Understanding Your Personal FinancesOct 09, 2014
Everybody wants to attain more financial stability in their lives and learn how to get out of debt when necessary. However, understanding the terminology can be daunting. The first step to achieving healthier personal finances is to recognize the components and how they all work together.
While there are dozens of personal finance glossaries available online, they simply don’t go into enough depth and tend to list hundreds of different terms. Focusing on learning about the basics of your household finances can give you a great starting point for getting a hold on them.
Gross Income and Net Income
First off, when stating your income, you should always include all of your income sources. This includes any employment, consulting, sales, tips, etc., from which you earn money. Your gross income refers to the money you make before any deductions. Net income is the amount of money you actually bring home. When looking at borrowing against your net worth, a lending institute will ask for your gross income. However, when you are creating a budget for your home, it is important that you base it on your net income.
Your expenses refer to any payments that you need to make each month. These can include bills such as cable, telephone, utilities, as well as personal loan payments, vehicle payments and your mortgage. Expenses also include products or services that you have to pay for regularly, such as groceries, child care, transportation/gas, gym memberships, etc.
Assets are anything of economical value that you own. This can include financial savings such as cash, bonds, mutual funds, retirement plans, pensions or other investments. It can also include property or personal items such as boats, collectables, jewelry, vehicles, etc. Your assets combine to work in your favour when you are looking at attaining a loan or working on debt consolidation.
Any monetary obligations that you have are considered your liabilities. Also referred to as your debts, these obligations can include any previous borrowing you have done for your mortgage, car and school loans and any existing credit card debt. Liabilities are subtracted from your income and assets in order to calculate your net worth.
Your net worth is calculated by subtracting your liabilities from your assets. A lending institution will look at your net worth when evaluating your borrowing power.
Debt and Debt Consolidation
Debt is another word used to describe a liability that you are required to pay back by a specific date. Often when people mention being “in debt” to a specific amount of money, they are referring to their total household debts combined. When the amount becomes too much to manage, many people seek debt help in the form of a consolidation. Debt consolidation is a type of larger loan that is used to payoff other debts at once. It allows you to tackle multiple loans with one manageable payment.
One of the most important terms to understand with personal finances is ‘budget’. It is essentially a game plan that is used to determine where your money goes each month. Many of the terms above are used when planning out your budget. For instance, if you start with your net income and subtract your expenses, you may find you are left with a surplus that can be used to pay off debts or build your assets.
Learning about your finances is a critical step to achieve the goals you have for your money. However, simply understanding the terms may not be enough to get you out of a major financial crisis. Getting debt help from a professional when necessary can get you back on the right track much quicker and give you the tools to stay there.