What Is the Definition of Personal Finance?

You might have your own theories as to the answer of what is the definition of personal finance. However, this is one of those area's where it is best to know what the generally considered appropriate definition of the term is. Therefore, if you are engaging in a conversation with someone about personal finance, you will know what he or she is talking about. Even more importantly, you will be able to make smart decisions regarding personal finance because you will know exactly what that means.

In general, personal finance is defined as the way in which an individual or a family makes decisions in relation to their financial portfolio. Therefore, the most basic definition can more or less be implied from the name "personal finance." If you are budgeting for how you are going to save for a vacation with friends, that is an example of personal fiance. If you sit down with your spouse and plan out your spending for the mortage or the kids' college tuitions, that is yet another example of personal finance.

Clearly, personal finance can encompass quite a range of items. If you are debating whether or not to save five dollars or to spend it on a cup of coffee, you are engaging in a decision regarding personal finance. Of course, this decision is not one that has as much weight or importance as some of the other aforementioned examples.

Components of Personal Finance

Although personal finance has a fairly broad definition, there are some essential components to it as laid forth by the Financial Planning Standards Board. This group suggests that there are six major components to personal financial planning, which will help to further your understanding of the question what is the definition of personal finance. They are as follows:

• Financial position: The person or persons involved in the financial planning needs to understand what his/her/their financial situation is. This process absolutely involves knowing your own net worth. You must figure this component out by adding up your household assets and subtracting your household liabilities. You must also determine your household cash flow, which is the expected yearly income minus the expected yearly expenses.
• Adequate Protection: An understanding of how a household can be protected in event of an emergency must also be in place. Examples of emergencies include, but are not limited to, natural disasters and death. The way to handle this component of financial planning and personal finance is through buying insurance for each of these areas.
• Tax Planning: They say that the only two certainties in life are taxes and death. A household should realize that their income taxes will be based on their income, and their property taxes are based on the value of their home. As income and the value of their home grows, so will the taxes that have to be paid. However, personal finances involve figuring out how tax costs can be lowered through tax reduction programs.
• Investment and Accumulation Goals: The premise behind this component is rather simple. The more you invest, the more you will be able to accumulate. People have particular financial goals in mind, whether it is for a new house or to have a certain amount of profit from stocks. These types of financial goals require careful planning and secure investments.
• Retirement Planning: As the name implies, this section of personal finance involves planning for your or your families retirement. You should have a decent idea of how much money you are going to have available to you once you retire. Furthermore, you need to know if you are going to be financially secure enough to retire at the time that you want to do so.
• Estate Planning: Perhaps this a part of planning that people would like to avoid; however, unfortunately that is not really the most intelligent option.  Estate planning involves planning for what will happen when you die, and planning for the tax due to the government at that time. The more you are able to amass before your death, the more those in your will can get.