People often associate discussing personal finances with a catastrophe, such as trying to cover one’s expenses after losing a job, managing a household because of an illness, or becoming unable to work because of an injury. But in reality, making personal financial decisions is a process that doesn’t just help people weather a financial catastrophe but also helps them achieve their dreams and goals, too, such as owning a home, affording college for their children, retiring early, and so on.

You should begin to think seriously about your personal finances when you get your first job, if not earlier. It is most prudent to begin managing your personal finances from the day you receive your first allowance! The sooner you think seriously about your finances, the easier it is to direct your earnings toward achieving your goals in life.

When an individual or a family uses financial principles to manage how money is budgeted, saved, invested, preserved for future life events, and protected against risks, it’s called personal finance. In its simplest form, personal finance is about setting goals, making choices, and following through. As Figure M5.1 shows, you need to have a plan for reducing your expenses and increasing your income and assets so they begin to work for you.

Money management is a key component of personal finance and generally includes the following:

• Determining what you have

• Setting goals for what you want or need

• Planning how to achieve your goals

There are several different aspects to effective money management. We begin by exploring how to create a financial plan.