The Five Pillars Of Personal Finance (2024)

Personal FinanceDefinition

Personal finance is a term that refers to personal money management.

Things like budgeting, investing, retirement planning, banking, insurance, mortgages all fall under the category of personal finance.

Personal Finance – The Five Pillars

In this section I'm going to explore the five most important areas or “pillars” of personal finance—that you must understand to stay on top of your finances.

1. Income

Your income is one of the most important factors that will affect your financial situation.

Your household income will directly influence your way of life and your level of financial freedom.

Here are some common ways that you may generate an income:

• Wages/Salary
• Work bonuses
• Dividends
• Rental Income
• Pensions

As mentioned above, your income has the biggest influence on your financial situation—and increasing it will improve all areas of your financial situation!

As Dave Ramsey says: “Your income is your most powerful wealth-building tool”.

Related articles:

• How to Invest 50k Wisely
• How to Invest 20k

2. Spending

The spending category includes ways that you spend money—without making a return. This category does not include investments of any kind.

Some types of spending include:

• Fuel for your car
• Rent/Mortgage
• Food
• Travel
• Electricity
• Entertainment

Your expenses reduce the amount of money you have left over to invest—and subsequently build wealth.

It's just as important to manage your money properly as it is to increase your income—to achieve financial independence.

It doesn't matter how much money you make, if you can't keep a cap on your spending—you're going to have a bad time.

Good spending habits are the key to financial independence and financial security.

3. Saving

The process of saving money includes putting money away in a savings account—or simply holding onto cash.

There are many reasons that you might want to save money—Including:

• Building an emergency fund
• Saving up for a holiday
• Saving up for a birthday present
• Preparing to invest

I could have made this list much bigger—but you get the point. It's important that you have some cash stashed away at all times—as an emergency fund.

You won't regret building an emergency fund—especially in the event that you lose your job, or an unexpected expense pops up!

it's time to get onto the next pillar of personal finance—investing!

4. Investing

Investing refers to the purchasing of income generating—and appreciating assets (assets that make you money—and go up in value).

Investing your money is one of the best ways to build wealth over the long-term. Investments have an inherent level of risk—but there is no reward without risk, right?

Here are some common investment examples:

• Stocks
• Bonds
• Mutual Funds
• Real Estate
• Businesses

The rate of return you receive from your investments is typically related to the level of risk your investments have.

For example, US stock markets have provided average returns of roughly 10% over the last 120 years. While stock prices may fluctuate wildly over the course of a few years—the stock market is known to be a safe long-term investment vehicle.

Larger companies such as Apple, Coca-Cola and Microsoft are known as safe investments—because of their large size. While small, start-up companies pose a higher level of risk—and you have a high probability of losing your entire investment when investing in smaller companies.

Essentially, investing is a great way to build wealth—whilst having an inherent level of risk.

For more investing ideas visit our How to Invest 1000 Dollars post. Where I explore 11 great ways to invest your first $1,000.

5. Protection

Personal finance protection refers to products that you can use to protect yourself against unforeseen negative events that may occur.

Here are some common ways to protect yourself financially:

• Getting Auto Insurance
• Getting Homeowners/Renters Insurance
• Getting Health Insurance
• Getting Long-Term Disability Insurance
• Estate Planning

Insurance and proper estate planning are things that we must all consider.

It's a good idea to seek professional advice when setting up a protection plan for yourself and your family.

To learn more about insurance visit Dave Ramsey's 8 Types of Insurance You Can't Go Without.

Personal Finance Careers

Finance is an enormous industry, and there are plenty of jobs available within the personal finance category.

I have created a list of personal finance careers below—in case this subject has sparked your interest!

Here are some common personal finance careers:

• Financial Advisor
• Investment Advisor
• Financial Planner
• Tax Advisor
• Estate Planner

There are many jobs in the personal finance industry, as you can see.

That's it for the five pillars of personal finance. Educate yourself on these five personal finance pillars—and managing your finances will be a breeze!

Personal Finance Books

If you'd like to learn more about personal finance, visit our Best Personal Finance Books post. I explore some of the best personal finance books of all time.

The books cover investing, budgeting, saving, lifestyle choices and more!