Why Is Personal Finance Important?

If the thought of financial planning makes you wince, sigh, or roll your eyes, you’re not alone. For all the non-business-whiz-kids out there, personal finances can feel like a mountain of information that you’ll never be able to climb. 

In reality, there are a few accessible and basic principles that can help you and your family stay on a safe and thriving financial path, beginning with financial education. 

Looking for answers to the questions: “what is personal finance?” and “why is it important?” We’ve got the basics covered below, along with practical money managing tips to get started. 

What Is Personal Finance?

At a foundational level, personal finance refers to the contents, planning, and care of your resources and obligations. These are comprised of: 

• Assets including real, personal, and intangible property with identifiable value
• Debts such as secured and unsecured loans and revolving credit 
• Income from all earned, passive, portfolio, benefit, and gift sources
• Expenses, both fixed and variable

Personal finance in terms of active management helps you: 

• Understand what you currently own, owe, and are due
• Grow your assets and earnings over time
• Reduce fees and costs associated with debts and expenses

Why Does Personal Finance Matter?

Understanding the terms and principles can help, but why is it important to have a personal financial plan? 

Taking control of your finances—no matter how big or small the dollars are—can provide guidance, protection, and control in your life. No amount of money allows you to live forever in a state of perfect bliss, but financial planning helps you build a thicker cushion between your family and the hardships life throws at you and helps you make more informed financial decisions. 

The decisions and arrangements you make with your personal finances can help you: 

• Recover and rebuild from an accident, crime, or natural disaster 
• Meet your expenses after a job loss
• Access optimal healthcare treatments
• Receive enough income after a disability
• Maintain a home and standard of living after a death in the family 
• Retire from working in your later years

While successful financial planning is the route to building wealth over time, does money buy happiness in addition to providing protection against stresses and hardships that it can reduce? 

Recent analysis of two respected research studies (Kahneman and Deaton in 2010 and Killingsworth in 2021) concludes that there is indeed a correlation between happiness and income level, although it plateaus somewhere around the six-digit level.¹

Actionable Steps of Personal Financial Planning

If you’ve been working on money matters by common sense alone, you’ve likely picked up some good financial management habits. But, like any aspect of your life, personal finance requires intentional planning, action, and follow up in order to identify and meet goals. 

There are four basic steps to creating a financial plan:

1. Establish Goals

We’re looking for a range of life goals that start with your current reality, and extend to what can be possible to achieve financial stability. These might include: 

• Set up an emergency savings fund
• Go on vacation this fall
• Buy a house in five years
• Pay for a wedding
• Start a new business
• Retire at age 60

Goals help motivate us toward specific outcomes instead of just figuring out how to save money. They can make a difference in deciding whether to take on overtime hours, train for a new position, or skip the daily trip to Starbucks.  

Making and saving money helps you live the life that you want to live with financial freedom, and avoid some of the effects of the inevitable challenges your family will face. Setting goals is a way to positively connect your finances to your values. 

2. Create a Budget

What money is coming in, going out, growing, or costing you interest and fees? Before you figure out how to set your goals into action, you need to know what your current financial situation is, as close to the penny as possible. This is why it’s helpful to know how to start a budget.

A budget primarily identifies two components of your money: income and expenses. It provides a monthly view of the amount and timing of: 

• All income sources
• Debt repayments for credit cards and loans
• Fixed expenses, such as mortgage or rent, insurance, and some utilities
• Variable expenses, such as water, energy, grocery, and gas costs
• Contributions to savings, retirement plans, and investments
• Cash expenses
• Whether you’re living under, at, or above your income level

You can set up a budget on an app or a spreadsheet; pen and paper can be a starting point, but you’ll want the ability to make calculations, sort charges into subcategories, and compare figures from month to month. Check with your credit union or bank for suggestions on downloading or connecting your spending plan data to budget software.

3. Make a Plan

If your goals tell you what you want to happen, and your budget tells you what’s actually going on, your plan is the map between the two. Adjusting your budget to help meet your financial goals could include: 

• Identifying savings opportunities, like fewer meals out or a lower-cost mobile provider
• Increasing your retirement plan contributions
• Paying off credit card balances monthly

Hopefully you’ll identify some changes that can be easily addressed, but your personal financial management plan may also break down larger steps. For instance, if your monthly expenses leave you living paycheck to paycheck, you may want to set a goal to increase your income.

Let’s say your goal is to secure a raise at your current job. The plan that backs up this goal might break down into steps such as: 

1. Review past annual review remarks and address areas for improvement.
2. Take continuing education courses provided by the company.
3. Watch videos on assertiveness and how to ask for a raise.
4. Present the boss with a plan that highlights knowledge, accomplishments, and improvements, and confidently request a 15% raise. 

4. Analyze and Adapt

If we continue with the example above of a goal to increase income, then what happens if the company says they’ll consider a raise next year but can’t grant your request now? You need a way to keep moving forward toward the goal rather than being thwarted when one approach meets a stumbling block. In this case, perhaps you switch focus to researching opportunities at other companies that will provide an immediate income boost. 

A review and adjustment cycle for your financial planning helps you evaluate actions and results, and make changes to keep moving forward toward financial security. When you’re just getting started, you may want to do either a monthly or quarterly review and revision. 

Eventually, annual or biannual reviews can be used to tweak numbers, goals, and plans to reflect the changes in your lifestyle and circumstances over time. 

Connect with Experts

A full deep dive into financial planning could mean spending all day, every day, on it.

The good news is that there are already people who’ve spent that time learning the theories, philosophies, and tactics to help you expand your income, grow wealth, and protect your assets—and they’re more than ready to answer that “why is personal finance important” question.

Some areas that can benefit from guidance include: 

• Meeting basic needs during financial stress
• Establishing emergency, short- and long-term saving structures
• Insurance planning for protection and investment 
• Paying down high debt, including consolidation and repayment prioritization
• Investing in new-to-you types of wealth-building
• Retirement planning that maximizes your access to different types of accounts
• Tax planning to minimize how much is taken from you in taxes
• Bankruptcy planning 
• Credit repair
• Diversification of investments to keep your assets safe through economic ups and downs
• Estate planning

Financial planning help isn’t just for the richest one percent. There are resources for all income and asset ranges. Check out the financial literacy educational resources, tools, and advisory services available from: 

• The Consumer Financial Protection Bureau (CFPB)²
• Free or low-cost credit counselors³
• The SEC’s Investor.gov site⁴
• Your credit union or bank
• An employer or 401(k) provider
• Online brokers and investment firms

How Home Equity Can Support Your Personal Finance Goals

When you’re considering how to work on your financial goals and build wealth, don’t forget to check on the current value of your equity and consider how you can leverage it. 

For many families, home equity is one of the largest—and most underutilized—assets in a financial portfolio. Real estate property values tend to increase over time, plus you’re paying down your mortgage with each monthly payment. 

If you’re looking to unlock the cash value of your equity without hiring movers and finding a new place to live, a sell and stay transaction may work for you. With Truehold's sell and stay transaction, you can continue living in your home as a renter and leverage your home equity without taking out loans. 

A sell and stay transaction combines the sale of your home with a lease agreement. Along with freeing up cash to invest or use for critical needs, you’ll also gain freedom from the cost and stress of essential repairs, property tax, and property insurance.

Ready to learn more? Our representatives can tell you more and help discover whether Truehold is the right solution for you. 

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Sources: 

1. Knowledge at Wharton. Does Money Buy Happiness? Here’s What the Research Says. https://knowledge.wharton.upenn.edu/article/does-money-buy-happiness-heres-what-the-research-says/‍
2. Consumer Financial Protection Bureau (CFPB). Consumer resources. https://www.consumerfinance.gov/consumer-tools/‍
3. Consumer Financial Protection Bureau (CFPB). What is credit counseling? https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/‍
4. Investor.gov from U.S. Securities and Exchange Commission Office of Investor Education and Advocacy. Free Financial Planning Tools. https://www.investor.gov/free-financial-planning-tools