Chapter 1: 4 Pillars of Personal Finance
Personal finance is the foundation of successfully navigating your life. It's about setting clear financial goals and knowing how to reach them—whether through saving, investing, or managing debt wisely. At its core, personal finance is about building a practical plan to make the most of your income and grow your wealth over time. By becoming financially literate, you'll gain the confidence to navigate complex financial decisions, avoid common pitfalls, and recognize truly valuable advice when it matters most.
Personal finance can be broken down into four areas. Income, saving, spending, and investing:
Income
Income is the starting point of personal finance. It is the entire amount of cash inflow that you receive and can allocate to expenses, savings, investments, and protection. Income is all the money you bring in. This includes salaries, commissions, dividends, gifts, and other courses of cash inflow.
Spending
Spending is an outflow of cash and typically where the bulk of income goes. Spending is whatever you use your income to buy. This includes rent, mortgage, groceries, hobbies, eating out, entertainment, and anything else you spend money on.
Being able to manage spending is a critical aspect of personal finance. You must ensure your spending is less than your income; otherwise, you won't have enough money to cover your expenses or will fall into debt. Debt can be devastating financially, particularly with the high-interest rates credit cards charge.
Saving
Savings is the income left over after spending. You should aim to have savings to cover large expenses or emergencies. However, this means not using all your income, which can be difficult. Regardless of the difficulty, you should strive to have at least a portion of savings to meet any fluctuations in income and spending, somewhere between three and 12 months of expenses.
Beyond that, cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time. Instead, cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow, such as investments.
Investing
Investing involves purchasing assets, usually stocks and bonds, to earn a return on the money invested. Investing aims to increase an individual's wealth beyond the amount they invested. Investing does come with risks, as not all assets appreciate and can incur a loss.
Investing can be difficult for those unfamiliar with it. It helps to dedicate some time to gain an understanding through readings and studying. We will cover investing methods and long term strategies in a later section.
These four areas will be the foundation for understanding how personal finance works. We'll use these four areas to further expand on how they can be used to manage one's money. Here are the best practices and tips for personal finance.