What, Exactly, is “Personal Finance”?

Chances are, you’ve come across the phrase “personal finance.” Maybe you’ve used it. Maybe you searched for it and that’s why you’re here. But have you thought about exactly what it means? Something about individuals, something about money. It turns out that, properly defined, personal finance is richer, deeper, and even more important than it appears.

Like each of us, you’re a unique individual. Sure, you share some characteristics with others, and that’s no surprise. You’re influenced by your parents, family, friends, teachers, neighbors, culture, and country. And, while psychologists and philosophers are still trying to pin down “human nature,” whatever exactly it is, you’ve got it! But other characteristics are 100 percent yours—even identical twins have different personalities and perspectives.

All those characteristics, whether common or unique, help shape what you want out of life. Are you trying to build a safe and secure home for your family? Are you worried about the future, or confident that it’ll all work out fine? Do you value experiences more than possessions, or vice versa? Are you highly competitive, or more fulfilled in supporting others as a team player—or maybe you get kicks both ways?

Money turns out to be stunningly intimate. Your answers to questions like these shape how you view money and, therefore, how you manage your personal finances.

Personal finance strategy is about choosing monetary approaches that’ll work for you, based on your personality, values, and goals. Because, even if your current approach isn’t working, any new personal finance strategies you pursue still need to reflect who you are—or it’s likely you won’t be comfortable with them, and they probably won’t work for you.

This is what makes personal finance management so very personal. And it’s why many financial advisors so often say that personal finance starts with being honest with yourself about what really matters to you.¹

Not all, but many of the financial goals people set for themselves either involve accumulating more money than they currently have or setting funds aside to meet a desired goal. For example, saving for college or a vacation. Buying a home. Preparing for retirement. Helping your children get started on financial independence, leaving them a legacy, or making sure you won’t be a burden to them.

But building wealth requires dealing with a closely related issue: risk.

Humans have always had to make judgments about risk. (“Shall I go pick berries? I’m hungry, but there might be a lion out there.”) We all make those judgments—and, as behavioral economists have discovered, we tend towards similar biases when we do.² (For example, most of us worry more about losing money than we are pleased about winning the same amount.)

That said, some people are bigger risk-takers than others. Personal finance involves respecting your personal view of risk—though most financial advice would discourage you from behaving too recklessly with your hard-earned money.^3,4

So, how can personal finance management help you accumulate more money with a level of risk appropriate for you? First, by identifying ways to spend less and save more. Experts typically recommend personal finance strategies for cutting day-to-day or big one-time expenses, or avoiding fees you shouldn’t have to pay³—for example, reducing interest payments, consolidating debt, or finding tax credits you weren’t aware of. Sometimes, personal finance strategy might also help you earn more—perhaps by helping you plan for an education credential that could earn you a raise or promotion.

Often, though, personal finance also involves helping you make better decisions about growing the money you have. That means investing—and choosing how to invest. Lower-interest, relatively safe savings accounts, CDs, or U.S. treasury bonds? Individual stocks? Corporate or municipal bonds? Mutual funds or exchange-traded funds? Annuities?

Personal financial planning involves figuring out which options make the best sense for you, based on your goals, how soon you’ll need the money, and—again—how you view risk. (One common personal finance strategy for controlling risk is diversification: purchasing different kinds of assets that tend to react differently to a given stimuli, or increase and decrease in value at different times, reducing the risk that they’ll all decrease in value together.^3,5) You can also consider:

• How much the investments cost. You don’t want too much of your profits eaten up by fees.
• How much you’ll pay in taxes. What matters is what you can keep.
• How the overall economic outlook may affect your investments.