What Does Personal Finance Look Like?
At a Glance
in this post, we'll cover the 5 activities that encompass personal finance.
At first glance, personal finance seems very intimidating, however, we break things down into 5 common activities that people may do every day around personal finance.
Although these categories are not meant to be definitive, they can be a great way to simplify the specifics into a broad goal to work toward.
It can sometimes be hard to pin down a topic like personal finance because usually when we talk about it, we are referencing something more specific like banking or investing. Investopedia defines personal finance as a term that covers money management, saving, and investing.
They go further to specify a number of activities that qualify as well as including the whole industry of services that might help with any number of these tasks. The common thread in all these activities is that they come down to how you manage your money and personal resources.
Between the very broad umbrella that the term “personal finance” represents and the myriad of specific activities that can entail, Annuity.org has broken things down into five broad categories that encompass most of the specifics:
Income represents any money or personal resources you receive over a given time period.
A person’s income source bears some relevance on specific categories of personal finance such as taxation, loans, mortgages, and Social Security.
More immediately relevant in most cases, however, is how much income you expect to receive as part of your day to day living.
Spending represents any money or personal resources you use over a given time period. Much like with income source, the things you are spending money on can bear some relevance depending on a combination of factors.
For example, if you are spending money from an ABLE account the things you spend that money on will determine whether or not you pay taxes and can even affect Supplementary Security Income (SSI) payments.
In many cases spending is just shorthand for wherever your money goes, including things that can be somewhat out of your control like taxes.
Savings represent any money left over from your income after your spending. For people who are in a position to save some money, it is not at all uncommon to build up a little bit of extra money to have available in the event of an emergency.
Investments often come from savings but are not the same thing. Whereas savings are often relatively stable, investments can earn you more money but also come with the risk of losing money.
Typically, there are many investment options out there that can match your personal risk tolerance.
Another key difference from savings is that money you have invested often won’t be immediately available to you if an emergency comes up when you need it.
This is why despite the value of investing many people who are in a position to save money make sure they have some savings available before putting any of their money at risk.
Protection in this context refers to mitigating the financial harms that come from unlikely but not impossible events. This may include things like harm to investments or savings but can also include unexpected expenses such as car repairs or fixing property damage from major weather events.