Many finance professionals say that the best thing you can do with your money, first, is to save it. But what happens afterwards? Or even before? Understanding personal finance will help you answer these questions and more. But first, what is personal finance?
Personal finance covers all aspects of individual and household money management and deals with how you can make the most of your finances — regardless of how much you earn. Understanding and prioritising personal finance can help you achieve your financial goals and maintain financial stability.
In this article, we’ll explore what personal finance means, the areas it covers and the key factors that could affect your finances. We’ll also dive into the concept of personal finance management and discuss surefire ways to manage your finances. Let’s begin!
What does personal finance mean exactly?
Your financial management skills, money-related tools (like savings apps) and financial intelligence are all part of personal finance. It also includes your financial state, money mindset and understanding of the core areas of finance.
Understanding these concepts — as well as the relationship between them — sums up what we refer to as personal finance. Still, it’s essential to know that personal finance (as the name suggests) is wholly concerned with you (or your household) and your relationship with money.
Therefore, the conversations and ideas around the subject and in this article do not apply to countries or businesses — no matter how small their finances might be.
There’s a lot to uncover in personal finance (as we’ll see in this article), but its cornerstone is this: do not spend more than you make. Every discussion around the topic is grounded in this principle.
What are the areas of personal finance?
The best way to start a thorough conversation about personal finance is with the areas it covers. These core areas (or components) play a crucial role in your money management efforts, and it’s impossible to fully understand personal finance without discussing them.
The five core areas of personal finance are:
- Income. Your income is the foundation of your personal finances and refers to all the money you earn from jobs, investments or gigs.
- Saving. Your savings are the portion of your income for future needs or emergencies. They provide a financial safety net and enable you to pursue your future financial goals.
- Protection. This includes insurance, retirement planning and asset planning. They help safeguard you against unforeseen events that could impact your financial stability.
- Spending. Wisely managing your purchases is a core area of personal finance. It’s essential to balance enjoying today and securing your future.
- Investing. This area focuses on growing your wealth over time by strategically putting your money into assets and opportunities that have the potential for appreciation — like stocks, bonds or real estate.
Developing a comprehensive financial plan that addresses each area can also contribute to your overall financial well-being.
What factors affect personal finance?
Personal finance covers your relationship with money. However, certain factors could influence this relationship — positively or negatively. Let’s examine them.
Some of the factors that affect personal finance include:
- Family structure. This refers to the size and composition of your family and can affect your finances in many ways. For example, you could spend more and save less if you come from a large family with many dependents.
- Health. Unexpected medical expenses can be a major financial burden, and chronic health conditions like asthma may require you to take time off work or stop some jobs completely. Additionally, some health conditions may increase your risk of disability, which could make it challenging to maintain your income.
- Career choice. Your income potential, job security and benefits package will vary depending on your chosen profession. For example, people with higher levels of education and specialised skills (like doctors and engineers) tend to earn more money.
- Age. Your income needs, saving habits, financial goals and risk tolerance will change as you age. For example, according to the PiggyVest 2023 Savings Report, Gen Z and millennials are more interested in starting a family compared to Gen X and Boomers.
Now, let’s dive into personal finance management.
What is personal finance management?
Personal finance management refers to the exact methods and techniques you can use to manage your finances. It includes budgeting methods like the 50-30-20 rule, savings and investment apps like PiggyVest and principles like paying yourself first.
The primary aim of personal finance management is to achieve your money goals and maintain financial well-being. Therefore, it covers many activities that help you optimise your income, reduce expenses, save efficiently, invest safely and make informed financial decisions.
What are the principles of good personal finance management?
As we mentioned, the goal of personal finance management is to create a sustainable and secure financial future. However, every strategy in personal finance management relies on key principles for effectiveness.
The following are the fundamental principles of good personal finance management:
- Finance prioritisation. This means understanding what is most important to you financially and ensuring your spending and saving habits reflect those priorities. For example, cutting down on weekend activities makes sense if you’re saving for a new house.
- Needs, costs and benefits assessment. Before you make any significant financial decision, it’s vital to assess your needs, the costs and benefits of the decision, and how it will impact your overall financial goals. For example, before buying a new phone, it’s great practice to consider your need for the device and its cost.
- Restraint. Restraint is the ability to exercise financial discipline and control your spending. This means resisting impulse purchases (like the random shawarma) and avoiding unnecessary debt. Restraint can be difficult, but it’s essential for achieving your financial goals.
These principles are also sometimes referred to as personal finance management skills.
How to manage your personal finances
We already spoke about the areas of personal finance and the principles guiding its effective management. Now, it’s time to get our hands dirty: how can you manage your personal finances today in Nigeria?
Here’s how you can manage your personal finances as a Nigerian:
- Develop a sense of timing and make essential purchases as quickly as possible.
- Build an emergency fund that can cover your expenses for 3 to 6 months.
- Automate your savings with PiggyVest.
- Practise financial discipline at all times.
- Know your income and track your spending.
- Use a budgeting method that works for you.
- Have a financial goal for the future, and stick to your weekly or monthly goals to achieve it.
- Buy quality items no matter how expensive they might be.
- Don’t oversave — you’re better off saving 20% of your income consistently than 70% once in a blue moon.
- Pay yourself first by prioritising your savings when you receive income.
- Don’t borrow what you can’t afford to give away.
- Cook in bulk and plan your meals.
- Practise effective debt management.
- Use insurance.
- Reward yourself by buying stuff you want or scheduling vacations — within your budget.
Remember that personal finance is dynamic, so your strategies may need adjustments over time. And don’t be afraid to try unconventional methods (like saving most of your income) if they work for you. Personal finance is also profoundly personal.
How to learn more about personal finance management
While reading this article is a significant first step to understanding personal finance, we recommend doing even more. Fortunately, there are many excellent ways to learn more about personal finance management.
You can learn more about personal finance management through any of the following ways:
- Read authoritative and helpful online blogs. The PiggyVest Blog is a great place to learn about personal finance — from saving to investing and even business studies. There are also several others, like Investopedia and The Economist.
- Read finance books with practical ideas. Books have always been and will always be an excellent way to learn anything. Top picks include The Psychology of Money by Morgan Housel, The Richest Man in Babylon by George S. Clason and Money: A Users Guide by Laura Whateley.
- Take relevant online classes. Platforms like Coursera, Udemy and edX feature extensive (and sometimes free) courses that can help improve your financial management skills. An excellent example is the Introduction to Personal Finance course offered by SoFi on Coursera.
- Listen to personal finance podcasts. Whether you use Podbean, Spotify or Google Podcasts, you’ll find several creators that offer excellent financial advice for beginners.
- Watch educational YouTube videos. YouTube is a gold mine if you follow the right creators. You can start by checking out the PiggyVest YouTube channel to find gems like our Saver Of The Month series, where we speak to top PiggyVest savers!
You can also talk to finance experts and professionals like Odunayo Eweniyi, COO and co-founder of Piggytech. Fortunately, we’ve got you covered!
We have a new “Ask Odun” column on our Money Matters by PiggyVest newsletter where you can ask her all your finance-related questions. Subscribe for free today to ask as many questions as you like!
Personal finance management is an ongoing process that requires regular assessment, adjustment, and adaptation to life changes — good and bad. Therefore, you’ll need to be open to making conscious choices with your money to achieve financial goals, handle unexpected challenges and build a secure financial future.
The articles on the PiggyVest Blog are developed by seasoned writers who use original sources like authoritative websites, news articles and academic journals to perform in-depth research. An experienced editor fact-checks every piece before it is published to ensure you are always reading accurate, up-to-date and balanced content.
- Southern Bancorp: The Five Categories of Personal Finance
- SSRN: Personal Finance: Past, Present and Future