The first step to managing your personal finances is knowing your financial status. You can only manage what you know you have.
Most people are caught up in debt or broke because they never know their financial status. They keep spending or borrowing as the case may be until they run out of finances or run into debt.
Here’s the good news, I would give you steps to knowing your financial status and how this can help you not only manage your finances but help you build wealth in the long run.
Know your assets
Your assets are resources you can control that are cash or cash equivalent or can result in future cash inflow.
Control here is key! If you own any asset that anyone can collect from you without any objection, it is NOT an asset.
Know your liabilities
Your liabilities are claims anyone has on you or obligations you owe that will eventually result to transfer of assets described above from you to another person.
If you have to keep paying for it or will pay for it in the future(transfer of cash), it constitutes a liability. For example, a car on loan or house on mortgage, not until you have finished paying for it, it is a liability. Used a service you have not paid for? That’s a liability.
Know your regular sources of income
Your regular income is an inflow of assets described above, most often than not, as a virtue of what economists call factors of production: land, labour and capital.
This simply means rental from natural resources you own and control, wages and salary you earn from providing services or producing products, returns on investments. Irregular sources of income are inheritances, trust funds, one-off gifts and pleasantries.
Know your regular expenses
Your expenses in layman terms are what you spend your assets (mostly cash) on. Most people focus more on their income without paying attention to their expenses. When this happens, it may not only erode your income but also leave you in debt.
You need to know what you dispense your assets on regularly, this includes but not limited to food, clothes, housing, repairs, transportation etc. These make up your expenses.
Knowledge application is what differentiates a learned man from he who knows not. If you do not apply what you learn, you are not any better than the unlearned.
Take 10 minutes of your time, pick up a piece of paper or a device and write down what you own and can control that will bring possible cash inflow, maybe not today but in the future. If you cannot exchange it for cash or another form of asset, it is not an asset.
Now be true to yourself, what is in your possession that can be collected at anytime, or you have to keep paying for, make a list of those things you owe the bank and other people.
Write down your sources of income and all your regular expenses you make for a specific period, day, week or month.
Now, net off your liabilities from your assets (Assets-Liabilities), what you have in front of you depicts your financial status.
Secondly, net off your regular expenses from your income (Income-Expenses), this depicts whether you are improving your financial status or making it worse.
Do you like what you see?
Dedicate time to knowing your financial status regularly. The next article will be on what to do after you have established your financial status.