When we try to understand Personal Finance, the best thing to do is to understand what Personal Finance is NOT.
Many people think that accounting and personal finances are the same, but Personal Finance is NOT accounting.
At first glance they may seem the same; they both have something to do with money. However, definitions will help us better understand the differences.
Merriam-Webster’s definition of accounting is “a system for recording and summarizing business and financial transactions and for analysing, verifying and reporting the results”.
From this definition we see that accounting is the process of analysing and recording what you have already done with money.
Therefore, having an accountant is usually not enough when it comes to your personal finances.
Accountants usually do not deal with personal finances (there are exceptions to this rule). If your accountant is not also a financial advisor or trainer, he or she will probably simply look at what you did with your money at the end of the year and report back to you on their analysis.
This report is usually a tax return; what you owe to the government or what the government owes you.
Very rarely does the accountant provide an individual with a balance sheet, profit and loss account or net worth statement; all very helpful tools that are necessary for the effective management of personal finances.
Personal Finance looks at your finances from a more active and goal-oriented perspective. This is what gives accountants something they can record, verify and analyze.
Merriam-Webster’s (concise encyclopedia) definition of “Finance” is “the process of raising funds or capital for all kinds of expenses”. Consumers, businesses and governments often do not have the funds they need to buy or do business, while savers and investors have funds that could earn interest or dividends if used productively. Financing is the process of transferring funds from savers to users in the form of credits, loans or capital invested through agencies, including Commercial Banks, SALES AND ASSOCIATION OF LOYAN and non-bank organisations such as CREDIT UNIONS and investment firms. Finance can be divided into three broad areas: BUSINESS FINANCING, PERSONAL FINANCING and public finance. All three include generating budgets and managing funds to achieve optimal results.
Simplification of personal finances
Understanding the definition of “finance” we can divide our “personal finance” into 3 simple steps: –
1. The process of raising funds or capital for all kinds of expenses = generating income.
The company receives money by selling its products and services. This is referred to as “income” or “income”. Some companies will also invest part of their revenue to generate more revenue (interest income).
A person receives money through work or small business (self-employment, sole proprietorship, network marketing or other small business ventures). Money coming into the company can be salary, hourly wage or commission, and is also referred to as income.
The government gets the money through the taxes we pay. This is one of the main ways in which the government generates income, which is then used to build infrastructure such as roads, bridges, schools, hospitals, etc. for our cities.
2. Using our money to make purchases = spending money.
How much we spend in relation to how much we spend in relation to what makes the difference between optimal results in our personal finances huge. Making good spending decisions is crucial to achieving financial wealth – no matter how much you do.
3. Achieving optimal results = Maintaining as much of our money as possible
It’s not about how much it counts, but about how much KEEP counts, which really matters when it comes to your personal finances.
This is the part of personal finance that is a challenge for virtually everyone.
Often people on high incomes (at least six digits) also spend the same amount (or more), which means that they take on debt and that the debt starts to generate interest. Soon debt may begin to rise rapidly and may destroy any hope they have for prosperity.
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