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The Importance of Personal Finance and Why You Need to “Get It”

What is the importance of personal finance and what impact does it have on your wealth building efforts?

If building wealth is your long term, big-picture vision for your financial well-being then personal finance is the day-to-day details (the micro vs. the macro) that are going to create that big picture and eventually get you the long term results you are looking for.

Therefore if you understand the importance of personal finance and personal finance basics you will be building the foundation for wealth.

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save, and spend monetary resources over time, taking into account various financial risks and future life events [1].

Your personal finance knowledge, education, decisions and plans coupled with your goals, income and desire will all combine to define your wealth picture. Therein lies the importance of personal finance; the consistent management and improvement of your personal finances will see its impact not over the next couple of months but over the next couple of decades.

If you don’t get the importance of personal finance from early on this can seriously delay or prevent you from building wealth. The following areas provide ways for you to apply the importance of personal finance starting today:

  • Understand personal finance basics. Learning how to balance your checkbook, creating and tracking personal finance budgets, paying yourself first to create savings, investment and emergency funds. Learning how to use a credit card responsibly and understanding interest rates, fees and all the other sneaky tactics creditors use. Understanding financial products whether they are loans, investments or insurance. Knowing your net worth.

    Getting a hold of these basic concepts surprisingly enough doesn’t come to many of us until later in life. Although many of these things should be taught at the high school level unfortunately they are not so it is up to you to seek this education out.

  • Importance of personal finance planning. In order to create wealth you create personal finance plans that are fueled by goals. Personal financial planning is made out to be complicated by some that get paid to do it for you. Although some financial planning aspects are best handled by experts there is no area of financial planning you can’t take on yourself. Whether you hire someone or not you will still have to remain in charge and this will require knowledge and the desire to seek that knowledge.
  • importance of personal finance

  • Understand the importance of personal finance on avoiding/eliminating debt. By keeping on top of your personal finance management you can avoid falling into the easy debt trap that is so rampant in our society. You can also use debt to your advantage and use it responsibly like you would for example, buying a house/car that you can afford.

    You can then include in your personal finance plan your strategy to go from debt to wealth, so that you eliminate all debt from your life and create wealth. Knowing how to create and track personal finance budgets will be a big help in this area.

  • Pass it on. Teaching your children the importance of personal finance will get them started on the right track. Like I mentioned before, our schools do not do a good job teaching personal finance management skills. It is up to us as parents to take on this and the best way to do it is to lead by example.

    As soon as your children start handling money you should start this. When I give my children money for completing a chore or when they get money for a special occasion I teach them to set some aside for savings and some for giving to charity. They also have a piggy bank in their rooms so they can start understanding how money accumulates. If they want to buy a toy they save money for it or we agree on a plan for them to earn it. And, we don’t buy at the store just because they ask for it.

    As they age the same principles apply but the amounts get larger. Once the age is appropriate you walk them through savings and investing, credit cards and loans. Again, lead by example, by you showing them how you have used these and walking them through it they will learn the importance of personal finance.

  • Understand the financial opportunities available to you today. Do you understand how that 401(k) or stock purchase plan your employer offers works? How a health savings account, disability insurance or mutual funds work?

    Many of us have some of these resources available to us right now and don’t use them or use them to their full potential because we do not understand them. Many working adults are not knowledgeable about personal finance topics (see sidebar). That could be a lot of money we are not making not based on lack of resources or income but lack of knowledge!

    How knowledgeable are working adults about personal finance? - The main finding is that the surveyed personal finance topics are important and working adults are not knowledgeable about them. First, the results show that retirement planning is very important. Additionally, many long-term financial planning issues such as setting goals and issues related to company benefit provisions are important… we find that, overall, people are not knowledgeable about personal finance… The findings suggest that future educational programs should focus on important personal finance areas where people have inadequate knowledge. These areas include retirement planning and basics of personal finance [2].

    I have a family member that told me she is enrolled in her company’s 401(k) but couldn’t tell me where that money is at or where is it invested. So for all she knows it could be going to a bad mutual fund or it could be invested in the company’s stock both of which could potentially provide very poor returns.

    Sit down and write a summary of where all your money is and where is it going. Then find out if where your money is sitting is the best place it could be. Call up the company that administers your 401(k) and find out where your money is being invested and ask them to explain it to you if you don’t understand.

Once you appreciate the importance of personal finance and the impact it can have on your wealth you will seek out the opportunities to improve your personal finance plan, skills and knowledge.

The good news is that this is very learnable and only as complicated as you want to make it.

Be proactive and take charge of your financial destiny by learning about the different aspects of personal finance and all that is available to you.

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[2] An Analysis Of The Importance Of Personal Finance Topics And The Level Of Knowledge Possessed By Working Adults. Financial Services Review, Spring 2006 by Volpe, Ronald P, Chen, Haiyang, Liu, Sheen

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