What is '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.

RELATED TERMS
  1. Personal Spending Plan

    Similar to a budget, a personal spending plan helps outline where ...
  2. Finance

    The science that describes the management, creation and study ...
  3. Personal Income

    Total compensation received by an individual. Personal income ...
  4. Associate In Personal Insurance ...

    A designation earned by professionals looking for training in ...
  5. Personal Financial Statement

    A document or spreadsheet outlining an individual's financial ...
  6. Rational Choice Theory

    An economic principle that assumes that individuals always make ...
Related Articles
  1. Investing

    What Does Finance Cover?

    Finance is the study of banking, leverage, credit, capital markets, money and investments, along with how they are used by individuals and companies.
  2. Investing

    The Difference Between Finance And Economics

    Learn the differences between these closely related disciplines and how they inform and influence each other.
  3. Financial Advisor

    Are You Saving Too Much?

    "Spend now! Don't worry about retirement," say some experts. Could they possibly be right?
  4. Investing

    The Difference Between Finance And Economics

    Finance and economics are often taught as separate subjects, but they are interrelated disciplines that influence one another in many ways.
  5. Financial Advisor

    Financial Planning: Can You Do it Yourself?

    There's no shortage of financial advice out there, but do you have the inclination, time and skills to do it yourself?
  6. Small Business

    What is Equity Financing?

    Companies that are short on cash may need financing to pay for short-term needs or long-term capital expenditures.
  7. Retirement

    Retirement Savings Tips For 35- To 44-Year-Olds

    Learn how the "sandwich generation" can save for retirement while taking care of their kids and parents.
  8. Financial Advisor

    6 Personal Finance Tips to Start 2016

    The new year is an excellent opportunity to review your personal financial plan and take steps to get on track to meet your goals in 2016 and beyond.
  9. Retirement

    Retirement Savings Tips For 25- To 34-Year-Olds

    Keep saving when mortgages, marriages and debt demand your attention.
  10. Retirement

    Retirement Savings Tips For Young People

    Learn how to avoid the bad habits that keep the average young adult from saving.
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Answer >>
  2. Other than accounting, what does a corporate finance job involve?

    Understand the various levels of positions and titles of a corporate finance job. Learn what a corporate finance job involves ... Read Answer >>
  3. How soon should I start saving for retirement?

    Learn about the basics of retirement planning and the reasons why it is so advantageous for individuals to start saving for ... Read Answer >>
  4. What is the difference between macroeconomics and finance?

    Dive into the world of economics by learning the key differences between macroeconomics and finance. These ideas help investors ... Read Answer >>
  5. What are the benefits for a company using equity financing vs. debt financing?

    Learn what some of the principal advantages are for a company that chooses to utilize equity financing in preference to debt ... Read Answer >>
  6. What are the best ways to plan for retirement?

    Learn the basic steps to creating a solid retirement plan that can support you and your family, and find out how to manage ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center