The Basic Concept of Personal Finance

Personal Finance

Finance is the science and study of investments, assets, and their liabilities. It makes us see things not in the terms of their current market value but in the terms of their short-term or long-term future market value. It basically provides a time-based value of assets and even money. The return rate of these viable assets contributes to the liabilities involved in finance. Personal finance includes all financial activities that an individual engages in such as assessing his/her current and future needs and setting up a plan to effectively fulfill those needs within the constraint of the available capital or income.

Personal finance depends heavily on one’s living requirements, individual goals and desires and, most importantly, income. There are some direct consequences of personal finances which have an interesting impact on the economy of the country.

Personal Debts & Credit Cards

Personal debt is incurred when an individual decides to borrow money from a creditor. This money may be for the purpose of fulfilling a need, aspiring to achieve a certain standard of living, or it may even be used to enhance the individual’s income. Personal debts have many common forms which include but are not limited to vehicle loans, mortgage loans, home insurance and credit card loans.

A credit card debt is the most common form of personal debt in the current economy of the world. Almost every bank serves as a creditor to allow its account holders to spend a set amount of cash monthly using their credit cards. This encourages the user to go beyond their financial standing and make purchases in the hope of repaying it later, cloaking the fact that this borrowing can lead to high amounts of interest being levied on their loan to be repaid. In this way, an individual might end up paying more than the item is worth.

Credit cards are infamous for a very popular effect called transparency effect. Transparency effect means that the consumer is sucked into making more and more purchases when they feel that they are not losing anything. When a person is buying things using a credit card, the creditor is paying for them and the individual is not losing anything significant. This creates an illusion in their mind and they spend more than they can repay.

Personal Bankruptcy

When financial loans are not repaid, the individual is first warned and then some legal action is taken against them. For credit card users, this commonly occurs when their grace period of repayment ends and their purchases are taxed with high amounts of interest, which become almost impossible for them to pay. Personal bankruptcy comes in when a person admits to the creditor that they are unable to repay their debt. Usually, this leads to the settlement of a loan repayment tenure during which a consumer must repay the credit amount or else face legal action. Under some conditions, the consumer gets exempted from repaying this loan completely, but this is a rare happening.