why is personal finance important essay

More From Forbes

5 reasons personal finance should be taught in school.

• Share to Facebook
• Share to Twitter
• Share to Linkedin

Piggy bank with glasses and blackboard

Having basic personal financial skills is one of the most important things you can do to live a healthy, happy and secure life. Your level of understanding around the fundamentals of budgeting, saving, debt and investing will impact every part of your life and can mean the difference between prosperity or poverty.

With how important these basic life skills are, it's shocking that only 17 states require students to take a high school course in personal finance. High schools teach Geometry, Art, Latin, and Home Economics—all valuable to know for sure. But how often on a day to day basis do you need to calculate the area of a trapezoid? Personal finance is a necessary life skill that must be taught in schools. Here are five reasons why:

1 - Money touches everything.

At 18 years old, kids are thrust out into a world where every step they take from graduation to retirement will be directly impacted by their financial knowledge and money management skills. Career decisions, buying your first house, getting married, having children—finances all play a massive role in each of these life events. And it's not just the major ones; finance is a part of our everyday life. Whether it's where we eat, what we buy, traveling, going out with friends or negotiating prices, every day we are faced with financial decisions. Young adults lack the experience and education to make these decisions - big or small.

2 - The Majority of Americans want personal finance taught in schools.

When it comes to financial education in schools, many adults feel that more should be done to help students get a head start. A recent Credit Karma/Qualtrics survey found 63% of respondents think personal finance education should be taught in schools. Although nearly two-thirds of Americans are in agreement of the importance of finance in our schools, respondents were a bit divided over when this should happen. 

Best High-Yield Savings Accounts Of 2024

Best 5% interest savings accounts of 2024.

• 30% believe it should start in elementary school (Author included!) 
• 33% believe it should start in middle school
• 32% believe it should start in high school
• Only 5% believe it should start in college

Despite some debate over just how young is too young when it comes to learning about personal finance, or where that education should occur, the study shows many Americans are aligned on putting school-sponsored personal finance education on the political agenda. More than three-quarters (77%) of those surveyed believe politicians should push to add financial education in schools, and 67% of those surveyed would prefer to vote for a candidate who prioritizes adding mandatory personal finance education to the public school curriculum. 

Additionally, there’s a lot that Americans would be willing to give up to receive better financial education, including happy hour (35%), dating apps (29%), morning coffee (24%), vacation days (12%) and even their sex lives (8%). 

3 - Lack of financial knowledge has painful consequences

Finances are understandably one of the major causes of stress for adults. Everyone can relate to this stress; even the wealthiest people have felt financial pains at one time or another. Debt and/or a lack of savings can cause considerable hardship on a person’s life. And it doesn’t just cause daily stress. Financial problems can lead to divorce, poor health, depression, and bankruptcy.

The statistics below show that plenty of adults are feeling the pressure of financial issues. Many of these could be avoided with some basic knowledge.

●     Nearly half of Americans don’t have enough cash available to cover a $400 emergency . Getting fired or having a medical emergency without any savings would be devastating. Understanding the importance of an emergency fund could prevent this.

●     Millennials are starting their careers with a combined $1.52 trillion in debt . Students coming out of college have more crippling student loans than ever. They are spending years trying to pay them off, which means they are saving less than they could. Being taught about debt, the different ways to pay for colleges, and the importance of not borrowing more than you can afford could help to prevent these massive numbers.

●      38% of U.S. households have credit card debt . On average, they owe $16,048 with an APR of 16.47%. While some debt, like mortgages or student loans, can be considered “good” debt, credit cards are most definitely not. Learning the dangers of credit cards and high interest rates are critical, as well as the importance of paying them off.

●      33% of American adults have $0 saved for retirement. Considering the fact that most will need at least $1 million to retire (for 30 years of living), a lack of savings is a major problem. The most important rule in saving for retirement is to start early. However, seldom do because they weren’t taught the important of compound interest and time.

4 - Financial literacy leads to a healthier life

More than half (51%) of millennial respondents surveyed answered that they feel their level of personal finance knowledge is holding them back from making financial progress, compared with just 43% of Gen Z and 26% of Gen X and older. And, they are right - it is holding them back from their full potential. The positives that come with having a financial education are undeniable, such as:

• Promotes good savings habits. Just imagine if your child came out of college and started immediately saving for their future. Imagine if we all had.
• Budgeting teaches awareness and responsibility. If someone has a budget that they actively manage, it forces them to look at their spending. They are aware of how much they have available, and this leads to making better spending decisions.
• Smart financial decisions positively affect one’s credit score which impacts their entire life: getting a job, applying for a credit card, renting an apartment, buying a home or car, getting insurance, even signing up for their power bill. Having an excellent credit score means saving thousands and thousands of dollars in interest payments over their lifetime.
• More jobs, more money, and less debt are good for the economy as a whole.
• Understanding money management leads to financial health and positive attitudes around money. People’s attitudes around money can be instrumental in shaping their character, plus promotes the desire to give back.

5 - Where else will they learn it?

The study showed that in lieu of school-sponsored personal finance lessons, many Americans turn to alternative sources of money advice and information. For example, 41% of respondents said they’re self-taught, while 37% said their parents taught them about finances. Just 12% said they learned about personal finance from teachers.

• Editorial Standards
• Reprints & Permissions

• Undergraduate
• High School
• Architecture
• American History
• Asian History
• Antique Literature
• American Literature
• Asian Literature
• Classic English Literature
• World Literature
• Creative Writing
• Linguistics
• Criminal Justice
• Legal Issues
• Anthropology
• Archaeology
• Political Science
• World Affairs
• African-American Studies
• East European Studies
• Latin-American Studies
• Native-American Studies
• West European Studies
• Family and Consumer Science
• Social Issues
• Women and Gender Studies
• Social Work
• Natural Sciences
• Pharmacology
• Earth science
• Agriculture
• Agricultural Studies
• Computer Science
• IT Management
• Mathematics

Investments

• Engineering and Technology
• Engineering
• Aeronautics
• Medicine and Health
• Alternative Medicine
• Communications and Media
• Advertising
• Communication Strategies
• Public Relations
• Educational Theories
• Teacher's Career
• Chicago/Turabian
• Company Analysis
• Education Theories
• Shakespeare
• Canadian Studies
• Food Safety
• Relation of Global Warming and Extreme Weather Condition
• Movie Review
• Admission Essay
• Annotated Bibliography
• Application Essay
• Article Critique
• Article Review
• Article Writing
• Book Review
• Business Plan
• Business Proposal
• Capstone Project
• Cover Letter
• Creative Essay
• Dissertation
• Dissertation - Abstract
• Dissertation - Conclusion
• Dissertation - Discussion
• Dissertation - Hypothesis
• Dissertation - Introduction
• Dissertation - Literature
• Dissertation - Methodology
• Dissertation - Results
• GCSE Coursework
• Grant Proposal
• Marketing Plan
• Multiple Choice Quiz
• Personal Statement
• Power Point Presentation
• Power Point Presentation With Speaker Notes
• Questionnaire
• Reaction Paper

Research Paper

• Research Proposal
• SWOT analysis
• Thesis Paper
• Online Quiz
• Literature Review
• Movie Analysis
• Statistics problem
• Math Problem
• All papers examples
• How It Works
• Money Back Policy
• Terms of Use
• Privacy Policy
• We Are Hiring

Personal Finance, Essay Example

Pages: 5

Words: 1261

Hire a Writer for Custom Essay

Use 10% Off Discount: "custom10" in 1 Click 👇

You are free to use it as an inspiration or a source for your own work.

One’s financial plan is an essential component for any prospective notions of personal wealth and readiness for retirement.  In a distinct set of areas, these personal goals in my plan of action are realized for financial independence.  In the matters of my personal budget, investments, and way of life these factors come together to create a harmonious financial plan for realizing my financial goals.  It is extremely important to examine one’s budget to gauge one’s financial abilities and leverage.  This will dictate the amount of money for investments, in accordance with one’s financial goals.  Finally, cutting down expenses and making other decisions about one’s way of life can provide additional financial relief.  These steps are important in being able to realize personal wealth and readiness for retirement. There are a number of things to consider from a personal standpoint in regards to one’s finances.  Planning for the future and for my retirement is something that requires a plan, along with establishing a plan to attain wealth.  There are a number of things that need to be in consideration in order to obtain wealth and plan for the future.

Before personally identifying numbers from which to work, my personal budget needs to be take in consideration.  One must work within his or her means, and this is of course true in my case as well.  My financial plan must take into consideration where I am right now in regards to my financial goals and in these dynamics.

The first step is identifying my expenses.  This is a process that will allow myself to examine whether my expenses are reasonable.  Furthermore, I will be better able to reduce my expenses after examining them in detail.

Cutting down on my expenses will do two things immediately.  Firstly, the immediate impact to my budget and financial comfort will be improved.  I will be better able to control how much money is spent in various areas, which will put me at better ease financially.  Secondly, there are important benefits in the long term for such efforts.  By cutting down on unnecessary expenses, I will be able to realize this lost money and invest it in my future, or at least a place that will benefit me financially.

Retirement Account

Once the expenses are identified in my budget, my retirement account should take on a high priority.  Even if I am unable to make the maximum allowed contributions to my retirement account, it is important that I establish a place for my retirement account in my budget.  If I keep these consistent payments going into my retirement account, I will put myself in a better financial stance for the future.

With regard to my budget, examining my income and expenses will allow me to decide how much I can afford to contribute to my retirement account.  This process will help me identify the level of financial flexibility I have.  Obviously, I will have to take other investments into account as well, in addition to my retirement account.

After identifying the constraints of my budget, I should make a plan in accordance with my retirement.  By identifying an amount to target for my retirement, I will be able to project interest for a certain number of years, in order to gauge how much I will need to contribute on a monthly basis.  Of course such calculations will not be exact, but by doing this I will be able to adjust my calculations based on differences in my contributions, or interest levels in my investments.

Another valuable aspect of my finances are other types of investments.  Investments are a great way to establish personal financial growth.  Identifying investments, such as CDs, stocks, and other types of investments will allow be to better realize personal wealth and growth in my financial goals.

Devoting part of my budget to investments is another important part of my financial plan.  I have identified a number of investment options that will work with the limitations and opportunities in my budget.  Separating short-term from long-term investments, I have allocated an amount to realize investments as part of my overall financial plan.  For me my budget, encompassing all aspects of future financial growth is important, from short, long, and retirement-based investment plans.  In my every person should allocate funds to each, regardless of the budgetary demands of one’s finances.

The Way of Life

Managing one’s finances is more of a way of life than anything, at least according to my perspective.  When all of these factors are considered, it is important to stay focused on one’s financial goals.  Even for someone who does not have many financial resources, it is important to have a plan of action and to stay committed on executing that financial plan to realize these financial goals.

Cutting down on expenses is a matter that is very important to one’s financial goals.  To a certain extent this becomes a way of life.  For instance, some households easily spend a hundred dollars a month on unnecessary groceries, such as expensive snacks and drinks.  However, if lower-cost replacements could be utilized, the savings and the potential investment return on such savings would be impressive.

Thus one should approach one’s budget with a positive approach.  One can easily cut down on expenses in many different ways, from eating out and buying cheaper groceries, to limiting one’s entertainment budget.  If these expenses can be cut on a regular basis, budgets would be much more easy to handle, and much more conducive to realizing the financial goals of many.

In identifying my plan of action, this is an approach that I am taking.  Even if I don’t have as much money to allocate to investments and a retirement account, it does not mean that I can’t cut spending.  Then, once I cut my spending, I can potentially see valuable returns in investments over time.  These potential returns will be able to go a long way to my financial goals, retirement-related goals, and my plan for obtaining personal wealth and financial freedom in both the short-term and long-term.

One important aspect that cannot be overstated is commitment.  In my opinion, if one is committed to his or her finances, he or she will be able to cut spending and obtain financial freedom.  Similar to my situation, even if one doesn’t fell as if though many financial assets can be allocated to investments, respectable returns can be seen on money saved through other means.  One doesn’t always have to have a large income to be financially successful.  It can easily be obtained with smart spending and planning as well.

My plan for realizing my financial goals starts with my budget.  Examining one’s budget is arguably the first crucial step for obtaining a plan of action in the face of financial goals.  By identifying both the income and expenses of one’s budget, one is able to gain awareness of the flexibility or lack thereof in one’s finances.

Allocating amounts of money to investments is a primary course of action in my financial goals.  In order to realize a level of personal wealth and readiness for retirement, investments must be a part of my financial plan of action.  This remains an important part of my budgetary considerations for realizing my financial goals.

In my plan for financial success from the short to long term, I have realized that much of this revolves around one’s commitment.  Even if one is unable to allocate even the smallest amount to an investment account, one could do so if he or she cuts down on unnecessary expenses.  With these goals in mind, anyone can realize financial independence and wealth with these basic steps.

Stuck with your Essay?

Get in touch with one of our experts for instant help!

South Africa’s Apartheid Policy, Essay Example

Analysis of a Cam Feeding Therapy Modality, Research Paper Example

Time is precious

don’t waste it!

Plagiarism-free guarantee

Privacy guarantee

Secure checkout

Money back guarantee

Related Essay Samples & Examples

Voting as a civic responsibility, essay example.

Pages: 1

Words: 287

Utilitarianism and Its Applications, Essay Example

Words: 356

The Age-Related Changes of the Older Person, Essay Example

Pages: 2

Words: 448

The Problems ESOL Teachers Face, Essay Example

Pages: 8

Words: 2293

Should English Be the Primary Language? Essay Example

Pages: 4

Words: 999

The Term “Social Construction of Reality”, Essay Example

Words: 371

Financial Tips, Guides & Know-Hows

Home > Finance > What Are The Five Foundations Of Personal Finance?

What Are The Five Foundations Of Personal Finance?

Published: January 22, 2024

Learn the five essential foundations of personal finance to achieve financial stability and success. Discover key principles and strategies for managing your finances effectively.

• Personal Finance

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Understanding the five foundations of personal finance, budgeting: the bedrock of financial stability, saving: building a financial safety net, investing: growing wealth and securing the future, managing debt: navigating towards financial freedom, risk management: safeguarding financial well-being.

Introduction

Personal finance is a critical aspect of everyone's life, yet many individuals find themselves navigating its complexities without a clear roadmap. In today's fast-paced world, where financial decisions have far-reaching implications, it's essential to establish a strong foundation for managing personal finances. The five key pillars of personal finance serve as the cornerstones for achieving financial stability, security, and prosperity. By comprehensively understanding and effectively implementing these foundations, individuals can gain control over their finances and work towards their long-term goals.

The five foundations of personal finance encompass budgeting, saving, investing, managing debt, and risk management. Each pillar plays a vital role in shaping an individual's financial well-being, and they are interconnected, working in harmony to build a solid financial future. Throughout this article, we will delve into each foundation, exploring its significance and practical strategies for implementation. Whether you're a recent graduate, a seasoned professional, or someone looking to enhance their financial literacy, mastering these foundations is pivotal for achieving financial success. Let's embark on a journey to unravel the intricacies of personal finance and equip ourselves with the knowledge and tools to make sound financial decisions.

Budgeting serves as the cornerstone of personal finance, providing a roadmap for managing income, expenses, and savings. It empowers individuals to allocate resources efficiently, prioritize financial goals, and track their spending patterns. A well-crafted budget not only fosters financial discipline but also instills a sense of control and awareness regarding one’s financial standing.

Creating a budget begins with assessing all sources of income and categorizing expenses into essential and discretionary items. This delineation enables individuals to distinguish between necessities, such as housing, utilities, and groceries, and non-essential expenditures, including dining out and entertainment. By establishing clear spending limits for each category, individuals can curb impulsive spending and direct their resources towards their financial objectives.

Moreover, budgeting facilitates the cultivation of a savings habit. By earmarking a portion of income for savings and emergency funds, individuals fortify their financial resilience, ensuring they are prepared for unforeseen expenses or economic downturns. Additionally, a well-structured budget allows for the allocation of funds towards debt repayment, thereby aiding in the reduction of interest payments and eventual debt elimination.

Embracing technology can significantly enhance the budgeting process, with various apps and software offering tools for expense tracking, goal setting, and financial analysis. These digital resources streamline the budgeting process and provide real-time insights into one’s financial health, empowering individuals to make informed decisions.

Ultimately, budgeting is not merely a financial exercise but a mindset that fosters prudence, discipline, and foresight. It lays the groundwork for sound financial management, enabling individuals to live within their means, save for the future, and navigate financial challenges with confidence.

Saving is a fundamental pillar of personal finance, serving as a means to build a financial safety net, achieve financial goals, and secure one’s future. It involves setting aside a portion of income for future use, thereby cultivating a habit of prudence and foresight. Saving not only provides a cushion for unexpected expenses but also facilitates progress towards significant milestones, such as homeownership, education, or retirement.

One of the primary vehicles for saving is the establishment of an emergency fund. This fund, typically equivalent to three to six months’ worth of living expenses, acts as a financial buffer during unforeseen circumstances, such as medical emergencies, job loss, or major home repairs. By prioritizing the accumulation of an emergency fund, individuals mitigate the impact of financial shocks and avoid falling into debt due to unexpected events.

Furthermore, saving paves the way for achieving long-term financial aspirations. Whether it’s purchasing a home, funding higher education, or retiring comfortably, disciplined saving is integral to realizing these objectives. By diligently setting aside funds and leveraging the power of compounding, individuals can steadily progress towards their desired milestones, ensuring financial stability and peace of mind.

Automating the saving process can be a powerful strategy, as it removes the temptation to spend the allocated funds and reinforces consistent saving habits. Setting up automatic transfers from a checking account to a designated savings or investment account streamlines the saving process, making it a seamless and integral part of one’s financial routine.

Ultimately, saving is not solely about accumulating money; it embodies a mindset of prudence, preparedness, and future-oriented thinking. By embracing the discipline of saving, individuals lay the groundwork for financial security, enabling them to weather unexpected challenges and pursue their aspirations with confidence.

Investing is a pivotal component of personal finance, offering a pathway to grow wealth, generate passive income, and secure a prosperous future. It involves deploying funds into various financial instruments with the aim of earning returns that outpace inflation, thereby increasing the purchasing power of capital over time.

One of the fundamental principles of investing is diversification, which entails spreading investments across different asset classes, such as stocks, bonds, real estate, and commodities. Diversification mitigates risk by reducing the impact of volatility in any single investment, thereby safeguarding the overall portfolio from significant fluctuations.

Furthermore, investing fosters the power of compounding, wherein returns generated from investments are reinvested to generate additional earnings. Over time, compounding accelerates wealth accumulation, as the initial investment, along with its accrued returns, continues to grow exponentially.

For individuals seeking to invest, it is essential to align investment strategies with their risk tolerance, financial goals, and time horizon. Long-term investments, such as retirement accounts and equity holdings, are suited for individuals with extended time horizons, allowing for the weathering of market fluctuations and the realization of substantial growth over time.

Moreover, embracing a disciplined approach to investing, characterized by consistent contributions and periodic portfolio rebalancing, ensures that individuals remain aligned with their financial objectives and risk tolerance. Regularly reviewing and adjusting investment allocations in response to changing market conditions and life events is crucial for maintaining a balanced and resilient investment portfolio.

Ultimately, investing is not solely about generating wealth; it embodies a strategic approach to securing financial independence and realizing long-term aspirations. By harnessing the potential of investing, individuals can fortify their financial future, create opportunities for wealth accumulation, and pave the way for a prosperous and fulfilling life.

Debt management is a critical aspect of personal finance, influencing individuals’ financial well-being and shaping their ability to achieve long-term goals. While debt can serve as a tool for accessing essential assets, such as homes and education, effective management is essential to prevent it from becoming a burden that impedes financial progress.

One of the primary strategies for managing debt is to prioritize high-interest debt repayment, such as credit card balances and personal loans. By directing surplus funds towards eliminating high-interest debt, individuals can reduce interest payments and expedite their journey towards debt freedom.

Consolidating high-interest debts through methods such as balance transfers or debt consolidation loans can also be an effective approach to streamline debt repayment. This consolidation can lower overall interest costs and simplify the repayment process by combining multiple debts into a single, manageable payment.

Moreover, adopting a proactive stance towards debt management involves creating a realistic repayment plan and adhering to a structured budget that allocates funds towards debt reduction. This approach not only accelerates debt repayment but also instills financial discipline, ensuring that individuals remain focused on their long-term financial well-being.

Furthermore, prudent use of credit and the avoidance of unnecessary debt are integral to effective debt management. By exercising restraint in borrowing and maintaining a healthy credit utilization ratio, individuals can safeguard their financial stability and creditworthiness, setting the stage for future financial opportunities.

Ultimately, managing debt is not solely about repaying what is owed; it embodies a mindset of financial responsibility and empowerment. By adopting proactive debt management strategies, individuals can liberate themselves from financial burdens, pave the way for future prosperity, and embark on a journey towards lasting financial freedom.

Risk management is an integral facet of personal finance, encompassing strategies aimed at mitigating potential financial setbacks and protecting one’s assets and income. By proactively identifying and addressing risks, individuals can fortify their financial well-being and navigate unforeseen circumstances with resilience and confidence.

One of the fundamental components of risk management is the acquisition of insurance coverage to protect against various contingencies. This includes health insurance to mitigate the financial impact of medical expenses, property insurance to safeguard against damage or loss of assets, and life insurance to provide financial security for loved ones in the event of unforeseen circumstances.

Furthermore, establishing an emergency fund serves as a crucial risk management tool, providing a financial buffer to address unexpected expenses or income disruptions. By maintaining a readily accessible pool of funds, individuals can mitigate the impact of unforeseen events, such as job loss or medical emergencies, without resorting to high-interest debt or depleting long-term savings.

Additionally, prudent estate planning and the establishment of legal safeguards, such as wills and trusts, are essential components of risk management. These measures ensure that individuals’ assets are protected and distributed according to their wishes, providing peace of mind and financial security for their beneficiaries.

Moreover, diversification of investments and the cultivation of a balanced portfolio serve as risk management strategies within the realm of investing. By spreading investments across different asset classes and geographic regions, individuals can mitigate the impact of market volatility and specific economic risks, thereby safeguarding their long-term financial objectives.

Ultimately, risk management is not solely about preparing for worst-case scenarios; it embodies a proactive approach to safeguarding financial well-being and fostering peace of mind. By implementing comprehensive risk management strategies, individuals can navigate life’s uncertainties with resilience, protect their financial assets, and lay the groundwork for a secure and prosperous future.

20 Quick Tips To Saving Your Way To A Million Dollars

Our Review on The Credit One Credit Card

How Would A Bank Secure Itself In Trade Finance

Return On Retained Earnings (RORE) Definition

Latest articles.

Navigating Crypto Frontiers: Understanding Market Capitalization as the North Star

Written By:

Financial Literacy Matters: Here’s How to Boost Yours

Unlocking Potential: How In-Person Tutoring Can Help Your Child Thrive

Understanding XRP’s Role in the Future of Money Transfers

Navigating Post-Accident Challenges with Automobile Accident Lawyers

Related post.

By:  •  Finance

Please accept our Privacy Policy.

We uses cookies to improve your experience and to show you personalized ads. Please review our privacy policy by clicking here .

• https://livewell.com/finance/what-are-the-five-foundations-of-personal-finance/

• Entertainment
• Environment
• Information Science and Technology
• Social Issues

Home Essay Samples Life

Essay Samples on Personal Finance

My personal financial goals in life: financial freedom.

As I embark on the journey of life, I recognize the profound impact that my personal financial goals will have on shaping my future. In this essay, I delve into the aspirations and plans that define my financial path, highlighting the importance of setting clear...

• Personal Finance

The Importance of Saving Money for Students

For students, the concept of saving money might seem distant amidst the pressures of academic life and the allure of immediate gratification. However, cultivating the habit of saving has far-reaching benefits that extend beyond the classroom. Learning to manage finances early on not only prepares...

Being Smart With Your Money: the Importance of Financial Literacy

Many people have discussed personal finance. Articles 'Should Financial Literacy Be Taught in More Schools' by Ramsey and 'Why is Learning Personal Finance Important' by Ryan discuss the reason why personal finance is beneficial to the educational system. Benefits of adding Personal finance to our...

Unlocking Financial Literacy: Exploring the World of Finance and Money Management

Finance is a business term that is associated with banking, investments, capital, debt and credit. Managing money, such as balancing a checkbook, involves finance. At one point in every person's life, one must deal with finances. An important topic among finance is assets and liabilities....

The Value of Understanding Personal Finance Management for Students

As a student, learning this course about personal financial statement is important. It shows the individual's net worth 'their assets minus their liabilities' which reflects what that person has in cash if they sell all their assets and pay off all their debts. If their...

Stressed out with your paper?

Consider using writing assistance:

• 100% unique papers
• 3 hrs deadline option

Why Personal Finance Should Be Taught in Modern Schools

About 59% of Americans have less than 1,000 dollars in savings. I think that Financial Literacy should be a requirement in schools all around the country. Financial planning should be taught in schools because finances affect everything, a lack of financial knowledge has consequences eventually,...

General Purpose Financial Report

General Purpose Financial Report basically provides the information and analysis about the scarce resources of a public sector or a private sector company. It normally focuses the general and overall financial information and produces the result for shareholders and board of directors to analyze the...

• Business Success

Best topics on Personal Finance

1. My Personal Financial Goals in Life: Financial Freedom

2. The Importance of Saving Money for Students

3. Being Smart With Your Money: the Importance of Financial Literacy

4. Unlocking Financial Literacy: Exploring the World of Finance and Money Management

5. The Value of Understanding Personal Finance Management for Students

6. Why Personal Finance Should Be Taught in Modern Schools

7. General Purpose Financial Report

• Personal Experience
• Personality
• Actions Speak Louder Than Words

Need writing help?

You can always rely on us no matter what type of paper you need

*No hidden charges

100% Unique Essays

Absolutely Confidential

Money Back Guarantee

By clicking “Send Essay”, you agree to our Terms of service and Privacy statement. We will occasionally send you account related emails

You can also get a UNIQUE essay on this or any other topic

Thank you! We’ll contact you as soon as possible.

• > Financial Analytics

What is Personal Finance? Importance, Types, Process, and Strategies

• Neelam Tyagi
• Nov 08, 2020
• Updated on: Mar 22, 2024

Let’s begin with defining Finance, “It is a comprehensive phrase that fully specifies explicit activities linked with banking, leverage or debt, credit, capital markets and investments, basically, it reflects the entire money management and the procedure of obtaining money according to requirement. However, Finance comprises monetary learning, and the study of banking, credit, investment, equities, and liabilities that entirely build the financial structure.”

Finance is an extremely important aspect in everybody life, but do you want to know how it is manageable and doable at a corporeal grade, or simply at the personal stage, probably, you would say "yes". So, Without further delaying, voyaging the Personal Finance monarchy

Table of Content

• Introduction to Personal Finance

Importance of Personal Finance

• Types & Examples
• Process & Strategies 

Introduction to Personal Finance

A generic definition of personal finance is, “maintaining your own money throughout your life. ” However, the authentic interpretation incorporates all the features and aspects of managing the income including various strategies and status of risk for distinct facets of life and different amounts of investments. 

In simple words, “It involves the understanding of the facts like how everyday spending affects our accounts, the utility of credit cards, how varying interest rates could make or break our portfolios”. These fundamental concepts assist in framing a picture of how stable an individual is financially and more importantly how to raise that stability in the future.

“Personal Finance is made up of various parts, but can be summarized as budgeting, setting spending and saving priorities, cash flow planning, and efficiently maximizing benefits through rewards programs.” – Anthony G. Lanza, Spectra Investment Management

It's all about actualising personal financial objectives whether it is adequate savings for short-terms financial demands, retirement planning, savings for kid’s education, etc. It completely relies on one’s income, expenditures, living expenses and requirements, essential demands, the individual targets along with the decisions made for meeting these targets within financial confinements. 

Some practical examples of personal finance are;

Learning how to budget, balance a cheque book, secure funds for important purchases, saving for retirement, planning for taxes, insurance purchasing and making efforts for investments.

Planning with the family on how the total income could be divided for mortgage or kid’s education, medical expenses, etc.

Deciding or debating whether to save or not a particular amount on some expenditures or save it for the future.

According to the definition provided by Investopedia , “Personal finance explains all the financial decisions and actions accounted by an individual or household that comprise budgeting, insurance, mortgage planning, savings and retirement planning.” 

Primarily, personal finance deals with

• Family budgets,
• Personal savings and investments, and
• The utilization of credit cards.

Most of the Individuals certainly get mortgages from commercial banks, savings and loan associations in order to purchase their own homes, while financing the purchase of consumer items such as automobiles or appliances can be collected from banks and finance firms. 

Additionally, charge accounts and credit cards are other significant modes by virtue of which most banks and businesses render short-term credits to consumers. 

(Recommended blog: 5 Key Elements of Financial Analysis )

Personal Finance Terms

Budget: While managing personal finances, budget is important in maintaining the record of spending patterns, it helps in planning how one could go with spending according to the income each month. It basically tells where is your money is going, when and where you can save, and how can you manage expenditures.

Insurance : In terms of managing personal finances, taking up the insurance is another part. One can protect itself via purchasing health insurance, life-term insurance, car insurance, etc, from risk and providing securities to material things also.

Savings : In our 20’s we just learn about personal savings, but with the entering in our 30’s we start planning about managing our funds, seek ways to invest correctly and save for retirement or old ages. Hence, it becomes necessary to make emergency savings funds to mask any financial discomforts and retirement saving plans to aid in future. 

Personal Finance has become an integral part of human life, and in the present COVID-19 world, it has become more necessary than ever before. (Click here to understand the concept of how COVID-19 is impacting Financial Markets )

Below are some of the imperative aspects of finance at a personal level;

Personal Finance has a great role in determining the direction and essence of human life in the prevailing economic and social circumstances.

For personal growth of an individual and his family, personal finance plays a key role by looking at the opportunities and keeping upgraded across the globe through keeping aware of any sort of risks. 

It has become more crucial to enrich the financially literate in order to acquire most of the income and needed savings where the study of personal finance assists in distinguishing amid favourable and cheap financial decisions and also help in making savvy conclusions.

Some of the seminaries are providing classes about managing money, therefore, it is important to have basic knowledge through free online courses, articles, blogs and podcasts.

In addition to that, a novel concept, small personal finance incorporates augmenting strategies, these strategies consist of budgeting, preparing emergency funds, clearing off debt, carefully leveraged credit cards, saving for retirement, and etc.

In addition to that, knowing the fundamentals of personal finance from savings accounts to budgeting can help us in constructing a better future by eliminating the various risks.

(Related blog: An Introduction to Financial Analysis)

What are the Personal Finance Principles ?

When a person thinks to manage his/her money, one of the finest approaches is “saving”, it can be strictly followed, “more you save, more you have”. However, principles that help to maintain success in business are discussed below;

Prioritization: By examining our finance, we can determine what forces the money streaming in, and making efforts to be assured and focused.

Assessment: The key requirement for professionals that resist them spreading too much. However, enthusiastic persons have always listed various ideas and ways that touch their financial needs, either it is a side business or investment idea at the appropriate time.  

Restraint: For instance, if a person is sending too much then his annual income it is not a good approach towards managing his financial goals as it won’t let him do better.

Understating to restraint expenditure on non-profitable assets until a person has secured his monthly savings or debt-reduction aims is important in keeping net worth. Restraint is simply the way of managing a successful business, applied to personal finance as well.

(Recommend blog: Fundamental Analysis Guide )

Besides that, one should follow the saying, “never work for money, make your money works for you”, therefore, produce multiple, but legitimate, ways to have more source of income. Also, it is advisable to make you educated with financial terms and keep updating yourself to have a precise understanding of your financial matters and make accurate decisions for yourself.

What are the Types of Personal Finance?

Some types of personal finance can be accomplished as;

• Banking , that depicts the fundamental banking functionalities of managing accounts and transactions assistance.
• Investment , that is made by judging the entire alternatives and picking out the suitable path which provides the acceptance of a specific measure of risk, like the investment in real estate, stock market, fixed deposit, etc.
• Mortgages and loans , that signifies the assistance and services letting a person leverage and obtain an asset for getting its objective. For example, acquiring a home loan or education loan for fulfilling his aspirations.
• Expert advice or counselling , that can be gained for analyzing the exact picture and getting the actual perspective of the situation to catch. Along with this, it serves as a guiding tool and the latest outlook. 

Process of Personal Finance

Simply, the process of personal finance can be explained as follows;

Studying the current condition: Figuring out the exact existing conditions in terms of where we stand, how the current situation is being handled in order to acquire a precise knowledge of the strengths and weaknesses.

Preparing up doable goals : Setting up objectives according to the preferences is necessary for deciding in which direction the next step should be placed, or where an individual should move forward in future.

Determining all courses of actions : Pinpointing the required plan and process should be captured in the current scenario and analysing the time-frame work, expenses, and opportunities interconnected with each and every individual subject of actions.

Checking out the alternatives : Deciding the full recognized alternatives and checking the pros and cons provided the inadequacy of resources. Also, selecting the alternative through moderating the perils to a satisfactory level.  

Applying a suitable area of action : It is a high time to seize an action, making the investments and performing the conventionalities.

Following up is pivotal : The necessary step is to follow up. Since the conditions are altering elementary and in the terms of changing environment, one should be dynamic adequately and should analyze the options from time to time in order to obtain the best results.    

Personal Finance Strategies

The key strategies for protecting your assets include obtaining various types of insurance, such as health, life, property, and liability insurance. It also involves investing in retirement accounts (like 401(k)s, IRAs, and pension plans) and structuring assets separately (through trusts, limited liability entities, joint ownership, and homestead exemptions). 

Diversifying investments and engaging in estate planning are also important. Regular review and updates to your asset protection plan, along with professional advice, ensure effectiveness in securing financial stability and minimizing risks.

Some top-notch personal finance strategies to follow;

Planning for a budget is a very important task and evaluating how much amount should be spent on which activities. For example, some fraction of total income must be expended on essential activities like rent, groceries, and how much should be spent on convenience and savings.  

With the holding of a credit card, one can get spur-of-the-moment purchases that yield in trapping in its own frame. Therefore, wisely implementation of credit cards is imperative in order to avoid ample troubles.

In addition to that, the conceptual knowledge of credit score is important. One should maintain a satisfactory credit score that supports in sustaining high-grade creditworthiness.

One of the important viewpoints is mitigating the debt, this is considered as the best approach in propelling a step ahead.

Considering the factor of retirement policy and planning is worthy. Initiating by implanting or investing appropriately and making scopes or expenses for retirement.

Understanding and acquiring the tax system of an individual’s country could aid in a vast portion of savings by making correct tax planning, expert advice is also beneficial to the regard.

Having suited insurance is a key ingredient in case of emergency and to avoid unexpected loss and concussions.

The last but most important strategy is having savings for emergency conditions including medical bills, a big loss like accidents etc. (In reference with ) 

(Also check: Financial Analysis: Types, Examples and Techniques )

In today’s environment, financial management has turned out to be the utmost significance. There are plenty of options available to professionally manage all personal finances and banking, even most of the banks are rendering such services where they can manage money successfully. 

Presently, personal finance is a very broad realm in itself. It can be concluded that Personal finance could be addressed as the management of money and financial decisions for an individual or for a family covering budgeting, retirement planning and investments.

“Being promoted to a top position in your organization, or even being elected to public office, does not suddenly endow you with financial literacy, if you did not acquire and develop it, earlier in your life.” – Strive Masiyiwa , founder of Econet Wireless

In spite of all the reliable resources, it is advisable to account for a worthwhile personal finance approach. One should be prudent enough to obtain finance literary knowledge in order to make acceptable decisions in this direction while maintaining money adequate.

Share Blog :

Be a part of our Instagram community

Trending blogs

5 Factors Influencing Consumer Behavior

Elasticity of Demand and its Types

An Overview of Descriptive Analysis

What is PESTLE Analysis? Everything you need to know about it

What is Managerial Economics? Definition, Types, Nature, Principles, and Scope

5 Factors Affecting the Price Elasticity of Demand (PED)

6 Major Branches of Artificial Intelligence (AI)

Scope of Managerial Economics

Dijkstra’s Algorithm: The Shortest Path Algorithm

Different Types of Research Methods

Latest Comments

sarahcrown999

NO UPFRONT FEES I had the worst scam experiences, I lost more than $850,000 these scammers have no mercy because they had me sell my properties when I had no money to pay them anymore. I was stuck and didn’t know the way out. I started researching and reached out to a legit recovery team and they “Highjacktech at gmale dot com” helped me get my lost Bitcoin back to my wallet. If you have ever been involved in any scam don’t give up cause they will get your funds back to you. Whatsapp: +1 321 988 1375

• Search Search Please fill out this field.

Understanding Budgeting & Personal Finance

How to create a budget to take control of your finances

• Why Budgeting Is Important

Create a Budget in Nine Steps

Budgeting strategies, how to make budgeting easier, why you should keep budgeting.

Budgeting is the personal finance tool for taking control of your money.

A budget is a written plan for how you will spend your money. It allows you to make financial decisions ahead of time, which makes it easier to cover all your expenses along with paying off debt , saving for the future, and being able to afford fun expenses. Budgeting consistently can help you turn your finances around and start the process of building wealth .

Why Budgeting Is Important in Personal Finance

A budget is a powerful tool because it allows you to determine how and where you want to spend your money. When you master budgeting, you make sure that every dollar is being used how you want it, and can track your spending to determine whether it matches your priorities.

Often when people start budgeting, they are surprised to see how much money is going to things that are not important to them, like eating out, mindless online shopping, or high-interest payments on credit cards .

Budgeting allows you to monitor your progress on financial goals and stick to your  financial plan . Eventually, it creates opportunities to eliminate debt and build wealth.

To create a budget, you have to start by creating a picture of your financial situation. It helps to have a list of the bills that you must pay each month, as well as your pay stubs, and either bank records or receipts from the past three months.

Step One: Determine Your Income

Begin by listing your monthly income. This should include any paychecks you receive, as well as income from other sources, such as:

• Child support
• Government benefits
• Social Security
• Investments

If you have a business, you should include the amount you pay yourself each month rather than the business's total income. If you do not get paid monthly, look at how much income you had last year and divide it by 12 to determine your likely monthly income this year.

Step Two: List Categories of Mandatory Expenses

Mandatory expenses are the expenses that you must pay every month and are vital to your housing, work, or legal obligations. These should include things like:

• Electricity
• Health insurance
• Prescriptions you take daily or monthly
• Transportation to and from work

You can usually identify mandatory expenses because they are fixed amounts, although some, such as electricity or water, can vary month to month. If you have debt payments, such as student loans or credit card payments, they should also be included. Don't worry about assigning values yet; simply make a list of the categories.

Step Three: List Categories of Discretionary Expenses

Next, identify your discretionary expenses . These are things you can go without but often choose to spend money on. They are wants, rather than needs, and may include:

• Fitness memberships
• Streaming subscriptions
• Leisure travel
• Personal grooming
• House cleaning

You can also include savings goals, such as retirement accounts or a down payment fund , as discretionary expenses for now. There will not be immediate consequences if you scale back on these for a little while, although there may be long-term consequences if you ignore them for an extended period of time. Once your budget is under control, you can move these to mandatory expenses with fixed monthly contributions.

Step Four: Estimate Expenses

Once you have all your spending categories listed, it's time to assign monetary values to them. Without looking at your spending patterns, write down what you think you must or will spend in each category in a month.

Step Five: Compare Estimated to Actual Expenses

Now, go back through your spending history for the last three months and determine what you actually spent in each category per month. You can use your receipts or bank statements to determine what you actually spent. Compare these to the numbers you estimated.

If there is a big difference between the two, that is a strong indicator you need a strict budget to manage your spending and keep track of your finances.

Step Six: Assign Spending Limits Within Your Income

Once you have a sense of how much you are spending per month compared to what you think you spend, it's time to set spending limits. Start by budgeting for mandatory expenses, then add up these values and subtract them from your income.

The amount you have left is what you can budget for discretionary expenses and savings goals. What you budget for expenses should not be more than your income; otherwise, you will end up in debt.

If you have debt payments, start by budgeting for the minimum payment , then add more if you have available funds leftover. If you have additional money after you plan your budget, you can add it to the categories for financial goals like saving for retirement or building an emergency fund. After that, you can budget more for discretionary expenses and luxuries.

Step Seven: Look for Places To Cut Expenses

If you have more expenses than income, you will need to find ways to cut back on your expenses. Start by lowering the spending limits in the discretionary section of your budget or eliminating them entirely.

Next, look for ways you can reduce your mandatory expenses, such as:

• A cheaper monthly insurance premium
• Using less electricity at home
• Taking the bus to work instead of driving
• Spending less on groceries

If your expenses are still more than your income, you may need to increase the amount you earn by negotiating a raise, adding a second job, or taking on gig work.

Step Eight: Track Your Spending

Once you have your budget set for the month, you will need to track your spending and stop when you have reached the limit in each category. When you stop spending, that's called sticking to your budget.

If you end up spending more in one category than you had planned, you can transfer money into that category to cover it from another category. For example, if you budgeted $400 for food for one month and you ended up spending $450, then you can move $50 from another category to cover it. To do this, you will need to check your spending before making purchases to see how much you have left.

Step Nine: Plan for The Next Month

After you have completed your first month of budgeting, it will be easier to plan for the next month. Look at how you spent your money, make adjustments for categories in which you spent more than you planned, and cut back on the categories that had additional funds in them.

You should also look ahead to large expenses coming up, such as insurance premiums that are only due every few months or upcoming holiday expenses . Plan for these larger expenses as you set your budget for the next month.

Every person is different, and one strategy may work better for you than another. If you are new to budgeting, try out different options to find the one that works best for your spending habits and financial mindset.

Envelope Budget

How it works : In an  envelope budget , you assign money to each category and deal with cash for as many categories as possible. At the beginning of each month, take the appropriate amount of cash out of your bank account and put it in a designated, physical envelope labeled with the name of each category. When you run out of money in that category, you either stop spending, or you have to take cash from the envelope for a different category to cover the difference.

Good for : People who are not good at tracking expenses or who need to stop using their debit or credit cards.

If you want to pay bills online or transfer money into a savings account, set those to be paid at the very beginning of the month, then take cash out for the remaining expenses after those bills have been gone through.

50/30/20 Budget 

How it works : The  50/30/20 budget  breaks down how much you should be spending on different categories. Fifty percent of your after-tax income is to be spent on your mandatory expenses, or needs; 30% should be spent on discretionary expenses, or wants; and 20% should be tailored toward savings and debt repayment.

Good for : People who want to focus on financial goals.

Make sure to separate savings and debt repayment from other expenses, rather than including them in either living expenses or discretionary spending.

Zero-Dollar Budget

How to works : A zero-dollar budget involves planning how you are going to spend your income down to the last penny. Every dollar of income you make for the month should be assigned to a spending category. This allows you to know where all of your money is going at any given time. It also makes it more important to monitor your budget regularly.

Good for : People who need to get control of spending.

Be sure to include a category for surprise expenses. If you have any extra income to budget at the beginning of the month, it can go into this category, then roll over into the next month if you don't spend it. This will allow you to build up a short-term emergency fund.

Five-Category Budget

How it works : The  five-category budget  sets up five basic categories and determines the percentage you should spend on each one. For housing, you can spend up to 35% of your income. Living expenses, which include mandatory expenses such as groceries, your cellphone bill, and discretionary spending, should make up 25% of your spending. Allocate 15% each for transportation and debt payoff. Finally, set aside 10% of your income for savings.

Good for : People who have some wiggle room in their finances but may have small amounts of debt.

Housing expenses include your mortgage payment or rent, as well as household utilities, home maintenance, HOA fees, and homeowners or renter's insurance.

It takes a lot of work to track your expenses, and for many people, budgeting can feel restrictive. If you share finances with another person, disagreements over spending can cause resentment or fighting.

The first two or three months of budgeting are the hardest, as you adjust categories and work on cutting your spending. Luckily, there are ways to make budgeting easier.

• Use a budgeting app : Tools like  You Need a Budget (YNAB)  or  Mint  will import your transactions for you and make it easier to assign categories, adjust the amounts, and track your spending. A single account can be shared between multiple people who need to track spending together.
• Use cash : Consider switching to cash for some categories, even if you aren't using an envelope budget. If you consistently overspend in a single category, such as eating out or groceries, take out cash at the beginning of the month for this category rather than using a debit or credit card to cover those expenses.
• Check on your budget each day : Set aside five minutes in the morning or evening to look at your spending and bank account. This can keep you from making a mistake or overdrawing your account.
• Find ways to save : The more money you can save on your daily expenses, the easier it will be to stick to your budget. Look for ways to save on your groceries, lower your utilities, negotiate on bills, and more. Shopping around for the best deals can make budgeting less stressful.
• Open an online bank account : If you don't already have a bank account, open a checking account through an online bank . These often have lower minimum deposits and fees than accounts through brick-and-mortar banks. Once you have a bank account, you can set up online payments, create savings or retirement accounts, and more easily track where your money is going.
• Make budgeting automatic : Schedule rent, loan repayment, or other mandatory expenses to be automatically paid on your payday. This will prevent you from accidentally spending that money on discretionary expenses. You can also schedule automatic transfers into your savings or retirement accounts. You can either do this automatically through your online bank accounts, by setting up different accounts where percentages of your paycheck can be deposited, or by using a budget app that can access your bank account.
• Work towards a goal : Sticking to a budget can be difficult, especially if you aren't used to regulating your spending. To motivate yourself, set a goal that you are saving toward: eliminating debt, building an emergency fund, getting to the point where you have more discretionary income, saving for travel, or any other goal you are determined to meet. Working toward a set goal can keep you focused and remind you why sticking to a budget is worth it.

Once you have your finances under control, have eliminated debt, or have met other financial goals you set, that doesn't mean you should stop budgeting.

Sticking to a budget makes it less likely you will accumulate debt or end up with large expenses you have no way to meet. It also allows you to save money for fun expenses, such as travel, and eventually get to the point where you can build wealth through investing.

Even when you have plenty of money to meet your mandatory and discretionary expenses, budgeting is still an essential part of smart personal finance. Using a budget allows you to understand your financial situation and manage your money. It puts you in control, rather than allowing your money to control you.

Consumer Financial Protection Bureau. " Budgeting: How To Create a Budget and Stick With It ."

Consumer.gov. " Making a Budget: What To Know ."

Consumer Financial Protection Bureau. " Track Your Spending With This Easy Tool ."

Consumer.gov. " Making a Budget: What To Do ."

Consumer Financial Protection Bureau. " Analyzing Budgets ."

• Financial Literacy
• Financial Literacy Resource Center

Financial Literacy: What It Is, and Why It Is So Important To Teach Teens

Education is the key to a successful financial future

• Search Search Please fill out this field.

What Is Financial Literacy?

Understanding financial literacy.

• Why It Matters

The Bottom Line

• Financial Literacy: What It Is, and Why It Is So Important To Teach Teens CURRENT ARTICLE
• Financial Goals for Students: How and Why to Set Them
• How to Teach Others About Finances
• How to Learn About Finance
• Principles of Building Wealth
• Finance Terms for Beginners
• Stock Market for Teens
• Investing for Teens: What They Should Know
• Saving vs. Investing: What Teens Should Know
• Talking to Teens About Financial Risk
• Portfolio Management for Young Adults
• What Are Asset Classes? More Than Just Stocks and Bonds
• What Is Stock Trading?
• Use the Investopedia Simulator
• Credit Tips for Teens
• Credit Cards vs. Debit Cards
• Banking 101
• What is Debt?
• What Is Fintech?
• What Is a Mobile Wallet?
• What Teens Need to Know About Cryptocurrency
• What Is Buy Now Pay Later?
• Best Ways to Send Money as a Teen
• 10 College Degrees With the Best Starting Salaries
• What Are the Five Purposes of Budgeting?
• How to Read a Pay Stub
• Teens and Income Taxes
• Renting an Apartment for the First Time: What You Need to Know
• Personal Finance Influencers to Know

Financial literacy is the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

When you are financially literate, you have the essential foundation for a smart relationship with money. This can help start a lifelong journey of learning about the financial aspects of your life. The earlier you start to become financially literate, the better off you'll be because education is the key to a successful financial future.

Key Takeaways

• The term “financial literacy” refers to understanding a variety of important financial skills and concepts.
• Financially literate people are generally less vulnerable to financial fraud.
• A strong foundation of financial literacy can help support various life goals, such as saving for education or retirement, using debt responsibly, and running a business.
• Key aspects of financial literacy include knowing how to create a budget, plan for retirement, manage debt, and track personal spending.
• Financial literacy can be obtained through reading books, listening to podcasts, subscribing to financial content, or talking to a financial professional.

Investopedia / Paige McLaughlin

Since about 2000, financial products and services have become increasingly widespread throughout society. Whereas earlier generations of U.S. residents may have purchased goods primarily in cash, various credit products are popular today, such as credit and debit cards and electronic transfers. A 2021 survey by the Federal Reserve Bank of San Francisco revealed that 28% of all payments were made via credit card, with only 20% being made in cash.

Given the importance of finance in modern society, a lack of financial literacy can be very damaging to an individual’s long-term financial success.

Pitfalls of Illiteracy

Being financially illiterate can lead to many pitfalls, such as being more likely to accumulate unsustainable debt burdens, either through poor spending decisions or a lack of long-term preparation. This, in turn, can lead to poor credit , bankruptcy, housing foreclosure , and other negative consequences.

Thankfully, there are now more resources than ever for those wishing to educate themselves about financial topics. One such resource is the U.S. government-sponsored Financial Literacy and Education Commission, which offers a range of free learning opportunities.

Financial literacy can help protect individuals from becoming victims of financial fraud, a type of crime that is becoming more commonplace.

Scope of Financial Literacy

Although many skills might fall under the umbrella of financial literacy, popular examples include household budgeting, learning how to manage and pay off debts , and evaluating the tradeoffs between different credit and investment products. These skills often require at least a working knowledge of key financial concepts, such as compound interest and the time value of money.

Financial literacy can cover short- and long-term financial strategies. The strategy you use will depend on several factors, such as your age, investment time horizon, and  risk tolerance . Financial literacy also encompasses knowing how investment decisions made today will impact your tax liabilities in the future.

Financial products such as mortgages, student loans, health insurance, and self-directed investment accounts have grown in importance. It is imperative for individuals to understand how to use them responsibly. It's also important to know which investment vehicles are best to use when saving, whether for a financial goal like buying a home or for retirement.

Other developments in finance such as e-wallets, digital money, and P2P lending can be convenient and cost-effective but require that consumers be educated adequately to use them to their advantage.

Why Financial Literacy Matters

It supports financial well-being.

Day-to-day living expenses, living within your means, short-term borrowing, long-term budget forecasting. To manage these and other essential financial realities properly as you go through life, you must be financially literate.

It is important to plan and save enough to provide adequate income in retirement while avoiding high levels of debt that might result in bankruptcy, defaults, and foreclosures.

In its "Economic Well-Being of U.S. Households in 2022" report, the U.S. Federal Reserve System Board of Governors found that many Americans are not prepared for retirement. Twenty-eight percent indicated that they have no retirement savings, while about 31% of those not yet retired felt that their retirement savings were on track. Among those who have self-directed retirement savings, about 63% admitted to feeling low levels of confidence in making retirement decisions.

Millennials' Challenge

Lack of financial literacy has left millennials—the largest share of the American workforce—unprepared for a severe financial crisis, according to research by the TIAA Institute. Even among those who reported having a high  knowledge of personal finance , only 19% answered questions about fundamental financial concepts correctly.

Forty-three percent reported using expensive alternative financial services, such as  payday loans  and pawnshops. More than half lacked an emergency fund to cover three months’ of expenses, and 37% were financially fragile (defined as unable or unlikely to be able to come up with $2,000 within a month in the event of an emergency).

Millennials also carry large amounts of student loan and mortgage debt. In fact, 44% of them said they have too much debt.

Though these may seem like individual problems, they have a wider effect on the entire population than previously believed. The lack of knowledge of mortgage products prior to the 2008 financial crisis created widespread vulnerability to  predatory lending . The financial impact of that crisis affected the entire economy.

Financial literacy is an issue with broad implications for economic health.

If you are a younger individual, retirement may seem years away. Yet it is one of the best goals to begin saving for. That's because the earlier you start, the longer your invested savings will have to compound and the more money you'll end up with. An employer-sponsored retirement account, such as a 401(k) , can help.

Benefits of Financial Literacy

Broadly speaking, the benefit of financial literacy is that it empowers individuals to make smarter decisions about their finances. In addition:

• Financial literacy can prevent devastating financial mistakes : Floating rate loans may have different interest rates each month, while traditional individual retirement account (IRA) contributions can’t be withdrawn until retirement. For someone unaware of these and other financial facts, seemingly innocent financial decisions may have long-term implications that cost them money or impact life plans. Financial literacy helps individuals avoid making mistakes with their personal finances.
• Financial literacy prepares people for financial emergencies : Topics such as saving or emergency preparedness get individuals ready for uncertain times. Though losing a job or having a major unexpected expense can be financially impactful, an individual can cushion the blow by saving regularly.
• Financial literacy can help individuals reach their goals : By better understanding how to budget and save money, individuals can create plans that define expectations, hold them accountable to their finances, and set a course for achieving important financial goals. Though someone may not be able to afford a dream today, they can create a plan that can help make it happen.
• Financial literacy gives rise to confidence : Imagine having to make a life-changing financial decision without all the necessary information. With knowledge about finances, individuals can approach major life choices with greater confidence. They'll be more likely to achieve the outcome they desire and less likely to be surprised or negatively impacted by unforeseen outcomes.

Strategies to Improve Financial Literacy Skills

Developing financial literacy involves learning and practicing skills related to budgeting, managing, and paying off debts , and more. It means understanding and using credit and investment products wisely. The good news is that, no matter where you are in life and financially, it’s never too late to start practicing good financial habits.

Here are several practical strategies to consider.

Create a Budget

Track how much money you receive each month and how much you spend. You can use an Excel spreadsheet, paper, or a budgeting app . Your budget should include income (paychecks, investments, alimony), fixed expenses (rent/mortgage payments, utilities, loan payments), discretionary spending (nonessentials such as eating out, shopping, and travel), and savings.

Pay Yourself First

To build savings, this reverse budgeting strategy involves choosing a savings goal, such as paying for higher education, deciding how much you want to contribute toward it each month, and setting that amount aside before you divvy up the rest of your expenses.

Pay Bills Promptly

Stay on top of monthly bills, making sure that your payments are always sent to arrive on time. Consider taking advantage of automatic debits from a checking account or bill-pay apps, and sign up for payment reminders (by email, phone, or text).

Get Your Credit Report

Once a year, consumers can request a free credit report from each of the three major credit bureaus —Equifax, Experian, and TransUnion—through the federally created website AnnualCreditReport.com.

Review these reports and dispute any errors by informing the credit bureau of inaccuracies. Because you can get three of them, consider spacing out your requests throughout the year to monitor your credit regularly.

In a 2022 survey by the Federal Reserve, 27% of adults in the U.S. reported not "doing okay" financially. The number who reported not living comfortably increased from 2021.

Check Your Credit Score

A good credit score enables you to obtain the best interest rates on loans and credit cards, among other benefits. Monitor your score via a free credit monitoring service. Or, if you can afford to and want to add an extra layer of protection for your personal information, use a credit monitoring service . In addition, be aware of what can raise or lower your scores, such as credit inquiries and credit utilization ratios.

Manage Debt

Use your budget to stay on top of debt by reducing spending and increasing repayment. Develop a debt reduction plan , such as paying down the loan with the highest interest rate first. If your debt is excessive, contact lenders to renegotiate repayment, consolidate loans , or find a debt counseling program.

Invest in Your Future

If your employer offers a 401(k) retirement savings account, be sure to sign up and contribute the maximum to receive the employer match . Consider opening an IRA and creating a diversified investment portfolio of stocks, fixed income, and commodities. If necessary, seek financial advice from professional advisors to help you determine how much money you will need to retire comfortably and develop strategies to reach your goal.

Example of Financial Literacy

Emma is a high school teacher who tries to inform her students about financial literacy through her curriculum. She educates them on the basics of a variety of financial topics, such as personal budgeting, debt management, saving for college and retirement, insurance, investing, and even tax planning. Emma’s students can and will use these concepts for things like renting an apartment, getting a first job, or even just paying for fun activities such as going to the movies.

Understanding concepts such as credit cards, bank accounts, interest rates, opportunity costs, debt management , compound interest, and budgets, for example, could help her students start saving and manage the student loans that they might rely on to fund their college education. It could keep them from amassing dangerous levels of debt and threatening their credit scores.

Similarly, she expects that certain topics, such as income taxes and retirement planning, will eventually prove useful to all students, no matter what they end up doing after high school.

Why Is Financial Literacy Important?

Financial literacy gives an individual the tools and resources they need to be financially secure throughout their life. The lack of financial literacy can lead to many pitfalls, such as overspending and accumulating unsustainable debt burdens. This, in turn, can lead to poor credit, bankruptcy, housing foreclosure, or other negative consequences.

How Do I Become Financially Literate?

Becoming financially literate involves learning and practicing a variety of skills related to budgeting, managing and paying off debts, and understanding credit and investment products. Basic steps to improve your personal finances include creating a budget, keeping track of expenses, making timely payments, being prudent about saving money, periodically checking your credit report, and investing for your future.

What Are Some Popular Personal Budget Rules?

Two commonly used personal budgeting methods are the 50/20/30 and 70/20/10 rules, and their simplicity is what makes them popular. The first entails dividing your after-tax, take-home pay into three areas: needs (50%), savings (20%), and wants (30%). The 70/20/10 rule also follows a similar blueprint, recommending that your after-tax, take-home income be divided into segments that cater to expenses (70%), savings or reducing debt (20%), and investments and charitable donations (10%).

What Are the Principles of Financial Literacy?

There are five broad principles of financial literacy. Though other models may list different key components, the overarching goal of financial literacy is to teach individuals about earning, spending, saving, borrowing, and protecting their money.

Financial literacy is the knowledge of various aspects of personal finance and the ability to make smart decisions about money.

It includes preparing a budget, knowing how much to save, recognizing favorable loan terms, understanding what impacts credit, and distinguishing different investment options that can be used to save for retirement.

The financial skills that come from financial literacy can help individuals handle their personal finances responsibly which, in turn, can help them protect the well-being of their financial futures.

Federal Reserve Bank of San Francisco. “ 2022 Findings from the Diary of Consumer Payment Choice .” Page 6.

U.S. Department of the Treasury. “ Financial Literacy and Education Commission .”

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2022 .” Pages 68, 71.

Bolognesi, Andrea and et al. “ Millennials and Money: Financial Preparedness and Money Management Practices Before COVID-19 .” TIAA Institute Research Dialogue , no. 167, August 2020, pp. 5, 6, 15, 22.

Bolognesi, Andrea and et al. “ Millennials and Money: Financial Preparedness and Money Management Practices Before COVID-19 .” TIAA Institute Research Dialogue , no. 167, August 2020, pp. 13.

Federal Trade Commission. " Free Credit Reports ."

Board of Governors of the Federal Reserve System. “ Economic Well-Being of U.S. Households in 2022 .” Page 5.

MyMoney.gov. " My Money Five ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• SUGGESTED TOPICS
• The Magazine
• Newsletters
• Managing Yourself
• Managing Teams
• Work-life Balance
• The Big Idea
• Data & Visuals
• Reading Lists
• Case Selections
• HBR Learning
• Topic Feeds
• Account Settings
• Email Preferences

5 Ways to Manage Your Personal Finances

• Rakshitha Arni Ravishankar

First, let go of your limiting beliefs about money.

Talking about money can feel awkward, uncomfortable, and even scary. Here are five pieces of advice from our authors on how to feel in control of your personal finances.

• Let go of your limiting beliefs about money.
• Take ownership of your money.
• Always set a timeline for your money goals.
• Build an emergency fund.
• Create a diverse portfolio of investments.

Money can evoke a range of difficult emotions for many of us. This anxiety only grows when we’re living through economically fragile times or don’t come from wealth . It can feel awkward, uncomfortable, and even scary to navigate these feelings when they show up. But know that it’s still possible to make smart decisions that will help you become financially stable .

• RR Rakshitha Arni Ravishankar is an associate editor at Ascend.

Partner Center

Essay on Financial Literacy for Students and Children

Importance of financial literacy, an introduction to financial literacy.

We go to schools, colleges, universities to complete our educated and start earning our livelihood. We take up jobs, practise professions or start our own businesses so that we can earn money to make our living. But which of these institutions make us capable of managing our own hard-earned money? Probably a very few of them. 

Our ability to effectively manage our money by drawing systematic budgets, paying off our debts, making buying and selling decisions and ultimately becoming financially self-sustainable is known as financial literacy. 

Financial literacy is knowing the basic financial management principles and applying them in our day-to-day life. 

Financial Literacy – What does it Involve? 

From simple practices like keeping a track of our expenses and understanding the need to spend money if we like a product to striking a balance between the value of time saved and money lost, paying our taxes and filing of tax returns, finalizing the property deals, etc – everything becomes a part of financial literacy. 

Get the huge list of 500+ Essay Topics here

As human beings, we are not expected to know the nitty-gritty of financial management. But managing our own money in a way that it does not affect us and our family in a negative way is important. We certainly do not want to end up having a day with no money at hand and hunger in our stomach. 

Why is Financial Literacy so Important?

Financial literacy can enable an individual to build up a budgetary guide to distinguish what he buys, what he spends, and what he owes. This subject additionally influences entrepreneurs, who incredibly add to financial development and strength of our economy. 

Financial literacy helps people in becoming independent and self-sufficient. It empowers you with basic knowledge of investment options, financial markets, capital budgeting, etc.

Understanding your money mitigates the danger of facing a fraud-like situation. A few strategies are anything but difficult to accept, particularly when they’re originating from somebody who is by all accounts learned and planned. Basic knowledge of financial literacy will help people with foreseeing the risks and argue/justify with anyone learned and well-informed.

What should you read on / get informed about in Financial Literacy?

• Budgeting and techniques of budgeting
• Direct and indirect taxation system
• Direct tax slabs
• Income and expense tracking 
• Loans and debt – EMI management 
• Interest rate systems: fixed versus floating
• Business and organisational transaction studies
• Elementary Book-keeping and Accountancy
• Cash in-flow and out-flow Statements
• Investment & personal finance management
• Asset management:
• Business negotiation skills and techniques
• Make or buy decision-making
• Financial markets 
• Capital structure – owner’s funds and borrowed funds
• Fundamentals of Risk Management
• Microeconomics and Macroeconomics fundamentals

While there are various media to learn about financial literacy, we recommend that you join a short-term, weekend programme which helps you get financially literate.

Customize your course in 30 seconds

Which class are you in.

• Travelling Essay
• Picnic Essay
• Our Country Essay
• My Parents Essay
• Essay on Favourite Personality
• Essay on Memorable Day of My Life
• Essay on Knowledge is Power
• Essay on Gurpurab
• Essay on My Favourite Season
• Essay on Types of Sports

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Download the App

• Business Essentials
• Leadership & Management
• Credential of Leadership, Impact, and Management in Business (CLIMB)
• Entrepreneurship & Innovation
• Digital Transformation
• Finance & Accounting
• Business in Society
• For Organizations
• Support Portal
• Media Coverage
• Founding Donors
• Leadership Team

• Harvard Business School →
• HBS Online →
• Business Insights →

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

• Career Development
• Communication
• Decision-Making
• Earning Your MBA
• Negotiation
• News & Events
• Productivity
• Staff Spotlight
• Student Profiles
• Work-Life Balance
• AI Essentials for Business
• Alternative Investments
• Business Analytics
• Business Strategy
• Business and Climate Change
• Design Thinking and Innovation
• Digital Marketing Strategy
• Disruptive Strategy
• Economics for Managers
• Entrepreneurship Essentials
• Financial Accounting
• Global Business
• Launching Tech Ventures
• Leadership Principles
• Leadership, Ethics, and Corporate Accountability
• Leading Change and Organizational Renewal
• Leading with Finance
• Management Essentials
• Negotiation Mastery
• Organizational Leadership
• Power and Influence for Positive Impact
• Strategy Execution
• Sustainable Business Strategy
• Sustainable Investing
• Winning with Digital Platforms

5 Reasons Why You Should Study Finance

• 23 Apr 2019

If you find finance intimidating, you’re not alone. When many people think of finance, they envision Wall Street high-rises, fancy suits, and frantic stock tickers.

But it doesn’t need to be intimidating. In fact, anyone can—and should—have a basic understanding of finance.

Here are five reasons why finance is essential knowledge for all professionals, regardless of their role, industry, or seniority level.

Access your free e-book today.

Why You Should Study Finance

1. finance is ubiquitous.

It doesn’t matter if you work in tech or education, consulting or advertising. Your company needs cash flow to do things like pay everyone’s salary, distribute dividends, and reinvest in product innovation.

Even if you don’t manage a budget yourself, finance is at the core of business decision-making. If you’re pitching a project or angling for additional funding, understanding and being able to communicate how you can turn that investment into revenue for your organization will help you make a more convincing argument.

Related: The 4 Finance Skills Every Leader Needs No Matter Their Industry

2. Finance Will Help Your Resume Stand Out

If you're looking for ways to differentiate your resume, finance is a good place to start. Especially if you’re entering the workforce as a young professional without extensive experience, showing you have business knowledge before you’re even in the field can make you a more attractive candidate. This is particularly relevant in non-finance fields , where financial education is less common but no less fundamental to running a successful business.

For example, if you’re hoping to land a managerial position, having an understanding of finance can demonstrate key competencies to employers. Managers with finance skills are able to better understand their team’s impact on the overall company and make well-informed business decisions.

"Whatever business decision that you're going to be making, you want to understand all facets of it," says Harvard Business School Professor V.G. Narayanan, who teaches the online course Financial Accounting . "So there are going to be human resource angles to it. There are going to be marketing angles to it. There are operational angles to it. But there's also: 'What is the impact on the financial statements of this particular decision that you're going to make?'"

Watch the video below featuring Professor Narayanan to learn more about why you should further your financial knowledge if you're in a non-finance role:

3. The Finance Industry Is Constantly Evolving

The world of finance has grown beyond traditional big banks. SoFi, Stripe, and Coinbase may not have existed a decade ago, but they have since revolutionized student loan financing, payment technology, and cryptocurrency, respectively. Understanding finance can help you keep up with the growing field of financial technology, also known as “fintech,” whether you want to work in the industry or become a conscious consumer of its products.

4. You’ll Become a Stronger Problem Solver

Yes, finance involves formulas, Excel spreadsheets, and ratios. But it also involves analyzing these numbers and turning them into actionable business insights. For example, consider the concept of value and its role in business decisions. Learning finance will teach you how to understand the difference between price and value, how to create value, and how the future affects value today.

Learning how to take quantitative data and use it to solve problems and make sound business decisions is a valuable skill that can serve you in your career now and in the future.

Related: Financial Terminology: 20 Financial Terms to Know

5. Finance Is Important Outside the Office, Too

While understanding finance is critical for work, it’s also critical for your fiscal well-being outside the office.

We're faced with financial decisions, small and large, every day. Whether it’s choosing to eat in or order out dinner, paying your gym fees in a lump sum or monthly installments, or turning your hobby into a side hustle, these choices require a basic knowledge of finance.

How to Study Finance

Having a clear understanding of basic financial concepts comes with various benefits and can help you excel professionally . Depending on your specific goals and needs, there are different avenues you can take to hone your financial know-how.

To brush up on your financial terminology and get familiar with some basic concepts, you can start by exploring finance- and business-related articles, websites, and newsletters .

To take a deeper dive into the world of finance, consider enrolling in an online finance course . Choosing a course offered by a top business school can enable you to gain a quality finance education in a format that works for your schedule . In addition, programs that award certificates of completion provide the opportunity to showcase your skills on your resume or LinkedIn profile to help advance your career.

Based on your personal and professional goals, your level of work experience, and other factors, you may choose to pursue a graduate degree in a finance-related field. This could be the right path for you if you’re looking to make a career change or land a position that requires advanced finance skills. In this case, you may find it helpful to prepare for a degree program by taking online courses to build a foundational knowledge of finance.

Related: Should You Go to Business School? 6 Benefits of Strong Business Skills

Understanding Finance Is Critical

No matter how you decide to learn about finance, having these skills can bring success in your professional and personal life.

Why is $1 today worth more than $1 tomorrow? How do you choose where to invest your 401(k)? Knowing these answers is fundamental to developing financial literacy and preparing yourself to make smarter decisions throughout your life.

Are you interested in developing financial literacy? Explore our online finance and accounting courses to discover how you can advance your career by gaining a thorough understanding of financial principles. Not sure which is the right fit for you? Download our free course flowchart .

This post was updated on September 10, 2021. It was originally published on April 23, 2019.

About the Author

• Share full article

Advertisement

Supported by

student opinion

Should All Schools Teach Financial Literacy?

And should students have to understand topics like budgets, consumer credit, student debt, saving and investing in order to graduate?

By Shannon Doyne

Students in U.S. high schools can get free digital access to The New York Times until Sept. 1, 2021.

How well do you think you manage money? Has anyone ever taught you any money-management skills? In general, how “financially literate” do you think you are? For instance, do you know how to budget and save? How to set up a bank account? Apply for financial aid and college loans?

Does your school teach these skills already? If not, do you wish it did? Should passing a financial-literacy class be a requirement for graduating from high school?

In “ Pandemic Helps Stir Interest in Teaching Financial Literacy ,” Ann Carrns writes about the growing interest in teaching students personal financial skills in U.S. schools:

As of early 2020, high school students in 21 states were required to take a personal finance course to graduate, according to the Council for Economic Education , which promotes economic and personal finance education for students in kindergarten through high school. That was a net gain of four states since the council’s previous count two years earlier. “We are making progress,” said Billy J. Hensley, president and chief executive of the National Endowment for Financial Education, a nonprofit group that promotes effective financial education. “I do think the pandemic is bringing more attention to the topic,” he said, noting that after the financial crisis more than a decade ago there was also a flurry of financial literacy proposals in state legislatures. An increasing number of studies support the effectiveness of financial literacy education when taught by well-trained teachers, said Nan J. Morrison, chief executive of the Council for Economic Education. And more teachers now say they feel confident teaching the material. A study released in March by researchers at the University of Wisconsin and Montana State University found significant increases in teacher participation in professional development. Still, the rigor of high school financial education varies. Just six states require high school students to complete a semester-long, stand-alone personal finance course, the council’s 2020 report found. Some states permit shorter courses or include the content as part of another class. In states that don’t require financial instruction, some schools opt to teach it and do an excellent job, but others ignore the subject completely — and they tend to be schools in less affluent districts, Mr. Hensley said.

The article also outlines the specifics on what the curriculum might look like:

Many financial literacy advocates consider a full-semester course the gold standard for personal finance instruction. Rebecca Maxcy, director of the Financial Education Initiative at the University of Chicago, said many courses focused mainly on skills, like writing a check or filing taxes. While those lessons can be helpful, she said, it’s important for courses to include discussions of how personal values and attitudes about money influence behavior, as well as an examination of the financial systems and potential barriers that students will encounter in the world of money. Questions like “Who benefits when you open a bank account?” can prompt meaningful discussions, she said. Some curriculum options, however, offer more condensed, basic instruction. Everfi, a digital instructional company, offers a free seven-session program for high school financial literacy. Students take interactive, self-guided lessons in topics like banking, budgeting and college financing. Sidney Strause, a freshman at Marshall University in West Virginia, said she had taken Everfi’s course as a junior in high school. The lessons were assigned as part of another course she was taking, and typically took 45 minutes to an hour to complete. “It taught me how to budget and save,” she said. “It’s crucial to adulthood.” Sometimes she would do the lessons at home and discuss them with her mother, she said, which led her mother to create a budget and set financial goals.

Students, read the entire article, then tell us:

What, if anything, in this article resonates with you and your experiences with learning about money?

Do you think schools should offer courses on financial literacy? Should taking them be mandatory for graduation?

What topics should financial literacy instruction in schools cover? In what grade should students start learning about it?

One of the experts quoted in this piece says that it’s important for courses to include discussions of how personal values and attitudes about money influence behavior. What are your general attitudes toward money, and where do you think you learned these attitudes? For instance, how much does making money factor into your goals for a future career?

Why do you think that some people believe the interest in teaching students skills about managing money increased during the pandemic? In this time, did you experience or witness any events that made you wish you had some knowledge of personal finances — or that made you grateful for what you know?

Earlier this year, the price of GameStop stock soared when individual traders, including some teenagers, purchased many shares as a way to both make money and retaliate against large hedge funds that forecast the stock losing value. Did you learn about this situation as it happened? Did you participate? Did any of your teachers talk about it, and if so, what did they say? If you have specific thoughts to contribute, answer our Student Opinion question, “ Should All Young People Learn How to Invest in the Stock Market? ”

About Student Opinion

• Find all of our Student Opinion questions in this column . • Have an idea for a Student Opinion question? Tell us about it . • Learn more about how to use our free daily writing prompts for remote learning .

Students 13 and older in the United States and the United Kingdom, and 16 and older elsewhere, are invited to comment. All comments are moderated by the Learning Network staff, but please keep in mind that once your comment is accepted, it will be made public.

Essay about The Importance of Personal Finance

This is a sample essay on the importance of personal finance. Students can use it as an overall guide on how to organize and structure your own essay on the same topic. If you have problems with such writing, turn to  CustomWritings.com , an  essay writing service for professional academic help. In this case, you will get a professional to write the paper for you. This option is of much importance for those who want to see how real experts work on such pieces of writing.

It’s not an exaggeration to say that money is one of the most important aspects of living life. Many people spend the entirety of their lives needing money, training to make more money, or actually making it so they can afford all of life’s many expenses. That said, one cannot deny that the modern days numerous expenses call for personal financing and management for almost everyone, but especially students. It’s no secret that many college students struggle with their finances, and while this scenario can be somewhat attributed to the rising cost of a college education, there have also been many arguments supporting the notion that students simply do not understand the importance of managing their finances. This sample piece discusses the value of personal finance in a student’s life.

The primary reason many students suffer financially throughout their college years is that they are often impulsive, mostly due to being young and relatively inexperienced in living on their own. Most students do not fully understand the true extent of expense when living solo, often leading them to put less value on money for necessity rather than amenities. A lack of inhibition is to be expected to some extent, and there’s not much that can be done about it outside of life experience itself. Personal financing is an excellent alternative, due to its inherent nature of bringing money to the forefront of the student mind. The first step to solving any one problem, in this case, a student’s lack of awareness or experience on an issue, is to make the issue obvious so that it can be studied and accounted for. In this light, personal finance is important to students simply so that they may realize just how vital financial management is when living on your own.

Naturally, personal finance serves a very important functional purpose for students as well. Once the need for personal finance makes itself obvious, that usually equates to budgeting. Budgeting one’s finances is one of the most effective ways of countering the impulsiveness of youth, primarily by not condemning it outright. Being able to spend money on things one does not need but does enjoy shouldn’t be criticized, so long as it is done in moderation and secondary to necessities, which budgeting helps facilitate. By taking the time to partition one’s resources according to their needs, not only does a student learn the details of their living expenses, but they ensure that they can be met. Furthermore, this partitioning of money lets the student know exactly how much they have left over to satisfy their secondary wants following their primary needs. In this way, personal finance, and the budgeting it entails accounts for a student’s needs but does not punish them for also satisfying their wants, within reason. Not only does this lead to greater financial stability for them, but it helps keep them content as well.

Finally, and perhaps most importantly, personal finance helps facilitate fiscal responsibility in students that have, for the most part, been able to rely on the financial abilities of their parents throughout most of their lives. There is much to learn about the financial world, especially once you are living on your own. Many students do not know the true value of an investment, saving money on a monthly basis, or the dangers of relying on credit, despite how important it is to build that credit. To call the financial world complicated would be an understatement, which is exactly why personal finance is such a broad term; and why learning its intricacies is valuable for anyone, not just students. In truth, the value of personal finance cannot truly be ascertained since it includes such a broad spectrum of knowledge, skills, and tricks, but that value also cannot be overstated enough. It is a valuable life skill that will serve any individual for as long as they live, but students, who are usually facing the world alone for the first time, can reap more benefits from personal finance than nearly anyone else.

In short, the value of personal finance to students is potentially even more significant than it is for the average member of society. There’s no real specific reason for why other than the simple fact that knowing how to manage your finances in useful no matter who you are or what you do. All other factors notwithstanding, there’s truly no argument to be made against an individual learning as much as they can about personal finance. But for a younger person that has less life experience than others, the benefits of learning and mastering the many facets of personal finance are great. Aside from teaching them more about managing their own money in a way that still allows them to indulge to an extent, they will also learn the value of many different financial tactics and the risks of relying too much on riskier financial alternatives. Going into full detail on the values of personal finance for a student is not possible in this brief discussion, but in reality, it doesn’t need to be. That personal finance is a valuable skill to learn is obvious, regardless of what member of society is in question.

References:

• Basu, Sudipto. “Personal Finance for College Students.” One Cent At A Time, 30 Dec. 2017, onecentatatime.com/personal-finance-for-college-students/.
• Clark, Sophia. “Why Personal Finance Education Is Important.” TechBullion, 18 Feb. 2018, www.techbullion.com/why-personal-finance-education-is-important/.
• https://www.BlueShoreFinancial.com, BlueShore Financial: “Ten Reasons Why Financial Planning Is Important.” Ten Reasons Why Financial Planning Is Important | BlueShore Financial, 2018, www.blueshorefinancial.com/ToolsAdvice/Articles/FinancialPlanning/TenReasonsWhyFinancialPlanningIsImportant/.
• Joy, Devin. “Personal Finance for College Students | Lesson Plans and Workbooks.” InCharge Debt Solutions, InCharge Debt Solutions, 2018, www.incharge.org/financial-literacy/resources-for-teachers/college/.
• “Personal Finance Lessons: Budget Planning for College Students | SunTrust Resource Center.” SunTrust, 2018, www.suntrust.com/resource-center/personal-finances/article/personal-finance-lessons-budget-planning-for-college-students.
• Sherman, Brad. “The Importance of Personal Finance Knowledge.” Sherman Wealth Management | Financial Planning in MD and DC Metro, 1 Nov. 2016, www.shermanwealth.com/the-importance-of-personal-finance-knowledge/.
• Zucchi, CFA Kristina. “Why Financial Literacy Is so Important.” Investopedia, Investopedia, 19 Mar. 2018, www.investopedia.com/articles/investing/100615/why-financial-literacy-and-education-so-important.asp.

Related Posts

Privacy Overview

What is an income statement?

• Key components of an income statement 
• Why they matter
• How to read an income statement 

What is an Income Statement?

Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

• An income statement is a financial document that details the revenue and expenses of a company.
• Some investors and analysts use income statements to make investing decisions.  
• The income statement, along with additional financial documents, is required to be filed with the Securities and Exchange Commission (SEC).

An income statement is one of three major financial statements used to evaluate the health of a company, along with the balance sheet and cash flow statement . There are several terms you'll need to understand in order to know how to read an income statement. 

An income statement is a financial statement that outlines a company's gains, losses, revenue, and expenses during a specific period. 

Also called a Profit and Loss (P&L) Statement or a statement of revenue and expense, the income statement is one of three major documents, along with the cash flow statement and the balance sheet , that provide information on a company's financial results during a specified time frame. 

Key components of an income statement  

There are several key components of an income statement, and knowing them can go a long way toward helping you interpret one of these documents effectively. 

Revenue 

Revenue is the amount of money the company brought in during the reporting period. With revenue, it may be important to note any trends to determine whether the company is making more money over time or if sales are slowing down. 

Expenses 

This section, crucial to analyzing an income statement, details how much the company has spent. Similar to revenue, it may be important to note trends to see if the company is spending more or if they're becoming more efficient over time. When looking at expenses, "We should consider whether the expenses grow in proportion to revenue and the drivers of these expenses," says Patrick Badolato, PhD, CPA, an associate professor in the accounting department at the McCombs School of Business at the University of Texas. 

Expenses can include many different line items, for example interest paid on debt, depreciation and amortization, rent and overhead, as well as money paid toward salaries and benefits. 

For the sake of clarity, depreciation is an accounting measure to account for the cost in the loss of value for tangible assets of the company, whereas amortization is an accounting technique to lower the book value of debt over time. 

Expenses also include cost of goods sold (COGS), which is the amount spent on the production of the products or services sold. For a company like Apple, it would include the glass to make the phone screen or the chips that go into the iPhone. 

Other costs that would be counted under expenses would be operating and non-operating expenses. Operating expenses are the cost to bring the product to the market. This could include things like marketing, payroll, and overhead expenses, such as insurance and rent. Non-operating expenses could include things that do not directly relate to core business functions. It may include things like contributions to pension plans or dividends to shareholders. 

Another major consideration is taxes, which of course cuts into any financial results a company generates. 

Net income 

Net income represents the total income left over after all deductions and expenses, including taxes, have been taken out. This is the last line on the income statement, frequently referred to as the bottom line, and it tells you what a company's profit or loss was during a specific time period. 

Why income statements matter

The income statement is important for a wide range of parties, including investors and people responsible for running a company (its executives and managers). 

"The income statement should be used by anyone trying to understand the business conducted as well as the profitability of a company," says Badolato. 

Assesses profitability

One simple way an income statement can come in handy is by providing a sense of just how profitable a company really is. Is the company in question making money? 

Income statements can help answer this question, along with providing some excellent insight into why, exactly, a company is experiencing its current financial performance. 

Informs business decisions 

By reviewing a company's income statement, you can quickly pinpoint areas that have room for improvement. For example, a company could cut costs in one area and put more money into others, such as sales and marketing, that could potentially fuel expansion. 

Attract investors 

Investors may use income statements, along with other financial statements, to make investing decisions and determine the financial health of a company. 

For example, an increasing amount of sales from year to year might be attractive for a potential investor and can be found in the first line of an income statement. Conversely, if costs are rising this can also be seen on the income statement and may lead an investor to ask more questions about the long-term profitability of the company. 

Investors and financial analysts also use the income statement to derive popular financial ratios like Earnings Per Share (EPS) .

Earnings per share is a measure that compares a company's net income compared to the outstanding shares. The price-to-earnings ratio, or P/E ratio , is another commonly used metric that factors in the company's stock price in relation to EPS. When comparing companies, EPS and the P/E ratio can help differentiate two companies in the same category and help an investor make a more sound investing decision, but both use information provided through the income statement. 

"The equation driving the Income Statement is: Revenues – Expenses + Gains – Losses = Net Income," says Badolato. 

Income statements are also important to regulators. All public companies are required to file a Form 10-K each year with the Securities and Exchange Commission (SEC) and Form 10-Q each quarter which include the income statement and other financial documents and disclosures. 

Income statement analysis

When analyzing income statements, there are two primary methods that are used: vertical analysis and horizontal analysis.

Vertical analysis shows each item on a financial statement as a percentage. An example of this would be the COGS expressed as 35% of the total revenue. This type of analysis can be useful when comparing with other companies in the industry. 

Horizontal analysis is used to review a company's performance over two or more periods by stacking each line item directly next to each other from the previous period. Instead of looking at one income statement at a time from different periods, horizontal analysis compares them side-by-side in one view. 

How to read an income statement 

Below is the 2021 quarterly income statement from Ford's Form 10-Q . One of the first things that you will notice is that the report is using horizontal analysis. This is because the report is comparing the second quarter of 2020 to the second quarter of 2021 as well as the first half of 2020 and the first half of 2021. 

In the first section under Revenues, you'll see each of Ford's major revenue streams, including car sales under Automotive, Ford Credit, and Mobility. In the notes section of the 10-Q, the Mobility line refers to Ford's autonomous vehicles and related business as well as its equity stake in Argo AI.

Next in the cost and expenses section, you'll notice where Ford is spending its cash. The bulk of those expenses fall under cost of sales, which is another name for the cost of goods sold. You can also see that costs have increased from the second quarter of 2020 to the second quarter of 2021 resulting in a net income of $561 million during the second quarter and $3.8B during the first half of 2021 in the final column on the right. 

Income statement vs. balance sheet 

Both income statements and balance sheets provide important details about how a company uses its cash and other assets, but there are a few key differences between the two.

Think of an income statement like a financial timeline, whereas a balance sheet is a snapshot at one point in time. This is because income statements provide details on the amount of money made and spent during a period. The income statement essentially answers the following questions: How much money did the company make? How was that money spent? Did the company make a profit? 

The balance sheet, on the other hand, tells you how much the company has in assets, liabilities and shareholder's equity. The balance sheet follows a simple formula:

Asset = Liabilities + Shareholder's equity

Like the name mentions, the figures on the balance sheet must match as any increases or decreases must be offset. Unlike the income statement, it does not provide information on how much money the company has made or lost, it only provides the amount of debt, cash and other assets that the company owns at that point in time. 

While these financial statements are different, both the income statement and balance sheet along with the cash flow statement are still linked and should be used together to determine a more holistic financial picture of a company. 

Income statements: Conclusion

The income statement is a good entry point to understand and evaluate a company's revenue and costs, but it's important to keep in mind that it's not a document that can tell the full story. 

"Financial statements are designed to work as a system and not as stand-alone statements," adds Badolato. "The Income Statement is only one piece in understanding the financial performance of a business. Using one financial statement without the others and other publicly available information — such as the footnotes in a financial filing — would be similar to betting before looking at one's cards."

The frequency can vary, but usually, companies prepare income statements either quarterly or annually. 

An income statement shows a company's financial performance during a specific time frame, whereas a balance sheet shows a company's assets and liabilities at one point. 

Companies release income statements in their financial reports, and you can also find them on the investor relations sections of corporate websites. 

An income statement can display a negative net income, which indicates that a company suffered a loss during a specific period. 

You can use the information on an income statement to calculate key ratios like gross margin, operating margin and earnings per share. 

• Main content