Managing money strategically has become the need of the hour. But the challenge is that today’s youth find it the most difficult. Our income, age, wealth, investments, credit card bills and other factors may be different for everyone. But everyone agrees on the general framework of the “Four Pillars of Personal Finance”. Those four elements are assets, liabilities, income and expenses. Managing all these four elements wisely will not only keep you out 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 within a certain period of time, however, the turnaround time depends on the nature of the asset. Assets are divided into different categories such as current assets, fixed assets, tangible, intangible, operating and non-operating assets. For example, a house is a tangible asset, but the shares you own are an example of an intangible asset. The two differ in terms of liquidity. Shares can be sold quickly and converted into cash, while a house may take a little longer.

You can list all your assets and add them up to understand your current value. Getting clarity on your diverse assets is the first step to 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 most powerful elements of finance. This is because they are the only element that provides you with a strong financial support. The more assets you have, the more their value will increase. Most assets gain value on their own over time. Some are short-term, while others may be long-term. For example, a house may take longer to appreciate in value, while shares may appreciate in value in a short period of time. It all depends on the nature and type of asset.

Liabilities

Simply put, liabilities are money you owe to others. Many of us fail to understand the basics of debt management and end up in debt. Liabilities are the opposite of assets. For example, student loans, credit cards, bills, and mortgages. In addition, the interest you pay on all of these liabilities is also considered a liability. Basically, interest is considered an indicator of the cost of debt. The higher your credit score, the lower the interest rate.

But one thing you need to understand is that liabilities are not always bad! Especially when you are taking on debt to build an asset like a home or to educate yourself. If you are considering debt as an option for financing, you should set an upper limit. The goal should be clear that you need to increase your assets over a certain period of time. It may be difficult at times, but you should stick to it in order to achieve your long-term goals.

income

Income refers to all the money that a person generates over a certain period of time. You can calculate this monthly or annually. Although monthly calculation is suggested to manage your cash flow, keeping track of your income and expenses will help you achieve your short-term goals. Income can be categorized into two parts, first is disposable income and second is discretionary income! Disposable income is basically the income/money left over after paying taxes to the government. This money is used for our daily needs. Discretionary income is what is left over after expenses. Therefore, income minus disposable income gives us discretionary income. Discretionary income can be saved or spent on luxuries. You can also use it to pay off debts. Therefore, you should use this income wisely and not spend unnecessarily.

You should 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 – you can engage in freelancing opportunities like blogging and teaching. Also, you can earn income from investments like 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!

Expenses

This refers to cash flow. All the money spent without earning is called expenses. Expenses are necessary to carry out our daily activities. Always keep track of your monthly expenses so that you do not spend more. Tracking your monthly expenses can be a very difficult task. You can use an app for that. Limit your credit card usage to avoid unnecessary expenses. Use discounts, offers, vouchers, etc. while making purchases. Try to build an emergency fund for urgent or sudden expenses so that your savings are not disrupted. Your financial stability depends on expenses, the more expenses, the less savings, and vice versa.

These are the four components of personal finance. It is essential to implement it in your daily activities to achieve long-term financial freedom. Once income and expenses are under control, assets and livability will come apart on their own. Monitoring all four components will help you analyze your current situation and plan your long-term goal. Long-term goals can only be achieved through short-term achievements. So, start planning and strategizing your financial freedom from today. Every small step you take can work wonders to achieve your retirement and financial freedom on time.