When we are trying to understand personal finance, the best thing is to understand what personal finance is not.
Many of us are unclear about the difference between accounting and personal finance. We think of them as one and the same, but personal finance is not accounting.
On the surface they may look the same; They both deal with their confidence as they choose to embark on their play activities. However, it will help us to understand the differences between the definitions.
Definition of accounting is “the system of recording and summarizing business and financial transactions and analyzing, verifying and recording results.”
Based on this definition, we see that accounting is the process of analyzing and recording what you have already done with your money.
So having an accountant is not enough when it comes to your personal finances.
Accountants generally do not relate to personal finances themselves (there are some exceptions to this rule). Unless your accountant is a financial advisor or trainer, at the end of the year he or she will probably report to you what he or she has done with your money.
This report is usually your tax return; Whether you owe the government or the government yours
The accountant provides a person with a balance sheet or income statement or net worth statement; All the very useful tools you need to manage your personal finances effectively.
Personal finance is looking at your finances from a more finance-active and goal-oriented perspective. It is something that provides an accountant with something to record, verify and analyze.
On the other hand, “Finance” means “the monetary resources and affairs of any entity, or person.” Consumers, businesses and governments often do not have the funds needed to buy or operate. Savings and investors have funds that are used for productive use. Finance is a non-bank organization such as credit banks, savings and loans in the form of credit, loans or investments from commercial banks, savings and loan agencies, associations and credit unions and investment companies.
Finance can be classified further as: business finance, personal finance and public finance, all of which involve budgeting and managing funds for optimal outcomes.
Simplified personal finance
By understanding the definition of “finance” we can do our “personal finance” in three simple activities below: –
- Procedure for raising funds or capital for any type of expenditure = earning income.
Businesses make money from the sale of their products and services. It is labeled “Revenue” or “Income”. Some businesses also invest a portion of their income to earn more (interest income).
An individual gets paid through a job or a small business (self-employment, sole proprietorship, network marketing or other small business). The money received can be salary, hourly salary or commission and is also referred to as income.
The government gets money through the taxes we pay. This main source of our income is used to build infrastructure such as roads, bridges, schools, hospitals, etc. for our cities.
- Using our money to buy = spending money.
How much we spend compared to how much we earn makes a difference in getting optimal results in our personal finances. It is important to make good spending decisions in order to achieve financial wealth – no matter how much you do.
- Achieving optimal results = keeping as much of our money as possible
It doesn’t matter how important you are – when it comes to your personal finances, you really care.
This is one of the most difficult parts of personal finances.
Most of the time people earn (six figures or more) and spend more (or more), which means they are drowning themselves in debt and the debt accumulates interest. Soon these debts could grow rapidly and destroy any hope of getting them wealth.
Personal finance made easy
There is no need to get involved in personal finance if you keep this simple formula in mind:
- Income – Expenses = Saving
For optimal results, you just need to spend less than you can save for yourself and your family and less than you can afford!
If you are not actively working for better results, by default you will get less than optimal results.
It’s really easy!
Now that you understand personal finance and what you need to do, the next step is learning how to do it!
The best way to get started is to follow these 3 simple steps:
- Know what you want to achieve – “If you don’t know where you’re going, any road will get you there” has become a very popular quote, probably because it’s really true. One of the habits highlighted by Stephen Covey in his book “7 Habits of Highly Successful People” is to start without always thinking. Knowing where you want to go will go a long way in ensuring you get there.
- Create a plan – which you can follow that will lead you to your goals. It is invaluable to know how you can achieve your goals in a step-by-step plan. Sometimes this is easier with the help of a consultant or financial instructor
- Use the tools and resources – which will help you stick to your plan and get your attention away from the things in life that can limit your income and cost you more. Don’t try to do all this in your head. You will end up with a big headache and your finances will be a huge dark fog!
If you’re serious about getting your personal finances on track, I encourage you to take advantage of our free “Personal Finance Blueprint.”
This will take you through the simple steps that will get you started optimizing your personal finances!