Understanding the Basic Aspects of Personal Finances

March 26, 2021 by Justin Weinger

There are many types of budgets and financial profiles. However, if you want to understand your financial state, you’ll need to understand components such as expenses, assets, income, and debt. Measuring each lets you see how financially healthy you are.

What are Assets and Liabilities?

These are the basic elements of your financial life. Taking the difference between these lets you find your net worth. For instance, let’s say you have assets, like a car and a home, worth a total of $800,000. Your liabilities could include the mortgage and what you owe on the car. If that debt is $500,000, your net worth would be $300,000.

An asset is something you own and has a potential cash value. So, if you needed money, you could sell the car or home. And the funds in your life insurance and financial accounts are also part of your assets. On the other hand, debt, such as car payments, mortgages, and student loans, are all liabilities. Getting rid of debt is the key to increasing your net worth. One way of doing that is to consolidate them. Many people have student loans, but student loan consolidation might be the right option since it lets you have a simplified payment. Then you can save more on your monthly expenses.

Income and Expenses

Liabilities and assets let you get an overall picture, but you’ll also want to track expenses and income to better understand where your funds are going each day. Income is the money coming in, and expenses include the funds going out. Once you create a budget and compare the two numbers, you can determine whether you have a negative or positive number. A negative number means you are incurring debt, while a positive one means you are saving money.

To calculate your income, you’ll want to add up dividends, tax refunds, interest, and take-home pay. If you are retired, you likely receive income from your investments, pension, or Social Security. When you add up income, ensure you account for things that can reduce expenses, including health care insurance.

You can divide your income into categories, like discretionary and disposable. The latter refers to funds required for living, like food, rent, and insurance. Anything left after these necessities is discretionary and can pay for eating out, taking vacations, and other fun things. Still, you have to be careful with discretionary income since it’s also what you use for your savings account.

Tracking Expenses

The expenses are the money you have to spend. To better understand them, you’ll need to have a budget and track each cent you spend. There are apps to help with that, and you can also get computer software. Or you might stick with a simple spreadsheet or even a notebook. When tracking your expenses, you’ll want to make sure you list everything, not just the big-ticket items. Look for financial statements, like credit card bills or data from your bank account, to see where your funds are going. By doing so, you can ensure you do not spend more than you make.

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