Personal Finance

DEFINITION of 'Personal Finance'

Personal finance defines all financial decisions and activities of an individual or household, including budgeting, insurance, mortgage planning, savings and retirement planning.

BREAKING DOWN 'Personal Finance'

All individual financial activities fall under the purview of personal finance; personal financial planning generally involves analyzing your current financial position, predicting short-term and long-term needs and executing a plan to fulfill those need within individual financial constraints.  Personal finance is a very individual activity that depends largely on one's earnings, living requirements and individual goals and desires.

Among the most important aspects of personal finance are:

  • Assessing your current financial position - looking at expected cash flow, current savings, etc.
  • Buying insurance to protect yourself from risk and making sure your material standing is secure
  • Calculating and filing taxes
  • Savings and investment
  • Retirement planning

As a specialized field, personal finance is a fairly recent development, though forms of personal finance have been taught in universities and schools as "home economics" or "consumer economics" since the early twentieth century. The field was initially disregarded by male economists, as "home economics" appeared to be the purview of home-making women.  However, more recently economists have repeatedly stressed widespread education in matters of personal finance as integral to the macro-economic performance of the economy.

Market theory and practice is largely guided by assuming the presence of the invisible hand: the idea that all consumers in a market economy will act rationally, or in their own self-interest.  In theory, this makes market fluctuations predictable and provides assurance that their movements have been in the interest of the consumer.  However, scholars in the late twentieth and early twenty-first centuries began to question that assumptionarguing that consumers actually act irrationally as a result of under-education in a more complicated and less comprehensible economy.  

Many consumers simply do not have the information to make the most rational financial decisions for themselves, or they are manipulated by circumstance or misinformation to perceive a decision as being more rational than it actually is.  As such, many colleges and universities have begun to offer personal finance courses, and almost all media publications regularly produce material doling out personal finance advice to consumers.

Matters of personal finance include, but are not limited to, the purchasing of financial products for personal reasons, like credit cards, life and home insurance, mortgages and retirement products. Personal banking is also considered a part of personal finance, including checking and savings accounts and new, 21st century banking products like Venmo.

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