Whenever we are attempting to understand Personal Finance, a good thing to complete is to understand what Personal Finance is NOT.
Many individuals believe that accounting and personal finance are the same, but Personal Finance is NOT Accounting.
On top they may seem the exact same; they both have something to do with money. However, the definitions may help us Personal finance understand the differences.
Merriam-Webster's definition of accounting is "the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results."
Based on this definition, we note that accounting is the method of analysing and recording what you have finished with your money.
For this reason having an accountant is normally inadequate as it pertains to your individual finances.
Accountants generally don't concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant is also an economic advisor or coach, he or she will more than likely just look at everything you have finished with your money at the end of the season and give you a written report of these analysis.
This report is normally your tax return; what you owe the government or what the government owes you.
Very rarely does the accountant offer an individual with a Balance Sheet or Income Statement or even a Net worth statement; all beneficial tools which can be essential to effectively manage your own personal finances.
Personal Finance is looking at your finances from an even more pro-active and goal oriented perspective. It's this that 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 kind of expenditure. Consumers, business firms, and governments often do not need the funds they should make purchases or conduct their operations, while savers and investors have funds that may earn interest or dividends if put to productive use. Finance is the procedure of channeling funds from savers to users in the shape of credit, loans, or invested capital through agencies including COMMERCIAL BANKS, SAVINGS AND LOAN ASSOCIATIONS, and such nonbank organizations as CREDIT UNIONS and investment companies. Finance may be divided into three broad areas: BUSINESS FINANCE, PERSONAL FINANCE, and public finance. All three involve generating budgets and managing funds for the optimum results ".
Personal Finance Simplified
By understanding the definition of "finance" we are able to break our "personal finance" into 3 simple activities:-
1. The process of raising funds or capital for any kind of expenditure = Generating an Income.
A Business gets money through the sale of the products and services. That is labeled "revenue" or "income ".Some businesses will also invest a percentage of the revenue to generate more income (interest income).
A Person gets money by way of a job, or a small business (self employment, sole proprietorship, network marketing or other business venture). The amount of money coming in can be quite a salary, hourly wage, or commission, and can be known as income.
A Government gets money through taxes that people pay. This is one of many main ways that the us government generates an income that's then used to build infrastructure like roads, bridges, schools, hospitals etc for our cities.
2. Using our money to make purchases = Spending Money.
Simply how much we spend relative to simply how much we make is why is the difference between having optimum results in our personal finances. Making good spending decisions is crucial to achieving financial wealth - it doesn't matter how much you make.
3. Getting optimum results = Keeping the maximum amount of of our money as you are able to
It's not how much you MAKE that matters - its how much you KEEP that basically matters in regards to your personal finances.