This is an interesting question that has been popping up again and again as I continue this blog. It’s becoming clear to me that my definition of personal finance is quite a bit wider than the definition others have of that term, so I decided to explore what exactly personal finance means in my book and how that reflects to the stuff I write about here at The Simple Dollar.
If this sounds rather boring, just bear with me – I think it will get interesting by the end of it.
First of all, here’s the definition of personal finance from Wikipedia:
Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial risks and future life events.
So what we have here are four major areas to cover:
Obtaining money This is the area that I write about that most people view as being a pretty big stretch. This, to me, includes career development, personal development, employment opportunities, education, and so on.
Planning for money Financial planning includes budgeting, but it also includes things like living wills, trusts, insurance, and such things. In effect, every time you consider what you’re going to do with money in the future – or what your estate will do with your money – you’re doing financial planning.
Saving and investing money When most people think of personal finance, this is the area they zoom in on. Now that you have the money, what are you going to do with it? A big part of personal finance is knowing where to put your money so that it will grow for the future.
Spending money What about the rest of the money? It’s spent on stuff. Finding good deals, being frugal, and knowing how to be a smart consumer are all key portions of evaluating how to spend money.
There’s one key ingredient, though, that’s missing from these four parts, and that’s you. Understanding yourself is the biggest piece of the puzzle for personal finance success. What makes you tick? How much risk can you stand? What are your weaknesses? What kind of things can you do to maximize your strengths and minimize your weaknesses? I often talk about personal finance solutions on here that cause many readers to wonder what the point is, or to raise an eyebrow. The truth is that no solution works for everyone.
In my opinion, the best personal finance resources are the ones that don’t answer the questions for you, but show you how to answer them for yourself. This is what makes Money Magazine so popular, in my opinion; they use a lot of examples of real people, lay out a few basic principles that everyone has in common, and then use those principles in concert with the people to build a personal finance answer. The value in those articles isn’t that they tell you how to live your own life, but that they show you how to apply basic ideas.
That’s really what personal finance is about: taking ideas that seem to be common sense and then applying them over and over again to various dimensions of life. Sometimes, the application seems obvious to you; other times, it can take you by surprise. The twist is that the things that seem obvious to some are the ones that take others by surprise, and vice versa.
Every article that appears here is intended to help someone with their financial situation. You might look at that article and just shrug your shoulders and think, “That’s not me,” and I expect that every reader I have does that at least some of the time. The thing is, the principles that really make you say “a-ha!” are the same ones that make you shrug your shoulders, just put into a different context. That’s what makes personal finance personal – and makes it endlessly interesting to me.