Wednesday, December 8, 2021

The Best Way to Understand Personal Finance

When we are trying to understand Personal Finance, the best thing to do is understand what Personal Finance is NOT. Many people think that accounting and personal finance are the same, but Personal Finance is NOT Accounting.

On the surface, they may seem the same; they both have something to do with money. However, the definitions will help us better understand the differences.

Merriam-Webster’s definition of accounting is “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.”

Based on this definition, we see that accounting is the process of analyzing and recording what you have already done with your money. This is why having an accountant is usually not enough when it comes to your personal finances.

Accountants generally don’t concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or coach, they will likely just look at what you have done with your money at the end of the year and provide you with a report of their analysis.

This report is usually your tax return, what you owe the government, or what the government owes you. Very rarely does the accountant provide an individual with a Balance Sheet or Income Statement or a Net worth statement, all beneficial tools necessary to effectively manage your personal finances.

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