Basic Guide to Personal Finance – Part 1 – Cash Flow, Assets, Liabilities

One of the main reasons people endlessly struggle
with money is a simple lack of financial knowledge. But don’t beat yourself up, it’s not really
your fault. They don’t teach you this stuff at school and your parents probably don’t
know it either. The good news is, you can quite quickly learn
some of the basics, which we’ll cover here. What we are going to show you is the basic
foundation that you can build on to improve your financial education. Some of this might
seem quite obvious but that isn’t necessarily a bad thing. The first term we are going to cover is cash flow. You need to understand cash flow and it’s probably the easiest to work out. Add up all the money you receive in a month (income), subtract
all the money you spend (expenditure), and whatever is left is your cashflow.
Understanding your cashflow is essential to taking control of your finances. If your cashflow
is negative, then you need to take immediate action. You have two simple options; increase
your income or reduce your expenditure. In most cases you can usually get faster results
by reducing expenditure but if you want long-term financial security then you need to also work
on increasing your income. In order to be in control of your finances
(and not the other way around) it is essential to track and monitor all your income and expenditure
and, ideally, create a budget. When you understand what your financial position is each month,
you can start to change it. It is true what they say, if you measure something, it improves.
There are lots of ways you can track your finances but you can’t beat a well-designed
spreadsheet. If you don’t want to create your own, I have created an easy-to-use and
attractive template. You can find the link to this in the description along with a tutorial.
Cashflow will be covered in more detail in another video. The next concept we are going to introdcuce is assets and liabilities. You probably know what assets are liabilities
are but you might not have thought about how they apply to your wealth. Wiktionary describes
an asset as “Something of value” and a liability as “an obligation, debt or responsibility
owed to someone.” If you want to be financially successful, you need to understand how assets
and liabilities play a powerful part in your wealth.
Let’s start with liabilities. A liability is essentially something that costs money
and/or depreciates in value. They are very bad for your financial health but we buy them
all day long, dream about them, get envious of other peoples’ and rarely stop to think
how they are affecting your long-term wealth. What counts as a liability? Put simply, everything
that isn’t an asset, is a liability! This includes;
Your car, your credit card balance, any outstanding loans, your mortgage, your 50” tv, your
new smartphone, that holiday you have booked, your gym membership, all your furniture, your
clothes… the list is endless. All of these things take money out of your
pocket and they don’t put it back. Now I’m not suggesting you treat this list
as the enemy and suspend all your shopping trips. But, before you buy something, you
need to be aware how it fits into your financial strategy. The reason so many people get fed
up with not having enough money, is they fail to put this simple concept into practice. Assets. There are really two types of assets. There are assets that are intrinsically worth
something and – importantly – will continue to be worth something in future. Ideally,
your assets will increase in value over time. Your car doesn’t count as an asset because
it depreciates in value over time so, while you can always sell it, you will never get
back the original money you invested into it.
Assets of this type are long-term investments and can include savings, pensions, property,
stocks and shares, a business or franchise, patents or intellectual property, art, antiques,
jewellery, etc. The other type of asset is much more exciting
in that they regularly put money back in your pocket and there is usually a crossover between
the two types of asset. Interest on savings, receiving pension payment, rent from a property,
dividends from shares and royalty payments are all good examples.
Another term for this type of additional income is passive income. The great thing about passive
income is that it goes into your bank regardless of how much work you do or how much time you
sacrifice. If you want to be financially free – which means no longer having to earn a
salary from a job – then it is essential you build your passive income stream. Passive
income is essential for long term financial success and will be covered in greater depth
in another video. The very simple rule to wealth, is to control spending on liabilities and gradually increase your assets and passive income. Over time,
the compounding effect of increasing your monthly income and in turn, investing in more
assets, leads to an exponential increase in your personal wealth.
This might seem like a long, slow process and it can be, but steady, consistent growth
over time is more powerful and guaranteed than any get rich quick scheme or any lottery
ticket. What we have covered in this video is the
merest tiny introduction to building your long-term wealth strategy.
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