Financial Planning involves many things our money, our efforts, our goals, our personality, and behavior.It is a long-term activity as well that extends to many years/decades. While we do try our best to plan our finances optimally, we do run into some problems –

• The unexpected loss of income source
• Mismanagement of income and expenses
• Unexpected financial burden
• Underperformance of Investments.
• our behaviour

Personal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan. This guide will analyze the most common and important aspects of individual financial management.

As shown below, the main areas of personal finance are income, spending, saving, investing, and protection. Each of these areas will be examined in more detail below.

Income

Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their family. It is the starting point for our financial planning process.

Common sources of income are:

• Salaries
• Bonuses
• Hourly wages
• Pensions
• Dividends
• 
  

Spending

Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (i.e., not an investment). All spending falls into two categories: cash (paid for with cash on hand) and credit (paid for by borrowing money). The majority of most people’s income is allocated to spending.

Common sources of spending are:

• Rent
• Mortage payments
• Taxes
• Food
• Entertainment
• Travel
• Credit card payments

 Saving

Saving refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings or investments. Managing savings is a critical area of personal finance.

Common forms of savings include:

• Physical cash
• Savings bank account
• Checking bank account
• Money market securities 

Most people keep at least some savings to manage their cash flow and the short-term difference between their income and expenses. Having too much savings, however, can actually be viewed as a bad thing since it earns little to no return compared to investments.

 Investing

Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back more money than they originally invested. Investing carries risk, and not all assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return.

Common forms of investing include:

Stocks

Bonds

Mutual funds

Real estate

Private companies

Commodities 

Investing is the most complicated area of personal finance and is one of the areas where people get the most professional advice. There are vast differences in risk and reward between different investments, and most people seek help with this area of their financial plan.

 Protection

Personal protection refers to a wide range of products that can be used to guard against an unforeseen and adverse event.

Common protection products include:

• Life insurance
• Health insurance
• Estate planning

This is another area of personal finance where people typically seek professional advice and which can become quite complicated. There is a whole series of analysis that needs to be done to properly assess an individual’s insurance and estate planning needs.