor income, expenses, savings, investments and, possibly, protective insurance.

Generally, there are five steps to follow to best manage your financial situation:

• assessment: which consists of a preliminary reconnaissance of your basic condition;
• goal tracking: to better calibrate your future maneuvers;
• definition of a financial plan: in line with the objectives and your availability;
• implementation process: in which particular attention must be paid to the expense item;
• monitoring of your financial status: to see if the objectives set have been achieved, or if, alternatively, it will be necessary to make corrective interventions.

More generally, there are some guidelines to follow that can be useful for better planning your financial activities. For example, having an emergency fund that allows you to effectively deal with any unforeseen events is important, as is debt containment – simply, not spending more than you earn – and, in some cases, setting aside a portion of your savings to supplement your future pension.

Personal Finance Techniques: Some Tips

Here are some useful and practical techniques to improve personal finance management, suitable for those who want to have more control over their money:

• 50/30/20 Budget Method: divide your monthly net income into: 50% for essential needs (rent, food, bills), 30% for desires (travel, shopping, entertainment), 20% for savings or debt reduction;
• set aside a portion for savings immediately, before spending on anything else, e.g. 10-20% of your income;
• keep a record of your expenses with an app (e.g. Money Manager, YNAB, Wallet), an Excel spreadsheet, a notebook;
• write down specific and realistic goals, for example: save €3,000 in 12 months for a trip, pay off credit card debt within 6 months;
• emergency fund: set aside at least 3-6 months of essential expenses for unexpected events;
• invest gradually: if you already have a small savings fund, consider investing in: ETFs (index funds), PACs (Capital Accumulation Plans), Deposit Accounts;
• avoid unnecessary debts;
• review the plan every month

Best apps for personal finance management

Technology can come to the aid of those who want a practical, easy-to-implement and always-on-hand method for managing their money.

Personal finance apps are, in fact, an excellent solution for monitoring salary, expenses, investments, savings.

Among these, the following stand out:

• Money Manager: very visual, easy to use, perfect for those who prefer to manually enter expenses, with detailed statistics;
• BudJet by Moneyfarm: very simple and intuitive interface; creation of summary graphs; setting spending limits for purchase categories; adding hashtags and notes;
• VisualBudget: simultaneous management of different accounts; income and expenditure scheme; creation of a budget for each category and monitoring; bar or pie charts for transactions, budget changes and budget control; possibility of inserting CSV (spreadsheet) or OFX (banking standard) files;
• N26 Spaces: piggy bank divided into spaces to which you can move money from the main account and thus set aside savings; customizations for savings goals; easy control of expenses; N26 customers with a free account can open a maximum of two spaces; Black and Metal customers can open up to 10 spaces.

The available applications also include those more specific to saving, a crucial activity for personal finance.

Original article published on Money.it Italy. Original title: Cos’è la finanza personale e perché è importante