Personal finance
Financial management for individuals and families to budget, save, and invest.
Personal finance is the financial management performed by an individual or family unit to budget, save, and spend monetary resources in a controlled manner, considering various financial risks and future life events. It encompasses the use of banking products, insurance products, and investment products, as well as the monitoring of credit scores, income taxes, retirement funds, and pensions. The field has roots in older academic disciplines like family economics and consumer economics, which were taught as part of home economics for over a century. A key early contribution came from Hazel Kyrk’s dissertation in 1920, which helped shape consumer and family economics, followed by the work of Margaret Reid, a pioneer in studying household and consumer behavior. In 1947, Nobel laureate Herbert A. Simon noted that people often make suboptimal financial decisions due to limited education and personal biases. Research in this area draws on theories such as social exchange theory and adult learning theory. Professional organizations in the United States, including the American Association of Family and Consumer Sciences and the American Council on Consumer Interests, advanced the field from the 1950s onward. The Association for Financial Counseling and Planning Education and the Academy of Financial Services were established in the mid-1980s, offering certifications like Accredited Financial Counselor and cooperating with the Certified Financial Planner Board. Mainstream economic and business faculties gave little attention to personal finance before 1990, but universities such as Brigham Young, Iowa State, and San Francisco State later introduced undergraduate and graduate programs. The early 2000s saw a rise in financial literacy education for general and specific audiences, though no standardized curriculum existed until after the 2008 financial crisis, when the U.S. President’s Advisory Council on Financial Capability was formed to promote financial literacy and standard-setting. Universal principles are difficult to define due to varying income, wealth, tax laws, and market conditions, though some experts argue that effective advice in the U.S. boils down to a few simple points: paying off credit card balances monthly, saving a portion of post-tax income, maintaining an emergency fund, maximizing tax-advantaged accounts, avoiding individual securities in favor
- field
- Personal finance
- known_for
- Financial management for individuals and families, including budgeting, saving, investing, and planning for retirement and other life events
- key_principles
- Pay off credit card balances monthly, save 10-20% of post-tax income, maintain a six-month emergency fund, maximize tax-advantaged accounts, avoid trading individual securities, use low-cost diversifi
Lore & Background
Personal finance encompasses the financial management activities performed by individuals or families to budget, save, and spend money in a controlled way while accounting for financial risks and future life events. Its scope includes evaluating banking products like checking and savings accounts, credit cards, and loans; insurance products such as health, disability, and life insurance; and investment options including bonds, stocks, and real estate. Individuals also manage credit scores, income taxes, retirement funds, and pensions. The field developed from earlier disciplines like family economics and consumer economics, taught within home economics for over a century. Hazel Kyrk’s 1920 dissertation at the University of Chicago helped establish consumer and family economics, while Margaret Reid, a home economics professor at the same university, became a pioneer in studying consumer and household behavior. Herbert A. Simon noted in 1947 that decision-makers often fail to make optimal financial choices due to limited education and personal biases. Professional organizations like the American Association of Family and Consumer Sciences and the American Council on Consumer Interests advanced the field from the 1950s to 1970s. The Association for Financial Counseling and Planning Education (AFCPE) and the Academy of Financial Services (AFS) were founded in 1984 and 1985, respectively, offering certifications such as Accredited Financial Counselor. After the 2008 financial crisis, standardized personal finance education curricula emerged, and the U.S. President’s Advisory Council on Financial Capability was established in 2008 to promote financial literacy. Key principles include paying off credit card balances monthly, saving 10-20% of post-tax income, maintaining a six-month emergency fund, maximizing contributions to tax-advantaged accounts, and using low-cost diversified mutual funds while avoiding individual securities.
Reader's Guide
Research into personal finance is based on theories such as social exchange theory and andragogy. Professional bodies like the American Association of Family and Consumer Sciences and the American Council on Consumer Interests helped develop the field from the 1950s to the 1970s. After the 2008 financial crisis, the United States President's Advisory Council on Financial Capability was set up to encourage financial literacy and develop standards in financial education. The personal financial planning process involves five steps: assessment, goal setting, plan creation, execution, and monitoring and reassessment.
Did You Know?
- Herbert A. Simon, a Nobel laureate, suggested in 1947 that decision-makers do not always make the best financial decision due to limited educational resources and personal inclinations.
Frequently Asked Questions
Who is Personal finance?
Personal finance is the ongoing practice by which a single person or household manages their money—budgeting income, setting aside savings, and allocating investments—while keeping an eye on risks and upcoming life milestones. It is not a single product or service but rather the overall discipline tying together banking, insurance, taxes, and retirement planning.
What are Personal finance's core responsibilities?
Its day-to-day duties include tracking spending against a budget, paying down credit-card balances in full each month, and directing roughly 10–20 percent of after-tax income into savings. It also oversees credit-score monitoring, income-tax filings, and the steady growth of retirement and pension accounts.
What key principles does Personal finance follow?
The foundational rules call for maintaining a six-month emergency cash reserve, maximizing contributions to tax-advantaged accounts, and favoring low-cost diversified funds over picking individual stocks. Avoiding speculative trading and keeping debt under control are equally central tenets.
How does Personal finance shield individuals from unexpected setbacks?
It builds a buffer by insisting on a six-month emergency fund and appropriate insurance coverage so that sudden medical bills, job loss, or other shocks do not derail long-term goals. This risk-management layer sits alongside the more growth-oriented investing side of the discipline.
Why is Personal finance important over a person's lifetime?
It translates everyday income decisions into concrete outcomes—home ownership, a funded retirement, and financial independence during later years. Without that structured approach, income tends to be consumed by short-term needs, leaving little room for the major life events that actually define a person's future.
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