There are four pillars of personal finance that give us the foundation in which we manage money. The pillars of personal finance are assets & savings, liabilities & debt, income, and expenses. Each pillar contributes to your overall net worth as a person. Knowing your net worth as a person is very beneficial as it helps you know your financial stand. It keeps things in perspective and helps you with your financial goals.
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Here are the pillars of finance and everything you need t know about them:
Assets & Savings
An asset is something that has economic value and can be converted into money. Assets include houses, savings, investment portfolios, land, valuable jewelry and bags, and so much more. What’s considered an asset is something that can be converted to cash in a short period of time. If you can’t convert your investment portfolios to liquid cash within a short period of time this is not an asset but a source of income.
An asset is one of the pillars of personal finance that can be converted to liquid money within a short period of time. Motor vehicles, motorcycles, boats, yachts are considered depreciating assets because they lose value over time. If you have a mortgage on your house then your house is no longer an asset but a liability.
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Liabilities & Debt
Liabilities and debt are defined as money that we owe or money we are owed. Things like credit card balances, mortgages, personal loans, car loans, student loans, and other types of loans are considered liabilities. Accrued interest on the types of loans that you have is also considered as liabilities. Liabilities and debt have a way of going out of control so it’s very important that you monitor your debt. This is very crucial in giving you an overall overview of your financials. There are various ways you can manage and track your debt.
Debt can be beneficial if used well i.e. a mortgage can be cheaper than paying rent. Make a plan and decide how much maximum debt you should have and how much you’re comfortable with. Liabilities and debt reduce your overall net worth.
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Tip: Assets and Liabilities give an overview of our long-term financial health. Income and expenses give a short-term overview.
Income
This is essentially how you make your money and the revenue you generate. There are two types f income; fixed and variable income. Fixed income is where the money you make gets credited to your account at the same time every month or week like salary, rental income, or pension. Variable income is the money you make from your business, side hustle, commissions, and capital gains. Income is what you use to acquire your assets and leverage against your debt.
Expenses
Expenses are what you spend your money on like the money you use to buy food, pay your bills. To have an accurate overview of how much expenses you have it’s good to create a budget and have a tracker as well. This will help keep things in perspective. Tracking expenses is much more challenging as opposed to the other pillars of personal finance. You can use an app or a google sheet to keep track of your expenses. Keeping track of your expenses will make sure oué living within your budget. This will also help track where you’re wasting money and how to take charge. You can use a budgeting app or a budgeting technique ta will account for every single cent that leaves your account.
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