# What Is Personal Finance, and Why Is It Important?

![Illustration of personal finance concepts including saving and investing](https://www.investopedia.com/thmb/TH8-Yt7GdB9TnJgo0RfsynjxbOQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/personalfinance_definition_final_0915-Final-977bed881e134785b4e75338d86dd463.jpg)

*The five areas of personal finance are income, saving, spending, investing, and protection. — Investopedia / Sydney Saporito*

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

## What Is Personal Finance?

Personal finance is the term used to describe all aspects of an individual's money management, including 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 on financial and investment opportunities.

Individuals with goals and desires must plan accordingly to fulfill those needs within their financial constraints, which also impacts how they approach the above items. To make the most of your income and savings, it's essential to become financially savvy by routinely keeping up to date with the latest financial products and technology, which will help you distinguish between good and bad advice and make intelligent financial decisions for your future based on your present financial situation.

The [best online banks](https://www.investopedia.com/the-best-online-banks-11722209) and [online brokerage platforms](https://www.investopedia.com/best-online-brokers-4587872) will provide free resources, education, and access to financial professinoals for little to no extra cost.

### 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.
*   Leading [online banks](https://www.investopedia.com/the-best-online-banks-11722209) and [brokerage platforms](https://www.investopedia.com/best-online-brokers-4587872) often provide an excellent selection of educational resources covering beginner concepts to advanced topics.
*   The core areas of managing personal finance include income, spending, savings, investments, and financial protection.
*   Smart personal finance involves developing strategies that include budgeting, creating an emergency fund, [paying off debt](https://www.investopedia.com/best-debt-payoff-planners-11762916), 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 habits, savings, investing, and financial protections (insurance and estate planning).

Not understanding how to manage finances or be financially disciplined has led Americans to accumulate enormous debt. In Q2 2025, the Federal Reserve Bank reported household debt had increased by $185 billion, bringing the total household debt to $18.39 trillion.

The following balances increased in the second quarter from the previous quarter in 2025:

*   **Credit card debt**: Up by $27 billion
*   **Auto debt**: Up by $13 billion
*   **Student debt**: Up by $7 billion
*   **Mortgage debt**: Up by $131 billion
*   **Home equity line of credit**: Up by $9 billion

Americans are taking on an ever-increasing amount of debt to finance significant 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 is typically where the bulk of income goes. Spending is whatever you use your income to buy. This includes rent, mortgage, groceries, hobbies, eating out, home furnishings, home repairs, travel, and entertainment.

Being able to manage your spending is a critical aspect of personal finance. You should ensure that you are spending less than what you bring in; otherwise, you won't have enough money to cover your expenses or 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 some savings to meet any fluctuations in income and spending—somewhere between three and 12 months of expenses is best.

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 financial products such as stocks, bonds, mutual funds, and ETFs, to earn a return on the money invested. Investing aims to increase an individual's wealth beyond the amount they invested. However, investing comes with risks, as not all assets appreciate and can incur losses to your portfolio.

Investing can be difficult for those unfamiliar with it; it helps to dedicate some time to understanding through reading and studying. If you don't have time, you might benefit from hiring a professional to help you invest your money, or check with your bank or online broker to find out their services.

### Protection

Protection refers to the methods people use to protect themselves from unexpected events, such as illnesses or accidents, and 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](https://www.investopedia.com/terms/f/financial_plan.asp), the better, but it’s never too late to [create financial goals](https://www.investopedia.com/financial-challenges-of-adhd-11775648) to give you and your family financial security and freedom. Here are some best practices and tips for personal finance.

### 1\. Know Your Income

It's all for nothing if you don't know how much you bring home after taxes and withholding. So, before deciding anything, ensure you know exactly how much take-home pay you receive.

### 2\. Devise a Budget

A budget is essential to living within your means and saving enough to meet your long-term goals. The 50/30/20 rule is a budgeting method that offers a great framework. It breaks down like this:

*   Fifty percent of your take-home pay or net income (after taxes) goes toward living essentials, such as rent, utilities, groceries, and transport.
*   Thirty percent is allocated to discretionary expenses, such as dining out and shopping for clothes. Giving to charity can also be included.
*   Twenty percent goes toward the future, such as paying down debt, saving for retirement, and emergencies.

It’s never been easier to manage money, thanks to a growing number of smartphone personal budgeting apps that put day-to-day finances in the palm of your hand. Here are just two examples:

*   [YNAB (You Need a Budget)](https://www.investopedia.com/ynab-vs-mint-5179966) helps you track and adjust your spending to control every dollar you spend.
*   PocketGuard is available in both free and paid versions. It uses an algorithm to help you avoid overspending by analyzing your income, bills, goals, and budget.

### 3\. Pay Yourself First

It’s important to “pay yourself first” to ensure money is set aside for unexpected expenses, such as medical bills, a significant car repair, day-to-day expenses if you get laid off, and more. The ideal safety net is three to 12 months of living expenses.

Financial experts generally recommend putting away 20% of each paycheck every month. Once you’ve filled up your emergency fund, don’t stop. Continue funneling the monthly 20% toward other financial goals, such as a retirement fund or a down payment on [a home](https://www.investopedia.com/save-for-a-home-or-retirement-8599275).

### 4\. Limit and Reduce Debt

It sounds simple enough: Don't spend more than you earn to keep debt from getting out of hand. But, of course, it's never that simple. Most people have to borrow from time to time, and sometimes going into debt can be advantageous—for example, if it leads to acquiring an asset.

Taking out a mortgage to buy a house might be one such case. Still, leasing can sometimes be more economical than buying outright, whether it's renting a property, leasing a car, or even getting a subscription to computer software.

On the other hand, minimizing repayments (to interest only, for instance) can free up income to invest elsewhere or put into retirement savings while you're young: This is also one of the best times for your nest egg to get the maximum benefit from [compounding interest](https://www.investopedia.com/terms/c/compoundinterest.asp). Some private and federal student loans are even eligible for a rate reduction if the borrower enrolls in autopay.

Student loans account for $1.63 trillion of consumer debt—if you have an outstanding student loan, you should prioritize it. There are myriad loan repayment plans and payment reduction strategies available. If you're stuck with a high interest rate, paying off the principal faster can make sense.

[Flexible federal repayment programs](https://www.investopedia.com/student-loan-repayment-options-what-s-the-best-way-to-pay-4772402) worth checking out include:

*   Graduated repayment—progressively increases the monthly payment over 10 years
*   Extended repayment—stretches out the loan over a period that can be as long as 25 years
*   Income-driven repayment—limits payments to 10% to 20% of your income (based on your income and family size)

### 5\. Only Borrow What You Can Repay

Credit cards can be major debt traps. However, it’s unrealistic not to own one in the present world, as they have applications beyond buying things. They are crucial to establishing your credit rating and a great way to track spending, which can be a considerable budgeting aid.

Credit needs to be managed correctly, meaning you should pay off your entire balance every month or keep your credit utilization ratio at a minimum (that is, keep your account balances below 30% of your total available credit).

Given the extraordinary rewards and incentives offered these days (such as cashback), it makes sense to charge as many purchases as possible—if you can pay your bills in full.

Using a debit card, which takes money directly from your bank account, is another way to ensure that you will not be paying for accumulated small purchases over an extended period with interest.

> **Important**
>
> Avoid maxing out credit cards at all costs, and always pay bills on time. One of the fastest ways to ruin your credit score is to constantly pay bills late—or even worse, miss payments.

### 6\. Monitor Your Credit Score

Credit cards are the primary vehicle through which your credit score is built and maintained, so watching credit spending goes hand in hand with monitoring your credit score. If you ever want to obtain a lease, mortgage, or any other type of financing, then you'll need a solid credit report. There are a variety of credit scores available, but the most popular one is the [FICO score](https://www.investopedia.com/terms/f/ficoscore.asp).

Factors that determine your FICO score include:

*   Payment history (35%)
*   Amounts owed (30%)
*   Length of credit history (15%)
*   Credit mix (10%)
*   New credit (10%)

FICO scores range from 300 to 850. Here's how your credit is rated:

*   Exceptional: 800 to 850
*   Very good: 740 to 799
*   Good: 670 to 739
*   Fair: 580 to 669
*   Poor: 579 and below

To pay bills, set up direct debiting where possible (so you never miss a payment) and subscribe to reporting agencies that provide regular credit score updates. In addition, you can detect and address mistakes or fraudulent activity by monitoring your credit report. Federal law allows you to obtain free credit reports once a year from the "Big Three" major credit bureaus: Equifax, Experian, and TransUnion.

Reports can be obtained directly from each agency, or you can sign up at AnnualCreditReport.com, a federally authorized site sponsored by the Big Three.

Some credit card providers, such as Capital One, will provide customers with complimentary, regular credit score updates, but it may not be your FICO score. Instead, Capital One's CreditWise program offers your [VantageScore](https://www.investopedia.com/terms/v/vantagescore.asp).

### 7\. Plan for Your Future

To protect the assets in your estate and ensure that your wishes are followed when you die, be sure you make a will and—depending on your needs—possibly set up one or more trusts. You also should look into insurance and find ways to reduce your premiums, if possible: auto, home, life, disability, and long-term care (LTC). Periodically review your policy to ensure it meets your family’s needs through life’s major milestones.

Other critical documents include a living will and a healthcare power of attorney. While not all of these documents directly affect you, all of them can save your next of kin considerable time and expense when you fall ill or become otherwise incapacitated.

Retirement may seem like a lifetime away, but it arrives much sooner than expected. Experts suggest that most people will need about 80% of their current salary in retirement. The younger you start, the more you benefit from what advisors call the magic of compounding interest—how small amounts grow over time.

Setting aside money now for your retirement not only allows it to grow over the long term but also can reduce your current income taxes if funds are placed in a tax-advantaged plan, such as an [individual retirement account](https://www.investopedia.com/the-best-roth-ira-brokers-8764132) (IRA), a 401(k), or a 403(b).

> **Fast Fact**
>
> While your children are young, take the time to teach them about the value of money and how to save, invest, and spend wisely.

If your employer offers a 401(k) or 403(b) plan, start paying into it immediately, especially if your employer matches your contribution. By not doing so, you’re giving up free money. Take time to learn the difference between a Roth 401(k) and a traditional 401(k) if your company offers both.

Investing is only one part of planning for retirement. Other strategies include waiting as long as possible before opting to receive Social Security benefits (which is smart for most people) and converting a [term life insurance](https://www.investopedia.com/terms/t/termlife.asp) policy to a [permanent life](https://www.investopedia.com/terms/p/permanentlife.asp) policy.

### 8\. Buy Insurance

As you age, it's natural for you to accumulate many of the same things your parents did—a family, home or apartment, belongings, and health issues. Insurance can be expensive if you wait too long to get it.

Healthcare, long-term care insurance, and life insurance all increase in cost the older you get. Additionally, you never know what life will send your way. If you're the sole breadwinner for the family, or you and your partner both work to make ends meet, a lot depends on your ability to work.

Insurance can cover most of the hospital bills as you age, leaving your hard-earned savings in your family's hands; medical expenses are one of the leading reasons for debt. If something happens to you, life insurance gives those you leave behind a buffer zone to deal with the loss and get back on their feet financially.

### 9\. Maximize Tax Breaks

Due to an overly complex tax code, many people leave hundreds or even thousands of dollars sitting on the table every year. By maximizing your tax savings, you’ll free up money to reduce past debts, enjoy the present, and plan for the future.

You should start saving receipts and tracking expenditures to take advantage of all possible tax deductions and credits. Many office supply stores sell helpful “tax organizers” that have the main categories already labeled.

After you’re organized, you’ll want to focus on taking advantage of every tax deduction and credit available, as well as deciding between the two when necessary. In short, a tax deduction reduces the amount of income on which you are taxed, whereas a tax credit reduces the amount of tax that you owe. This means that a $1,000 tax credit will save you much more than a $1,000 deduction.

### 10\. Give Yourself a Break

Budgeting and planning [can seem full of deprivations](https://www.investopedia.com/fa-one-thing-holiday-budgeting-8731639). Make sure to reward yourself occasionally. Whether it’s a vacation, a purchase, or an occasional night on the town, you need to enjoy the fruits of your labor. Doing so gives you a taste of the financial independence you’re working so hard for.

Last but not least, don’t forget to delegate when needed. Even though you might be competent enough to do your own taxes or manage a portfolio of individual stocks, it doesn’t mean you should. Setting up an account at a brokerage and spending a few hundred dollars on a certified public accountant (CPA) or a financial planner—at least once—might be a good way to jump-start your planning.

## Personal Finance Skills

The key to getting your finances on the right track is using skills you likely already have. It’s [also about understanding that the principles](https://www.investopedia.com/adulting-class-help-with-your-finances-11751125) that contribute to success in business and your career work just as well in personal money management. Three key skills are finance prioritization, assessing the costs and benefits, and restraining your spending.

*   **Finance prioritization**: This means that you can look at your finances, discern what keeps the money flowing in, and make sure that you stay focused on those efforts.
*   **Assessing the costs and benefits**: This key skill keeps you from spreading yourself too thin. Ambitious individuals always have a list of ideas about other methods for hitting it big, whether it is a side business or an investment idea. While there is a place and time for taking a flyer, running your finances like a business means stepping back and honestly assessing the potential costs and benefits of any new venture.
*   **Restraining your spending**: This is the final big-picture skill of successful business management that must be applied to personal finances. Time and again, financial planners sit down with successful people who still manage to spend more than they make. Earning $250,000 a year won’t do you much good if you spend $275,000 annually. Learning to restrain spending on non-wealth-building assets until after you’ve met your monthly savings or debt reduction goals is crucial in [building net worth](https://www.investopedia.com/tracking-your-net-worth-11679626).

## Personal Finance Education

[Personal money management](https://www.investopedia.com/balance-daily-spending-with-future-financial-goals-11729087) isn't one of the most popular topics in educational systems. Many college degrees require some financial education, but it isn't geared toward individuals, which means that most of us will need to get our personal finance education from our parents (if we're lucky) or learn it ourselves [through self-education](https://www.investopedia.com/what-the-ultrawealthy-are-reading-11745651) and emulating the ultrarich.

Fortunately, you don't have to spend much money to find out how to manage it better. You can learn everything you need to know for free online and from library books. Almost all media publications regularly dole out personal finance advice, too.

### Online Blogs

Reading personal finance blogs is a great way to start learning about personal finance. Instead of the general advice you’ll get in personal finance articles, you’ll learn exactly which challenges real people face and how they address them.

Mr. Money Mustache has hundreds of posts full of insights on escaping the rat race and retiring early by making unconventional lifestyle choices. CentSai helps you navigate a myriad of financial decisions via first-person accounts.

Million Mile Secrets and The Points Guy each teach you how to travel for a fraction of the retail price using credit card rewards. These sites often link to other blogs, so you’ll discover more sites as you read.

Of course, we can’t help tooting our own horn in this category. Investopedia offers a wealth of free personal finance education. You might start with our special sections on budgeting, buying a home, and planning for retirement—or the thousands of other articles in our personal finance section.

### At the Library

You may need to visit your library in person to get a library card if you don't already have one, but after that, you can check out personal finance audiobooks and e-books online without leaving home.

Some of the following bestsellers may be available at your local library: "I Will Teach You to Be Rich," "The Millionaire Next Door," "Your Money or Your Life," and "Rich Dad Poor Dad." Personal finance classics such as "Personal Finance for Dummies," "The Total Money Makeover," "The Little Book of Common Sense Investing," and "Think and Grow Rich" are also available as audiobooks.

### Online Classes

If you enjoy the structure of lessons and quizzes, try one of these free digital personal finance courses:

*   **Morningstar Investing Classroom** offers a place for beginning and experienced investors alike to learn about stocks, funds, bonds, and portfolios. Some of the courses you'll find include "Stocks Versus Other Investments," "Methods for Investing in Mutual Funds," "Determining Your Asset Mix," and "Introduction to Government Bonds." Each course takes about 10 minutes and is followed by a quiz to help you make sure that you understood the lesson.
*   **EdX** is an online learning platform created by Harvard University and the Massachusetts Institute of Technology. It offers at least three courses that cover personal finance: 'Personal Finance, Part 1: Investing in Yourself" from Wellesley College, "Personal Finance" from Purdue University, and "Finance for Everyone: Smart Tools for Decision-Making" from the University of Michigan. These courses will teach you how credit works, which types of insurance you might want to carry, how to maximize your retirement savings, how to read your credit report, and about the [time value of money](https://www.investopedia.com/terms/t/timevalueofmoney.asp).
*   **"Planning for a Secure Retirement"** is an online course from Purdue University. It's broken up into 10 main modules, and each has four to six sub-modules on topics such as Social Security, 401(k) and 403(b) plans, and IRAs. You'll learn about your risk tolerance, think about what kind of retirement lifestyle you want, and estimate your retirement expenses.

### Podcasts

Personal finance podcasts are a great way to learn how to manage your money if you're short on free time. While you're getting ready in the morning, exercising, driving to work, running errands, or preparing for bed, you can listen to expert advice on becoming more financially secure. In addition to "The Investopedia Express with Caleb Silver," you may find these valuable:

*   **"Freakonomics Radio"** and **NPR's "Planet Money"** both make economics enjoyable by using it to explain real-world phenomena such as "how we got from mealy, nasty apples to apples that actually taste delicious," the Wells Fargo fake accounts [scandal](https://www.investopedia.com/wells-fargo-timeline-7498799), and whether we should still be using cash.
*   **American Public Media's "Marketplace"** helps make sense of what's happening in the business world and the economy.
*   **"So Money" with Farnoosh Torabi** combines interviews with successful business people, expert advice, and listeners' personal finance questions.

The most important thing is to find resources that work for your learning style and that you find interesting and engaging. If one blog, book, course, or podcast is dull or difficult to understand, keep trying until you find something that clicks.

Education shouldn't stop once you learn the basics. The economy changes, and new financial tools like the budgeting apps mentioned earlier are always being developed. Find resources you enjoy and trust, and continually refine your money skills throughout retirement.

## What Personal Finance Classes Can’t Teach You

Personal finance education is a great idea for consumers, especially for those people just starting and who want to learn investing basics or credit management; however, understanding the basic concepts is not a guaranteed path to financial sense.

Human nature can often derail the best intentions to achieve a perfect credit score or build a substantial retirement nest egg. Learn about the three key character traits that can help you stay on track.

### Discipline

One of the most important tenets of personal finance is systematic saving. For example, say your net earnings are $60,000 per year, and your monthly living expenses—housing, food, transportation, and the like—amount to $3,200 per month.

There are choices to make surrounding your remaining $1,800 in monthly salary. Ideally, the first step is to establish an emergency fund or perhaps a tax-advantaged [health savings account (HSA)](https://www.investopedia.com/terms/h/hsa.asp).

> **Fast Fact**
>
> To be eligible for a health savings account, your health insurance must be a high-deductible health plan (HDHP).

Establishing an emergency fund takes financial discipline—without it, giving in to the temptation to spend rather than save can have dire consequences. In the event of an emergency, you may not have the money to pay the expenses, leading you to finance them through debt.

Once you have your emergency stash, you'll need to develop investing discipline—it's not just for institutional money managers who make their living buying and selling stocks. Average retail investors tend to do better by setting an investment target and sticking to it, rather than buying and selling stocks in an attempt to time the market.

### A Sense of Timing

Timing can be crucial. For instance, imagine you're three years out of college, have established your emergency fund, and want to reward yourself. A Jet Ski costs $3,000, but you want to start investing also. "Investing in growth stocks can wait another year," you say. "I have plenty of time to launch an investment portfolio."

However, putting off investing for one year can have significant consequences. The opportunity cost of buying a personal watercraft can be illustrated through the time value of money.

The $3,000 used to buy the Jet Ski would have amounted to nearly $49,000 in 40 years at 7% interest compounded monthly—a reasonable average annual return for a growth mutual fund over the long haul. Thus, delaying the decision to invest wisely may likewise delay the ability to reach your goal of retiring at age 65.

Doing tomorrow what you could do today also extends to debt payment. If you were to put the Jet Ski on your credit card, the $3,000 credit card balance would take 62 months (over five years) to pay off if you only made minimum payments of $75 each month. And don't forget the interest you're paying: at an 18% annual percentage rate (APR), it comes to $4,615.87 over those months.

### Emotional Detachment

Personal finance matters are business, and business should not be personal. A difficult but necessary facet of sound financial decision-making involves removing emotions from a transaction.

Making impulsive purchases feels good in the moment, but it can significantly impact long-term investment goals. So can making unwise loans to family members. Your cousin Fred, who has already burned your brother and sister, will likely not pay you back, either. The smart thing to do is decline his requests for help—you're also trying to make ends meet.

The key to prudent [personal financial management](https://www.investopedia.com/personal-financial-management-pfm-5181311) is to separate feelings from reason. However, when loved ones are experiencing real trouble, it pays to help if you can—just try not to take it out of your investments and retirement.

> **Fast Fact**
>
> Many people have loved ones who always seem to need financial help—it is difficult to refuse to help them. If you include planning to assist them in real emergencies using your emergency fund, it can make the burden easier.

## Breaking Personal Finance Rules

The personal finance realm may have more guidelines and tips to follow than any other. Although these rules are good to know, everyone has their own circumstances. Here are some rules prudent people, especially young adults, are never supposed to break—but can break if necessary.

### Saving or Investing a Set Portion of Your Income

An ideal budget includes saving a portion of your paycheck every month for retirement, usually around 10% to 20%. However, while being fiscally responsible is important and thinking about your future is crucial, the general rule of saving a fixed amount for retirement may not always be the best choice, especially for young people just starting out.

For one thing, many young adults and students need to consider paying for their most significant expenses, such as a new car, home, or postsecondary education. Taking away 10% to 20% of available funds would be a definite setback in making those purchases.

Additionally, saving for retirement doesn’t make much sense if you have credit cards or interest-bearing loans to pay off. The 19% interest rate on your Visa card would most likely negate any returns you get from your balanced mutual fund retirement portfolio.

Finally, saving money to travel and experience new places and cultures can be especially rewarding for a young person who’s still unsure about their life path.

### Long-term Investing/Investing in Riskier Assets

The rule of thumb for young investors is that they should have a long-term outlook and stick to a buy-and-hold philosophy. This rule is one of the easier ones to justify breaking. Adapting to changing markets can be the difference between making money, limiting your losses, and sitting idly by and watching your hard-earned savings shrink. Short-term investing has its advantages at any age.

Common investing logic suggests that young investors have such a long investment time horizon that they can afford to have a higher-risk appetite. After all, they have the rest of their lives to recover from any losses that they may suffer. However, you don’t have to take on undue [risk](https://www.investopedia.com/terms/r/risk.asp) in your short- to medium-term investments if you don’t want to. Diversification is an important part of creating a strong investment portfolio; this includes balancing the riskiness of individual stocks and their intended [investment horizon](https://www.investopedia.com/terms/i/investment_horizon.asp).

At the other end of the age spectrum, investors near and at retirement are encouraged to cut back to the safest investments—even though these may yield less than inflation—to preserve capital. Taking fewer risks is important as the number of years you have to earn money and recover from bad financial times dwindles, but at age 60 or 65, you could have 20, 30, or even more years to go. Some growth investments could still make sense for you.

## What Is Personal Finance?

Personal finance is the knowledge, instruments, and techniques to manage, grow, and protect your money. When you understand the principles and concepts behind personal finance, you can manage debt, savings, living expenses, and retirement savings.

## What Are the 5 Main Components of Personal Finance?

The five main components are income, spending, savings, investing, and protection.

## What Is an Example of Personal Finance?

One of the key ideas behind personal finance is not to spend more than you make. For instance, if you make $50,000 a year but spend $65,000, you'll end up with debt that continues to compound because you'll be spending more than you make to pay for past expenses.

## Why Is Personal Finance So Important?

The concepts behind managing your personal finances can guide you in making intelligent financial decisions. In addition, the decisions you make throughout your life on what to buy, sell, hold, or own can affect how you live when you can no longer work.

## The Bottom Line

Personal finance is managing your money to cover expenses and save for the future. It is a topic that covers a broad array of areas, including managing expenses and debt, how to save and invest, and how to plan for retirement.

In addition, it can include ways to protect yourself with insurance, [build wealth](https://www.investopedia.com/guide-to-financial-literacy-4800530), and ensure wealth is passed on to the people you want it to pass to.

Understanding how to manage your finances is a crucial life-planning tool that can help set you up for a life without debt. You [gain control over financial stresses](https://www.investopedia.com/reduce-stress-with-these-2-simple-money-habits-backed-by-experts-11794598) and have a way to manage the unexpected expenses that life can throw at you.

> **Article Sources**
>
> 1.  Federal Reserve Bank of New York. "[Center of Microeconomic Data](https://www.newyorkfed.org/microeconomics/hhdc)."
>     
> 2.  Federal Reserve Bank of New York. "[Household Debt Growth Remains Steady; Auto Loan Originations Pick Up](https://www.newyorkfed.org/newsevents/news/research/2025/20250805)."
>     
> 3.  U.S. Department of Education, Federal Student Aid. "[Repaying Student Loans 101](https://studentaid.gov/manage-loans/repayment/repaying-101)."
>     
> 4.  Federal Reserve Bank of New York. "[Household Debt Growth Remains Steady; Auto Loan Originations Pick Up](https://www.newyorkfed.org/newsevents/news/research/2025/20250805)."
>     
> 5.  myFICO. "[What Should My Credit Utilization Ratio Be?](https://www.myfico.com/credit-education/blog/credit-utilization-be)"
>     
> 6.  myFICO. “[What’s the Difference Between FICO Scores and Non-FICO Credit Scores?](https://www.myfico.com/credit-education/fico-scores-vs-credit-scores#)”
>     
> 7.  Federal Trade Commission. “[Understanding Your Credit](https://www.consumer.ftc.gov/articles/understanding-your-credit-0).”
>     
> 8.  Capital One. "[CreditWise: Get Your Free Credit Report](https://www.capitalone.com/creditwise/free-credit-report/)."
>     
> 9.  Consumer Financial Protection Bureau. "[Medical Debt Burden in the United States](https://files.consumerfinance.gov/f/documents/cfpb_medical-debt-burden-in-the-united-states_report_2022-03.pdf)."
>     
> 10.  Internal Revenue Service. "[Credits and Deductions for Individuals](https://www.irs.gov/credits-and-deductions-for-individuals)."
>      
> 11.  Morningstar. “[Morningstar Investing Classroom](https://www.morningstar.com/start-investing/classroom).”
>      
> 12.  EdX. "[About EdX](https://www.edx.org/about-us)."
>      
> 13.  Purdue University, College of Agriculture. “[Planning for a Secure Retirement](https://extension.purdue.edu/hhs/money/programs/planning-for-a-secure-retirement.html).”
>      
> 14.  Internal Revenue Service. "[Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans](https://www.irs.gov/publications/p969)."
>      
> 15.  Investor.gov. "[Compound Interest Calculator](https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator).
>      
> 16.  Calculator.net. "[Debt Payoff Calculator](https://www.calculator.net/debt-payoff-calculator.html?cnm1=Credit+Card&cbal1=3%2C000&cmpy1=75&cint1=18&cnm2=&cbal2=&cmpy2=&cint2=&cnm3=&cbal3=&cmpy3=&cint3=&cnm4=&cbal4=&cmpy4=&cint4=&cnm5=&cbal5=&cmpy5=&cint5=&cnm6=&cbal6=&cmpy6=&cint6=&cnm7=&cbal7=&cmpy7=&cint7=&cnm8=&cbal8=&cmpy8=&cint8=&cnm9=&cbal9=&cmpy9=&cint9=&cnm10=&cbal10=&cmpy10=&cint10=&cnm11=&cbal11=&cmpy11=&cint11=&cnm12=&cbal12=&cmpy12=&cint12=&cnm13=&cbal13=&cmpy13=&cint13=&cnm14=&cbal14=&cmpy14=&cint14=&cnm15=&cbal15=&cmpy15=&cint15=&cnm16=&cbal16=&cmpy16=&cint16=&cnm17=&cbal17=&cmpy17=&cint17=&cnm18=&cbal18=&cmpy18=&cint18=&cnm19=&cbal19=&cmpy19=&cint19=&cnm20=&cbal20=&cmpy20=&cint20=&cextramonthpay=0&cextrayearpay=0&cextraonepay=0&cextraonepayon=&cfixpay=y&x=Calculate#calresult)."