What Is Personal Finance, and Why Is It Important?

By 

Will Kenton

Updated January 22, 2025

Reviewed by 

Michael J Boyle

Fact checked by 

Vikki Velasquez

Definition

Personal finance is the practice of managing your money as well as saving and investing.

What Is Personal Finance?

Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, retirement, tax, and estate planning. The term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.

Individual goals and desires—and a plan to fulfill those needs within your financial constraints—also impact how you approach the above items. To make the most of your income and savings, it’s essential to become financially savvy—it will help you distinguish between good and bad advice and make intelligent financial decisions.

Key Takeaways

• Few schools have courses on managing your money, so it is important to learn how through free online articles, courses, blogs, podcasts, or books.
• The core areas of managing personal finance include income, spending, savings, investments, and protection.
• Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, paying off debt, using credit cards wisely, saving for retirement, and much more.
• Being disciplined is important, but it’s also good to know when you shouldn’t adhere to the guidelines.

The Importance of Personal Finance

Personal finance is about meeting your personal financial goals. These goals could be anything—having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It depends on your income, spending, saving, investing, and personal protection (insurance and estate planning).

Not understanding how to manage finances or be financially disciplined has led Americans to accumulate enormous debt. In Q3 2024, the Federal Reserve Bank reported household debt had increased by $3.8 trillion since December 2019, prior to the recession. In addition, the following balances increased from the second quarter of 2024 to the third:1

• Credit card debt: Up by $24 billion
• Auto debt: Up by $18 billion
• Student debt: Up by $21 billion
• Mortgage debt: Up by $75 billion
• Home equity line of credit: Up by $7 billion

Americans are taking on an ever-increasing amount of debt to finance purchases, making managing personal finances more critical than ever, especially when inflation is eating away at purchasing power and prices are rising.

Areas of Personal Finance

The five areas of personal finance are income, saving, spending, investing, and protection.

Income

Income is the starting point of personal finance. It is the entire amount of cash inflow that you receive and can allocate to expenses, savings, investments, and protection. Income is all the money you bring in. This includes salaries, wages, dividends, and other sources of cash inflow.

Spending

Spending is an outflow of cash and typically where the bulk of income goes. Spending is whatever an individual uses their income to buy. This includes rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel, and entertainment.

Being able to manage spending is a critical aspect of personal finance. Individuals must ensure their spending is less than their income; otherwise, they won’t have enough money to cover their expenses or will fall into debt. Debt can be devastating financially, particularly with the high interest rates credit cards charge.

Saving

Savings are the income left over after spending. Everyone should aim to have savings to cover large expenses or emergencies. However, this means not using all your income, which can be difficult. Regardless of the difficulty, everyone should strive to have at least a portion of savings to meet any fluctuations in income and spending—somewhere between three and 12 months of expenses.

Beyond that, cash idling in a savings account becomes wasteful because it loses purchasing power to inflation over time. Instead, cash not tied up in an emergency or spending account should be placed in something that will help it maintain its value or grow, such as investments.

Investing

Investing involves purchasing assets, usually stocks and bonds, to earn a return on the money invested. Investing aims to increase an individual’s wealth beyond the amount they invested. Investing does come with risks, as not all assets appreciate and can incur a loss.

Investing can be difficult for those unfamiliar with it—it helps to dedicate some time to gain an understanding through reading and studying. If you don’t have time, you might benefit from hiring a professional to help you invest your money.

Protection

Protection refers to the methods people take to protect themselves from unexpected events, such as illnesses or accidents, and as a means to preserve wealth. Protection includes life and health insurance and estate and retirement planning.

Personal Finance Services

Several financial planning services fall under one or more of the five areas. You’re likely to find many businesses that provide these services to clients to help them plan and manage their finances. These services include:

• Wealth management
• Loans and debt
• Budgeting
• Retirement
• Taxes
• Risk management
• Estate planning
• Investments
• Insurance
• Credit cards
• Home and mortgage

Personal Finance Strategies

The sooner you start financial planning, the better, but it’s never too late to create financial goals to give yourself and your family financial security and freedom. Here are the best practices and tips for personal finance.

Note

The 2022 Investopedia Financial Literacy Survey surveyed 4,000 adults and found that most Americans are concerned about personal finance basics, retirement f