Economics and Personal Finance: A Complete Guide

It is a well known fact that economics and personal finance are interrelated and they influence each other. Economics and personal finance are often taught and presented as separate disciplines. Both economics and personal finance are important and they have valid applications. Personal finance focuses on the techniques and tools of managing money. Both economics and personal finance focus on how companies and investors evaluate risk.

Economics has been more theoretical and finance has been more practical. The distinction with economics and personal finance has become less in the past twenty years. Both economics and personal finance professionals are being employed in government organizations, corporations and financial markets. Both economics and personal finance are absolutely important to the economy, investors and markets. Personal finance is derived from economics and it comprises assessing money, banking, credit, investments, and numerous aspects of financial systems. Finance can be divided into public finance, corporate finance and personal finance.

Personal Finance as an Offshoot of Economics

Economics throws light on how goods and services are made, distributed, used, and how the economy functions. Macroeconomics and microeconomics are two distinct branches of economy. Personal finance is an offshoot of economics and it elaborates the management, creation, study of money, banking, credit, investments, assets and liabilities. Budgeting, insurance, mortgage planning, savings and retirement planning are core components of personal finance. Both economics and personal finance are interrelated disciplines with some overlap.

Both personal finance and economics are concerned with the world of money, markets, and transactions. Economics give importance to regional or global economies and it analyses the behaviour of these people within these markets. It has been pointed out that economics is a broader field of study than personal finance and financial strategies for personal finance are dependent upon the individual’s earning, living requirements, goals and desires. Good personal finance strategy is a mixture of pension for retirement, savings for retirement, responsible use of credit cards, responsible use of loans, suitable insurance policies, and securing the best mortgage rates.

Income and Savings as the Vital Components of Financial Systems

Personal finance is the snapshot of an individual’s financial state and mindset of how to manage money and other financial tools such as income, debt, budgeting, credit, savings and investments. Income, savings, investments, checking accounts, spending, budgeting, credit, credit scores, insurance and taxes are the vital components of personal finance. Income and savings and investments are two most important types of personal finance. Passive income and active income are two key types of income. A best example of passive income is the interest we earn on money deposited into a savings account.

Salary or wage from a job is the best example of active income and savings and investments are best sources of passive income. Interest earnings from savings account and savings bonds are considered as savings income. Dividend paid to stockholders and interest paid to bondholders come under investment income. Checking accounts are suitable for transaction payments and they don’t generate much interest. It is a convenient and secure way to store transactional funds.

Investors use online software or spreadsheets to monitor their checking account balances on a daily or weekly basis. Expenditures can be divided into regularly recurring and predictable expenditures and non specific or unpredictable expenditures.