The anatomy of personal finance

While we have all heard and read about personal finance but am not sure if we can clearly articulate what exactly is personal finance. At least till some time ago, I was unable to clearly articulate what exactly is personal finance. Trying to exactly define  personal finance though a seemingly simple exercise is quite a confusing one. I was able to distill my confused thoughts into a simple pictorial which clearly identified the various elements of personal finance and the interplay between them.


Personal finance can be explained by a simple equation. The left hand side of the equation represents the inflow of cash via

1. Salary (for salaried folks) or income from active business (entrepreneur)  net of taxes
2. Passive income for e.g. interest earned from fixed deposits net of taxes
3. Cash inflow from any loan

The right hand side of the equation represents the usage of cash

1. Expenses e.g. day to day expenditure; living expenses etc
2. Interest payout for balancing the cash inflow from the loan
3. Savings which represent the leftover from the inflow of cash and the usage of cash

Anatomy of personal finance

The interplay between the two sides of the equation takes place in two ways

1. Conversion of savings into assets generates cash which leads to creation of passive income e.g. money deposited in bank 
2. Balancing of inflows from lons via interest payments e.g. cash from a home loan used to purchase a house creates EMI payment

Managing ones personal finance is all about balancing the left and right hand sides of the equations. To optimize the balancing process one should take the following actions:

1. Maximize = Salary; Passive Income; Loans for fund asset creation (e.g. home loans); Savings; Asset
2. Minimize = Taxes; Expenses; Loans to fund expenses (e.g. interest on credit cards); Interest