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Personal Finance – Meaning, Planning Process & Importance

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We all strive to live a life free from financial worries, but when we set out to achieve our financial dreams, we are faced with many challenges. Sometimes it’s not just the lack of funds that causes these setbacks, but rather their mismanagement. Many don’t invest in financial literacy, they procrastinate and delay decisions, they don’t control their spending, don’t define clear goals, and don’t engage in financial planning to achieve them. Then there are also unexpected expenses like medical bills and a lack of contingencies to deal with them. Such challenges are faced by many and stem from the complexities of handling money. People don’t realise that the remedy lies within their grasp through effective Personal Finance management techniques. 

Through personal finance management, one can not only regain control of their financial life but also pave the way for a future filled with security and success. In this blog, we’ll take a detailed look at the many aspects of personal finance and the steps you can take to start your personal finance planning journey. 

What is Personal Finance?

Before we go deeper, let’s start by understanding personal finance meaning:

  • Simply, personal financial planning refers to the process of managing one’s income, expenses, savings, investments, and overall financial resources to achieve specific short-term and long-term financial goals.
  • It includes budgeting, investment and retirement planning, and risk management.
  • It enables you to minimise your tax liabilities, equips you to effectively deal with debt, and prepares you to deal with unforeseen financial situations, such as the loss of a job.
  • With solid personal finance management, you can track the progress you are making toward your financial dreams while improving your financial literacy.
  • A Personal Finance plan ensures financial stability for the long term. 
  • A certified financial advisor can help you by creating a personalised financial plan based on your unique financial situation, goals, time horizon, and risk tolerance. They can also offer insights that will empower you to make informed decisions about your budget, insurance, investments, debts, and tax liabilities. 

Areas of Personal Finance

Broadly, the five important areas of personal finances are income, spending, saving, investing, and protection. Let’s break down each aspect to understand its importance in personal finance.


Income refers to the cash inflow you receive. It is used to bear essential and non-essential expenses, as well as for saving, investing, and financial protection. It includes every source of money such as salary, profits, interest, rental income, dividends, pension, bonuses, and other sources of cash inflow. It can be said that income is where personal finance begins, as understanding the nature and stability of your income is the first step toward crafting a solid financial plan.


Spending on the other hand refers to the cash outflow. Most of the income you receive is spent on covering essential and non-essential expenses. Essential expenses include expenses such as rent, mortgage, food, tax, and travel. Non-essential expenses include expenditures on entertainment, hobbies, and vacations. Spending is one of the key areas of personal finance that you need to monitor, as it ensures sustainability. If you spend more than your income, you will likely fall into debt. Remember, your income is limited and you don’t have as much control over your income as you do on your spending. The effectiveness of your financial plan depends on how smartly you manage your spending.


Savings refers to the remaining income once all expenses have been covered. This is why it’s important to have control over spending, as it directly impacts how much you can save. In recent years, however, the formula has evolved. Generally, we think of savings as “Savings = Income – Expenses”, but now it is recommended to save money as soon as you receive your income, and spend whatever is left. This way, you will be forced to save, which will help you in securing your future. So, “Expenses = Income – Savings”

The money you save can be used for building an emergency fund, repaying debts, or investing.


One mistake people often make with savings is that they let their money sit idly in a savings account. This error can be potentially very costly because of inflation. Inflation is the monster that eats your money slowly, and over time, it erodes its purchasing power. Essentially, the value of money today will decrease a year later depending on the yearly inflation rate. The key to beating this is investing.

Investing not only helps you beat inflation but also helps you gradually grow your wealth. The goal of investing is to generate a positive return on the money you invest, thus growing wealth. This can be done by buying assets, such as stocks, bonds, mutual funds, real estate, and gold, and taking on the risk associated with each asset. So, it’s important to recognise that investing carries risks, as not all assets appreciate and there is a possibility of incurring losses.


Protection involves safeguarding yourself, your loved ones, and your assets from unforeseen circumstances. This aspect includes buying insurance and estate planning. Health insurance policies provide a safety shield to you and your family in case of medical emergencies. Life insurance, on the other hand, guarantees the financial well-being of your family in the event of an unfortunate incident. Additionally, car and home insurance can help you cover heavy repair expenses in case of an accident. Protection is the proactive measure you take to shield against life’s uncertainties and maintain financial stability.

The Personal Finance Planning Process – Step-by-Step Guide

Here are ten steps you can take to get started on your personal finance planning. Remember, the sooner you start the better your financial future will be.

Step 1: Set Financial Goals

Whether it’s buying a house, funding your child’s education, or planning for retirement, clarity on financial goals is the first step towards success. Set SMART financial goals as they are essential for an effective financial plan. SMART means specific, measurable, attainable, relevant, and time-bound. Define your short and long-term financial goals while keeping these five points in mind. 

For example, instead of saying, “I’ll start saving money to buy a new car”, say ”I will save Rs. 20,000 each month for the next 12 months to make a downpayment for a new car.” This way you are being specific, and giving yourself a time frame to achieve the goal. The amount you have to save should be attainable and align with your overall financial situation. 

Step 2: Assess Current Financial Situation

This means taking stock of your current income, expenses, assets, and liabilities. How much money are you making after taxes? How much money is spent? How much is saved? How much goes to repaying debts? How much are your investments and properties worth?  With these you will be able to calculate your net worth, just subtract your total liabilities from your total assets. Knowing your net worth can be advantageous as you can track it over time to measure your progress. An honest assessment of your current financial situation will also help you set SMART goals.

Step 3: Create a Budget

Budget is how you manage your finances daily, and ultimately it is what helps you achieve your short and long-term financial goals. It details how your income will be spent, and makes sure you live within your means. Categorise your expenses in three parts: essential expenses, non-essential expenses, and savings. The non-essential expenses category will help you identify areas where you can make cutbacks to funnel more money into savings. 

Generally, you should aim to allocate 50% of your income to essential expenses, 30% to non-essential expenses, and save 20%. This allocation depends on your financial goals, however, so how you allocate your income may vary. Sometimes individuals can get carried away and make too many cuts in non-essential expenses. While you can do this, you have to be careful because making too many cuts means your lifestyle will suffer, and ultimately you will lose the motivation to stick to your budget. While creating a budget is a crucial component of the financial planning process, sticking to it is equally important so be realistic. 

Also Read: What is Budgeting in Financial Management? Know the Complete Guide on Budgeting

Step 4: Emergency Fund Planning

An emergency fund refers to a reserve of cash that you set aside to specifically use for unexpected expenses or situations. It provides you with a safety net and prevents you from going into debt when faced with unexpected events, such as medical emergencies, car repairs, or job loss. The Emergency Fund Planning process involves how much money you need to save and where. Generally, experts recommend saving three to six months’ worth of living expenses in an emergency fund, but this amount can vary based on your circumstances, such as the stability of your job, your lifestyle, or your monthly expenses. This cash should be easily accessible, as emergencies demand quick action. You can save it in a high-interest savings account so it can be quickly tapped into when needed.

Step 5: Debt Management

Debt can be a major cause of anxiety, so if you have any debts, prioritise paying them off as quickly as you can to secure your financial freedom. Explore different strategies such as debt consolidation or creating a structured repayment plan to effectively manage and eliminate your debts. If you pay off high-interest debts first, you will save a lot of money in the long run. On the other hand, by starting with the smallest debt, you will gain confidence and momentum to quickly clear your liabilities. 

Explore different strategies that suit you to manage debt.  Even if you don’t have any debt, avoid taking debts you can’t easily repay. An important thing to note here is your credit score. It reflects how well you’ve managed your debts, and determines how easily and quickly you will get loans should you need them. On top of that, people who have a good credit score get lower interest rates and higher credit limits, so work on improving your credit score. You can do this by paying off your debt on time, maintaining a healthy credit utilisation ratio, and not having too many debts active at the same time. 

Step 6: Investment Planning

Investment planning involves careful assessment of your financial goals, risk tolerance, and time horizon so you can find the most suitable financial products for your investment. It helps you grow your wealth, gives you security, and improves your overall financial well-being. Those who are new to investing can get easily overwhelmed, so inexperienced individuals should focus on improving their financial literacy through educational videos, podcasts, or articles. They should also seek guidance from a certified investment planner, who can assess their unique situation and help them build a diversified portfolio of investments tailored to their specific needs.

Step 7: Retirement Planning

When you are young, retirement may seem a lifetime away, but it is vital to start planning for it as early as you can. The sooner you start, the more time your investments have to grow through the power of compounding interest. Time is a big factor in building a decent retirement nest egg, and starting early provides a massive advantage. It also enables you to take more risk, as you have plenty of time to make back any losses incurred. There are plenty of options in India that you can explore to get started on your Retirement Planning, such as the Public Provident Fund and New Pension Scheme.

Step 8: Insurance Coverage

As said before, ensuring the safety of your loved ones, your assets, and yourself is a major part of financial planning. Having adequate insurance coverage becomes especially important when you have old parents or other dependents and when you are the main earner of your family. Life is unpredictable and you never know what it will throw your way, so it helps to be prepared. An important thing to keep in mind about insurance is that it gets expensive the older you get, so again, get insured as soon as you can.

Step 9: Tax Planning

For those who want to keep as much of their hard-earned money as possible, Tax Planning plays a crucial role in personal financial planning. Through tax planning, you can legally reduce your tax liabilities by taking advantage of the various benefits in tax law, such as Section 80C of the Income Tax Act of 1961. For example, if you invest in Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), or National Savings Certificates (NSC), you can claim deductions up to Rs. 1.5 lakhs from your taxable income. There are also deductions available for expenses like health insurance premiums, education loans, and house rent, which you can further use to optimise your tax liabilities. Explore different tax-saving instruments and keep up to date about any changes in tax regulations to take advantage of new opportunities that align with your financial goals.

Step 10: Regular Monitoring and Adjustments

Managing personal finances is a continuous process. It doesn’t end after you have made your financial plan. Monitoring and readjusting your financial plan is the essential final step to ensure its effectiveness and adaptability to changing circumstances. Regularly review your budget, portfolio, debt, and financial goals. Life is dynamic, your financial situation will change, your goals will evolve, you might add new members to your family, you might have to deal with unexpected expenses, there might be new international and domestic developments, or changes in the market, and so much more. Many factors will affect you and your finances, so make sure your financial plan reflects the changes, and readjust as needed.

Also Read: Important Things to Know About in Your New Year Financial Planning


There you have it! Your complete guide to personal finance. Simply put, personal finance is the art of managing your money today to secure a peaceful future. We dived into the five main areas of personal finance – income, spending, saving, investing, and protection to understand their role in the financial planning process. The ten steps we discussed, from setting financial goals to reviewing and readjusting your financial plan can help you effectively manage your finances and live a stress-free life. 

By implementing these strategies, you can confidently navigate the world of personal finance, but remember – it is important to start as soon as you can. It’s not a problem even if you start low, but it’s important to start. A certified financial advisor can prove invaluable in providing personalised insights and guidance tailored to your unique financial situation. He can help you by making a financial plan that aligns with your goals, risk tolerance, and time horizon. Be disciplined, be informed, and most importantly be positive and nothing will stop you from realising your dreams!