Let’s start off with the basics of personal finance.
Income vs. Expenses
Assets vs. Liabilities
In general, to get ahead in life we want our income to be greater than our expenses and our assets to be greater than our liabilities.
Income for most people comes from working at a job. The time we spend gives us a weekly, a bi-weekly, or a monthly paycheck. Other forms of income include methods like rent, dividends, interest, royalties, and business profits.
Expenses are everything we spend our money on. The basic expenses are food, water, shelter, clothing, phone, utilities, and transportation. The list of additional expenses can vary including items like entertainment, vacations, gifts, etc.
Assets are items that add to you total net worth. These can include items like stocks, bonds, real estate (minus loans), and cash.
Liabilities are items where you owe money to another entity. They are mainly debts or payables. Examples of personal liabilities include a mortgage, car loan, credit card debt, college loans, and auto loans.
In order to move towards financial independence, we need to have enough income to cover our expenses. With the extra income, we want to pay off the liabilities and add to the assets. Think of the flow of money starting with income and flowing to expenses, then to liabilities, and finally to assets.