It’s amazing how few people examine their personal finances in fine detail. Changing the way you look at your finances can have a huge effect on your decision-making. I treat my personal finances like that of a company because in accounting terms they are really no different (just simpler).
Like any ordinary business you have income and expenditure. In the majority of cases the income will be from your working salary. The expenses will be everything from the essentials (food, rent, healthcare) to the desirable (iPhone, holidays, morning coffee from Starbucks).
You will also have assets and liabilities. Your assets could consist of a house, a car, mobile phone, even stocks and shares. Liabilities will mainly be debt (mortgage, car finance, credit cards) but some of your assets can also be liabilities. Cars and houses for example have ongoing costs such as repairs and insurance. The deeper you go into your “company” finances the greater chance you have of identifying areas to reduce costs and increase income.
If you are able to reduce expenditure and increase income then you will be generating excess cash (company profit and also an asset). When we see our income increase, perhaps as the result of a pay rise, it’s common for us to just increase our spending. Resisting the urge to spend will reap rewards and the longer you do it for the greater the rewards will be. If you really want to grow your wealth, you should be making your money work for you by investing it. Investing your excess income creates and builds assets. This is the key to building wealth – growing assets. Proving that your liabilities are not also growing you will be increasing your net worth.
I will be going into greater detail on asset building in later blog posts but for now just try to look at your finances in a different light. What income are you bringing in? What are your expenses? Are you building valuable assets or increasing liabilities?
Would you want to invest in a company that was just breaking even? Or even racking up debt? Create a profitable “company” and you will soon building valuable assists. That’s the fun part!
If you are thinking of getting into investing, I highly recommend learning Warren Buffet’s number one rule.