Foundation of Personal finance
Improving financial literacy by breaking down the major components of personal finance
The mere thought of money, for some people is enough to cause panic, stress themselves out and completely zone out. In some cases they may feel that they don’t know enough about money, or they feel that since math was their least favorite subject, that money would be no different.
Unfortunately for those people, they spend so much time in fear, that they miss out on one of the best feelings there is; peace of mind. Thankfully, those of you who are reading this are not those people I just mentioned. How do I know? because……you’re here, reading this!
So now that we’ve established that you are not “most people” let’s get started on the path of improving financial literacy. The best starting point I could imagine is breaking down personal finance into a few major categories.
What is personal finance?
Personal finance does not need to be a big, scary monster that occupies the dark corners of your mind. Nor does it have to be the reason you are unable to get a peaceful night’s sleep. With the information in this article and subsequent articles, my hope is that you will learn how to understand and take control of your finances so you can truly enjoy the life you created for yourself on your vision/mood board.
Personal finance is just that, personal, so there is almost always some degree of subjectivity and adaptation that may be needed. Ideally, it would be most beneficial if you were able to apply the concepts as they’re discussed, but as long as you’re able to follow the principles that’s the important part.
There are three main categories of personal finance:
Past-til-present: This includes all your past financial transactions up until this very moment.
Present to near-future: This includes budgeting and saving for the next few months.
Long-term: This includes long-horizon investing, family-planning, and retirement.
In most cases all of your financial situations can be grouped in one of these three categories. Having a solid understanding of the correlation between these three categories will help you take your finances to new heights! The key is to be able to responsibly manage your income to take care of all three groups, without having any group be neglected.
Categories of personal finance
As with most things in life, once you start to breakdown large projects and concepts they seem to feel easier and more manageable. Now that we have started the process of demystifying personal finance, it should feel less intimidating and overwhelming. If it still feels vague and fear-inducing, stick with me and see that there is nothing to fear, but fear itself. (Thanks Franklin D. Roosevelt). But seriously, personal finance isn’t as intimidating as it seems to be.
So let’s take a look at a more detailed breakdown of the major categories of personal finance. Starting with what makes up the bulk of past-til-present.
Past-til-present
Previous financial transactions
Credit history
Past debts
Present to Near-Future
Consistent budgeting
Consistent saving
Starting and funding an emergency fund
Workplace benefits
Cutting expenses
Long term
Investing
Insurance
Retirement
Estate planning
Taxes
When it comes to thinking about how you see your finances, it is important to understand that some things that are listed can apply to many different groups. For example, while you may have debt that is already in collections, you may also have existing debt, like a current credit card balance, or debts that you may plan to address at some point in the future (think student loans). While there are exceptions and sometimes crossovers, using this breakdown, it is very easy to get a clear idea of how you can also start to get an idea of where most of your money flows (more on that in another article).
For some, simply seeing this breakdown is providing you a lot of much needed clarity, and to you I say, welcome to the first step of understanding your money. For those that see this breakdown as a refresher, I’m very happy that you’ve already been exposed to this information and I’m glad to remind you of a simple way to view your finances on a macro-level.
In either situation you may be in, as you read, I want to make sure we establish a baseline of what personal finance is, so as we dive deeper, there is a clear agreement on how you and I see the core tenants of personal finance.
So what now?
I believe in celebrating small victories, and appreciating gradual, consistent improvement. The information in this article certainly is not as nuanced as a breakdown of international economics. However, it is still a very good sign of progress and growth that you are interested in starting this journey of understanding personal finance. Whatever your reason for being here, the point is you are here. This is the starting point to a long, and rewarding journey to understanding and developing a better, and healthier relationship with your finances.
Feel free to read other articles as they are posted to continue growing in knowledge and confidence. Knowing that with each article you read you are making the necessary improvements to give yourself and your loved ones the best version of yourself!
THE BOTTOM LINE
While personal finance often gets dismissed or overlooked, when viewed in the proper perspective, it is not intimidating or terrifying. With a little time, knowledge and application, you can easily be on your way to living a high-quality life, full of happiness, fulfillment, and wealth in all areas.
FREQUENTLY ASKED QUESTIONS (FAQS)
Why is this the best way to cateogorize personal finance?
Personal finance is first and foremost your personal relationship with money. Which includes all of your past financial decisions (good and bad) that have led you to be where you are now. As well as the full context of your current financial situation, which includes your current cashflow and expenses. Lastly, it also includes your projected financial future, which is largely based on the decisions you make here and now. So to get a holistic, bird’s eye view of your overall financial standing, grouping your financial life in past, present and future allows for a clearly identifiable way to process and allocate your time and funds.
How do i overcome my fear of money, in relation to my finances?
In most cases, money-based fear stems from a lack of confidence in what you know, and as a result a fear of “losing” the money you do have. As you can see this is the perfect setup for a never-ending cycle of financial struggle and hardship. One of the most-efficient ways to overcome this fear is to commit to consistent, bite-size steps that are aimed at increasing your knowledge of money. It may not seem like much initially, however over a long period of time the change in your perception of money will be absolutely unmistakable.
What if I have another way of viewing my overall finances?
If you have another way of understanding your finances, I commend you for coming up with a system to assist you. I would challenge you to consider evaluating the efficiency of your current system, and consider areas in your pre-existing system that may have room for improvement, or a total overhaul. The key is to have a simple breakdown that is easy to understand and easy to explain. From there building on that solid foundation is a lot more manageable and easier to do.
