To learn how to manage personal finance .
1. Personal Finance
In simple words, personal finance is “accounting of your money” which includes:
- What are your expenses?
- What are the needless expenditures?
- How much are your savings?
- What are your future goals?
- Where are you investing?
- To understand personal finance, you must know about assets, liabilities, and net worth.
2. Assets
These are goods and services which can be measured in monetary terms. Assets help you to generate revenue and make profit. Cash, building, land, and investment are examples of assets. Assets are of two types:
i. Fixed assets:
- These are also called long-term or fixed-term assets.
- Fixed assets provide profit in long term.
- Property is an example of fixed assets.
Fixed assets are of two types:
a. Tangible assets
These assets are touchable and can be sensed. All physical assets are tangible assets such as:
- Land
- Jewellery
- Cash
- Equipment
- Inventory
- Machinery
- Furniture
b. Intangible assets
Intangible assets cannot be touched or sensed. For example, if you have a company, then it’s the patents, trademarks, copyrights, business name, logo, and brand value will be the company’s intangible assets.
ii. Current assets
Current assets are short-term assets that are used up or consumed in less than one year. These assets are used in the day-to-day operations of a business for running it.
Cash, marketable securities, prepaid expenses, and other liquid assets are examples of current assets
3. Liabilities
A liability is anything that a person or company owes like a loan. Liabilities are of two types:
i. Non-current liabilities
Non-current liabilities are the liabilities that are due for more than a year. These are also called long-term liabilities. For example, a long-term bank loan to buy a shop.
ii. Current liabilities
Current liabilities (short-term liabilities) are the liabilities that are due and payable within a short period of time (i.e. within one year). Electricity bill and school fees are examples of current liabilities.
4. Net Worth
Net worth is the difference between the value of the assets a person or a company owns and the liabilities they have. Net worth is the best way to determine the financial health of any individual or a company.
The following are the benefits of determining the net worth:
5. Personal Finance - Instruments
Personal finance includes the following things:
i. Budget
- Budget is an advance planning of your expenses, income, and savings.
- You should make a budget to manage your expenses.
ii. Saving and investment
- You should not only save money but also invest it in right instruments.
- Investment is very important to secure your future.
iii. Financial protection (insurance)
- You must have insurance for yourself, family, car, and house.
- Insurance is a very important aspect of personal finance.
iv. Taxes
- If you are earning, then you have to pay income taxes.
- Therefore, you must be aware of taxes.
v. Future planning
This includes buying a house, children’s education, retirement planning, etc.
6. Managing Personal Finance - Benefits
Managing personal finance helps you to:
- Avoid debts
- Increase savings
- Build an emergency fund
- Have a peace of mind
- Avoid needless expenses