Income and Expenditure are among the 4 pillars of personal finance. They are the supporting structures that help to build an individual’s current financial net worth. The four pillars are a guide to your financial growth.
These structures determine the foundation of your finance. Notwithstanding how large the cash inflow, the amount of investment, or the credit card may be.
As an individual, your financial capacity revolves around four common components, which are the four pillars of personal finance. These pillars help to build your financial foundation stronger.
A good measurement of these pillars will help you properly understand how healthy your financial status is.
4 Pillars of Personal Finance
We have assets, liabilities, income, and expenditures. Understanding how sensitive these four areas are could help the individual avert debts and maintain a steady income flow.
Assets
Assets comprise all resources that gain economic value, which an individual expects to be a future benefit.
Individuals or families can own an asset, which includes current, fixed, tangible, and intangible assets.
We have non-operating and operating assets. Your overall assets could determine your current net worth.
Although not all assets have monetary value or can be able to convert to liquid cash. For instance, houses, land, cash, shares, and others can be sold to gain cash. Understanding your assets and their value could help you understand your level of wealth.
Therefore, it is essential to acquire more access to gain strong financial support. Gaining financial freedom through the accumulation of assets can help you stay out of debt and be able to make more investments.
Even without many assets, having financial literacy will help you understand how to manage your finance and acquire more assets.
Although some of those assets may decrease in value as time goes on. For instance, a car or a house might fade in model or quality.
Liability
The liabilities of an individual represent all debts that need to be paid and other responsibilities that await the individual. It includes current liabilities also called short-term liabilities.
They are those financial obligations an individual needs to pay off within a short period like one year. These comprise tax, wages, and interest on the loan, those responsibilities have an immediate settlement.
While the other is long-term liabilities, those debts that can be met even after one year. They include rents, pension obligations, deferred tax, wages, and other debts that have future payments.
Liabilities are said to be the direct opposite of assets, which if not properly monitored may lead to heavy debt. It generally includes mortgages, payable bills, and various loans like study loans.
You can also include all interest from various loans. Sometimes when trying to manage liabilities we look for possible alternatives to increase assets or make the most profit on debts like loans.
Again, you could manage your liabilities by taking a strategy towards debt reduction. You can do this by reducing the number of loans to be able to pay them off quickly and still build assets for the time being.
Income
An individual’s income comprises all cash inflow generated within a specific period, whether daily, monthly, or annually.
It is best to take a periodic calculation of income in other to avoid lapses. It will also help to monitor accurate cash flow.
This cash flow is generated through tax refunds, pensions, profits from investments, dividends from shares, salaries, sales from assets—and other side incomes.
All these would increase the individual’s financial health. We classify income in two ways. When we talk of disposable income, we refer to any income that remains after paying taxes.
Then we use the reminder on personal expenses like rent, miscellaneous, and provisions. While the other discretionary income helps in making savings and payments of debts. It is very necessary to use income wisely.
Sometimes, your take-home pay or overall periodic income may prove insufficient in settling expenses and debt.
Then the need to consider other means of income becomes mandatory. Expenses like hospital bills, the desire for a new home, or an increment in children’s school fees. Switching to a higher pay might become thankful but the straightforward option could be a passive income.
Expenditure
An individual’s expenses represent all the spending made, which includes debts. In other to monitor your spending, you need to create a budget and trace every cent you spend.
For a complete record, keep track of every expense even the least phone bill you pay. This could help you understand when you are spending more.
Now, how can you keep expenses in check? This question is usually a very difficult one. This is because sometimes an individual’s expenses, are usually out of mostly inevitable budget.
Again, sometimes, you might be able to avoid spending on frivolities, but you can simply train yourself to resist them. This way, you can desist from those expenses you do not budget.
Conclusion
It is very important to always have a periodic check of your income and expenses. Evaluate your depreciating assets and be mindful of your accumulating liabilities.
In summary, the four pillars of personal finance are a foundation that guides you toward building and stabilizing your financial freedom.
