Personal finance refers to the financial management of which an individual or a family is required to make to obtain, budget, save and spend monetary resources over time, taking into account various financial risks and future life events. When planning personal finances, the individual needs to consider the suitability to his or her needs of a range of banking products, investments and insurances.
The key component of personal finance is financial planning. Financial planning has 5 steps, assessment, goal setting, creating a plan, execution and monitoring and reassessment. Some examples of typical goals most adults have are paying off credit cards and/or student loan debt, investing for retirement, investing for college costs for children and planning for passing on their property to their heirs. There are six key areas of personal financial planning. These areas include financial position, adequate protection, tax planning, investment and accumulation goals, retirement planning and estate planning.
Saving is income not spent or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving can also include reducing expenditures. In terms of personal finance, saving specifies low-risk preservation of money, as in a deposit account, versus investment, where risk is higher.
From an economic perspective, it is now commonly assumed that most rational individuals follow the life-cycle hypothesis of consumption and will attempt to smooth consumption given their lifetime income and adjust to shocks via changes in their savings behaviour rather than their consumption behaviour.