Managing money strategically has become the need of the hour. But the challenge for today's youth is that it seems the most difficult thing. Our income, age, wealth, investments, credit card bill, and other factors will be different for everyone. But everyone agrees on the general framework of the"four pillars of personal finance."Those four components are assets, liabilities, income, and expenses. Handling these four factors wisely will not only help you get rid of debt, but will also help you achieve financial freedom.

Let's take a look at the four pillars of personal finance.

Assets

Assets are resources that can be converted into cash over a period of time, however, the turnaround time depends on the nature of the asset. The assets are divided into different categories such as current assets, fixed assets, tangible and intangible, operating and non-operating assets. For example, a house is a tangible asset, but the shares you own are an example of a intangible asset. Both are different in terms of quality. Shares can be sold quickly and converted into cash, while the house may take a little longer.

You can list all the assets and add them together to get a sense of your current value. Getting clarity on your diverse assets is the first step towards achieving financial freedom. Examples of assets are house, bonds, mutual funds, gold, silver, antiques, land, commercial space, cash, fixed deposits, etc.

Assets are one of the strongest components of finance. Because this is the only factor that will give you strong financial support. If you do not have more liabilities, the value of this will increase as the assets grow. Most assets increase in value over time. Some may be short term, some may be long term. For example, a house may take longer to increase in value, while shares may increase in value in the short term. It all depends on the nature and type of property.

Liability

Simply put, liability means the money you owe to others. Many of us fail to understand the basics of managing debt and end up in debt. Liability is the opposite of assets. e.g. student loans, credit cards, unpaid bills, and mortgages. In addition to this, the interest payable on all these liabilities are also treated as liabilities. Basically, interest is considered as an indicator of the cost of debt. As your credit score goes up, your interest rate goes down.

But one thing you need to understand is that liability isn't always bad! Especially when it comes to creating an asset such as a home or educating yourself. If you are considering debt financing as an option, you should decide on an upper limit. The goal should be clear that the assets need to be increased over a period of time. Sometimes it may be difficult, but you have to stick to it to achieve your long-term goal.

Income

Income refers to all the money that a person generates in a given period of time. You can do this monthly or yearly. While a monthly calculation is suggested to manage cash flow, keeping track of income and expenses can help you achieve short-term goals. Income can be classified into two parts, first is disposable income and second is discretionary income! Disposable income is basically the income / cash remaining after paying tax to the government. This money is used for our daily needs. Discretionary income is what remains after expenses. So, income minus disposable income gives us discretionary income. Discretionary income can be saved or spent on luxury. You can also use it to pay off debts. Therefore, you should use this income wisely and do not spend unnecessarily.

Try to increase your sources of income. Try to build more sources of income that are passive in nature along with active income. For example - engaging in freelancing opportunities such as blogging and teaching. Additionally, you can earn income from investments such as rental income, interest income, and capital gains. An additional source of income will always keep your balance sheet positive and help you increase your net worth. So, start exploring new sources.

Costs

This indicates money flow. All money that is spent without income is called an expense. We need money to carry out our daily activities. Always keep track of your monthly expenses so as not to overspend. It is very difficult to keep track of your monthly expenses. You can use an app for that. Limit the use of your credit card to avoid unnecessary expenses. Use discounts, offers, vouchers, etc. when making purchases. Try to build an emergency fund for immediate or non-urgent expenses so that your savings are not disrupted. Your financial stability depends on expenses, and as expenses increase, savings decrease, and vice versa.

These are the four components of personal finance. To achieve long-term financial independence, it is necessary to implement it in everyday activities. Once income and expenses are under control, assets and liabilities will separate on their own. Observing all four factors will help you analyse your current situation and plan your long-term goal. Long-term goals can only be achieved through short-term gains. So, start planning and strategising your financial freedom from today. Any small step towards achieving your retirement and financial independence in time will bring miracles.