The Best Way to Understand Personal Finance

When we are trying to understand Personal Finance, the best thing to do is to understand what Personal Finance is NOT.

Many people think that accounting and personal finance are the same, but Personal Finance is NOT Accounting.

On the surface they may seem the same; they both have something to do with money. However, the definitions will help us better 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 see that accounting is the process of analysing and recording what you have already done with your money.

This is why having an accountant is usually not enough when it comes to your personal finances.

Accountants generally don’t concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or coach, he or she will likely just look at what you have done with your money at the end of the year and provide you with a report of their analysis.

This report is usually your tax return; what you owe the government or what the government owes you.

Very rarely does the accountant provide an individual with a Balance Sheet or Income Statement or a Net worth statement; all very helpful tools that are necessary to effectively manage your personal finances.

Personal Finance is looking at your finances from a more pro-active and goal oriented perspective. This is what 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 have the funds they need to make purchases or conduct their operations, while savers and investors have funds that could earn interest or dividends if put to productive use. Finance is the process of channeling funds from savers to users in the form 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 can 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 can break our “personal finance” down 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 their products and services. This is labeled “revenue” or “income”. Some businesses will also invest a portion of their revenue to generate more income (interest income).

A Person gets money through a job, or a small business (self employment, sole proprietorship, network marketing or other small business venture). The money coming in can be a salary, hourly wage, or commission, and is also referred to as income.

A Government gets money through taxes that we pay. This is one of the main ways that the government generates an income that is then used to build infrastructure like roads, bridges, schools, hospitals etc for our cities.

2. Using our money to make purchases = Spending Money.
How much we spend relative to how much we make is what makes the difference between having optimum results in our personal finances. Making good spending decisions is critical to achieving financial wealth – regardless of how much you make.

3. Getting optimum results = Keeping as much of our money as possible
It’s not how much you MAKE that matters – its how much you KEEP that really matters when it comes to your personal finances.

This is the part of personal finance that virtually everyone finds the most challenging.

Often people who make large incomes (six figures or more) also tend to spend just as much (or more) which means they put themselves in debt and that debt starts to accrue interest. Before long that debt can start to grow exponentially and can destroy any hope they would have had to achieving wealth.

Personal Finance made simple

Personal Finance doesn’t need to be complicated if you keep this simple formula in mind:

INCOME – SPENDING = WHAT YOU KEEP

For Optimal Results you simply have to make more than what you spend and spend less than what you make so you can keep more for you and your family!

If you are not actively working towards an optimal result you will by default get less than optimal results

It really is that simple!

Now that you understand personal finance and WHAT you need to do, the next step is learning HOW to do this!

The best way to start is by following these 3 simple steps:-

1. Know what you want to achieve – “if you don’t know where you are going, any road will take you there” has become a very popular quote, probably because it is so true. One of the habits that Stephen Covey highlights in his book “7 Habits of Highly Successful People”, is to always start with the end in mind. Knowing where you want to go will be a big help in ensuring you get there.

2. Have a plan – that you can follow that will get you to your goals. Knowing how you will achieve your goals in a step by step plan is invaluable. Sometimes this is easier with the help of an advisor or a financial coach.

3. Use tools and resources – that will help you to stick to your plan and not become distracted by the things in life that could limit our incomes and make us spend more than we should. Don’t try and work it all out in your head! You will end up with a massive headache and your finances will become one gigantic dark fog!

Finding Money You Never Knew

For most people getting out of debt is little more than a pipe dream. Creating a personal finance plan that includes a savings plan and a retirement plan are a venture that few are prepared to tackle. We all too often tell ourselves that we lack the funds necessary to achieve even a small part of what we want. We will look at the 4 steps necessary to achieve our financial dreams.

Creating money by reducing expenses

In most cases your current expense has done nothing but grow month to month. Every three months you should look at every expense that you have and find the waste. Things like upsizing every special value meal at McDonalds when you eat out. Sure it is a good buy but if you eat out every day that adds up to $32 per month on average. Electric bills can be reduced by $10-$15 per month just by small moves in the thermostat and turning out lights. A pack of cigarettes a day is costing you close to $4000 per year or $40,000 in 10 years. Not to say anything about the added expense to your healthcare.

Give your Personal Finances a reevaluation

Look at what your financial goals are. Most people set very modest goals and if they come up short they put themselves at risk. People take the advice of people who are just getting by themselves and guess what that advice will do for you. Yes, just get you by too. Look to people who are super successful. Why do you think super successful people turn to Warren Buffet for financial advice? Who does he turn to for advice, Bill Gates of course?

Build a plan that will give you everything that you want and more and if you come up just a little bit short, you will be living the life that the others are still dreaming about. Remember somebody has to live on that beach or live at the top of that mountain.

Free up Money sooner rather than latter

Have a plan to pay down debt. Remember just a few extra dollars a month on every bill will rapidly destroy the balances. Pick the low hanging fruit and pay them off first. Take the money that you have found by cutting expenses and apply it to the smallest balances first. There are a lot of ideas about how to do it but you must keep it simple to make it work. Learn to live without borrowing. When you borrow you are just building someone else’s future at your own expense.

Pay Yourself First

No matter what you do make sure that you pay yourself first. Remember this is your personal finances that you are trying to grow. If there is any way possible that you can have the money automatically taken out of your account that is the best way. Simply take the first 10% of the gross amount that you make and put it in a 401k or some other financial device that will grow rapidly and be harder to touch the money. This is your retirement plan for the future. You will need that money when you are living out your dreams.

To find out more great tips for your personal finances and great advice on how to prepare a retirement plan and a savings plan see the resource box below.

Gurus of Personal Finance

Some personal finance experts are popular all over the world because of their principles, concepts and ideas. They have shared their expertise on money management and saving techniques through their books and lectures. These authors have helped people live financially comfortable life by providing easy to follow techniques. We will have a glimpse of some personal finance gurus, who have been providing the right financial advice to their followers.

Dave Ramsey: Dave Ramsey, popularly known as “Debt Free Dollar Man”, is an expert in personal money management. He offers financial advice to people about how to get control of their money and lives. Noted for his preaches on ‘How to get out of debt and stay out of debt’, Ramsey often talks to his clients in a nationally syndicated radio talk show in U.S. He offers problems in personal finances and discusses topics and techniques on saving, investing, retirement planning, etc. Dave became popular for his #1 best-selling book, “The Total Money Makeover”, which furnishes excellent advice on financial fitness. The book demolishes popular myths on personal finance. His other book “Financial Peace Revisited” also gained huge popularity in 2002.

Robert Kiyosaki: Robert Kiyosaki is a well-known investor, educator and entrepreneur. He is noted for his best-selling book “Rich Dad, Poor Dad”. The author teaches mainly on how to create wealth by investing in the right channels instead of traditional advice on how to save money. His book is based on the story of two fathers of whom, one is rich and the other is poor. The whole story tells us about how the rich dad and poor dad educate their children. The author has been successful by selling over 26 million copies of his famous 15 books.

Suze Orman: Suze Orman is one of the top personal finance experts in the U.S. She has been called as “one-woman financial advice powerhouse” by USA today. She runs her own talk show “The Suze Orman Show” on Saturday nights on CNBC. Orman entered the New York Times best-sellers list with her book, “The 9 Steps to Financial Freedom”, which emphasizes the emotional way of achieving financial freedom. She became popular when three million copies of this book have been sold. The other two books that have the same success stories are “You’ve Earned It, Don’t Lose It” and “The Money Book for the Young Fabulous & Broke”.

Thomas Stanley: Author of six award winning books that have covered all the common connections of America’s wealthy people, Dr. Stanley has been studying the affluent market in America for over 30 years. He is known for his New York Times best-selling book “The Millionaire Next Door”, of which over two million copies have been sold. Later he published another book, “The Millionaire Mind”, based on America’s financial elite. This book has appeared #2 on the New York Times bestseller list. His latest book, “Stop Acting Rich” in 2009, is seventh among his books. Stanley is an expert in understanding ways of becoming wealthy.

David Bach: David L. Bach is a popular American personal finance author, motivational speaker and entrepreneur. He conducts television shows where he discusses money management techniques. David’s first book “Smart Women Finish Rich” gained popularity by appearing on the New York bestseller list for a decade. The author is best known for his “Finish Rich” book series and “Automatic Millionaire” book series. Of his 12 books, 11 books have been national bestsellers and 4 books – “Automatic Millionaire”, “Smart Women Finish Rich”, “Smart Couples Finish Rich”, and “The Finish Rich” have appeared at the same time on Wall Street Journal’s and Business Week’s best sellers list.

The advice provided by these experts is adopted from their real life experiences and has been tried and proved successful. Should you want to make the right changes in your personal finances, follow any one of these gurus to for healthy personal finance as well as reach to your financial goals.

Get Inspired and Think Big With Personal Finance

Have you ever assessed your personal finances and then set modest goals to pay off this tiny loan first or increase your income by just a little to start making progress? Did you ever wonder why this approach usually ends up being a financial failure? The importance of thinking big with your personal finance goals and getting inspired by them cannot be understated for your success and I will outline the benefits below.

From now on I want you to throw away your modest financial goals and start thinking big. I mean really big. You might have a goal to increase your income, for example, and find a way to earn an extra hundred dollars a month. That personal finance goal was the you of the past, I would like you to take your modest goals and multiply them by 1000! Increasing your income by $10,000 a month might sound inconceivable to you, might sound crazy, but it is one of the secrets to financial success.

Let us talk a little about why thinking big with your personal finance goals works. It begins with a belief that you are capable of anything, I believe in you and you should too. Your beliefs can limit you, like chains, or they can free you to soar the financial heights. When you are inspired you know you are capable of incredible accomplishments, and that includes the financial arena even if your past success has been less than admirable. What you needed was a huge goal, a goal that absolutely inspires and invigorates your efforts to unimagined heights.

By setting these inspired big personal finance goals you free up your personal resources to think big about money on a scale you had previously put little thought into. If I was creating a personal finance plan on a small scale, perhaps I would think and imagine ways on how I could sell a few hundred cookies to earn an extra hundred dollars each month. Now if we multiply our goal, our thinking dramatically changes, how can go about creating hundreds of thousands of cookies, efficiently, and to sell them to increase my income by $10,000 a month. The very nature of your planning changes, and in your thinking change lies the personal finance secret to wealth building.

You may not reach your big inspired personal finance goal on your first month, but your efforts will be reaching for the stars. The rewards are so great as to inspire herculean efforts of finance and business wizardry on your part. Plus, if you fall short, the results might surprise you, far exceeding your original meager personal finance goal of an additional $100 in income, you might find yourself growing and developing the beginnings of a vastly rewarding wealth building enterprise.