215 National Financial Literacy Month - Day 8 - The Pillars of Personal Finance

When it comes to pillars it is defined as firm upright support
for a superstructure, for the purposes of this episode it is
personal finance. Everyone has four basic components in their
financial structure: assets, debts, income, and expenses. 


Measuring and comparing these can help you determine the state of
your finances and your current net worth. You can think of them
as the vital signs of your financial circumstances. When they are
all in balance and working for you, your vitals are strong. When
things get off-kilter, like your liabilities being off the
charts, your finances may need some CPR to set them right.


So let us delve into the four pillars of personal finance.


Assets:


Assets are items that you own and that have value
that can be turned into cash when needed. Assets include cash in
your personal checking or savings account, whole life
insurance policies, 401k’s, investments, land, equity in your
home, valuable jewelry, and even antique fine china. The key to
an asset is its ability to be converted to liquid cash within a
short period of time. Your vinyl record collection may be the
envy of all your friends, but if you cannot convert it to liquid
cash when you need it, then it cannot be considered an asset.


Debts:


Debts are the accounting opposite of assets and include all
accounts payable. Things like your mortgage, student loans, car
loans, credit card balances, taxes owed, bills due, and money you
owe others for services are all considered liabilities. In
addition, accrued interest and principal on mortgages and other
loans are liabilities as well. Remember, interest
rates are an indicator of the cost of carrying debt, and
tend to be negatively correlated with one’s credit score: the
lower the credit score, the higher the interest rate.


Income:


Income is all the money you generate. It also
includes interest and dividends you make on your
investments. Tax refunds also qualify as income. For those under
age 65, take-home pay usually constitutes the majority of income.
Retirees and those over 65 gain most of their income from
investments, Social Security, or pensions. When taking stock of
your income, be sure to include benefits that reduce your
expenses, such as employer-provided health insurance, or that
increase your assets, such as 401K programs.


Expenses:


Expenses, or outflow, is all the money you spend. To gain an
accurate total of expenses, it is important to establish a budget
and to keep track of every penny spent. Keeping track of expenses
is more challenging than keeping up with income because of the
sheer number of different expenses.


If you have made an assessment of your pillars of finance,
assets, liabilities, income, and expenses, what are your
financial vital signs? Are you in a good space from a pillar of
personal finance perspective and are you ready for valuable
guidance on saving and investing for your future? Or are
things looking a little rocky and in need of some help increasing
assets, decreasing liabilities, and getting your income and
expenses in better balance? Whatever space you happen to be in at
this time, know that we are all a work in process.


Learn about Paul Lawrence Vann's virtual Financial Fitness
course, it is being offered at a 50% discount throughout the
month of April, National Financial Literacy Month, here is the
link:  https://bit.ly/3dbperG