In the video today, I will explain the basics of personal finance for people who are beginners or getting started on the topic. I will explain the 5 main concepts of personal finance and give you an overview on how most people manage their finances vs how “the rich” or “successful” people do. Moreover, I am going to give you 3 tips for you to start improving your personal finances straight away.
First I want to clarify the 5 main concepts of personal finance, which are: income, expenses, assets, liabilities and net worth
– Income is any money earned
– Expenses is any money spent, which means that this money is used for consumption
– Assets are anything that we own
– Liabilities is anything (money) that we owe
– Net worth is mainly what you own minus what you owe, aka your assets minus your liabilities
I made a short video on “how to make money”, and I explained there were 3 ways: exchanging your time, investing your money or creating something. Here there is one of the key differences between the richer and the average, and that is the number of income sources, and most importantly, where they come from. When we invest our money or create something, we are investing in assets. They can be either “physical” or digital assets, but they are still assets, which is something that we own or we have the right to. Most people just have 1 income source coming from exchanging their time while financially successful people have more than one income source (9 on average) and most of them coming from their assets (investing).
Then, there is often confusion between investing and spending. Moreover, most people misuse these terms without even noticing. Therefore, I wanted to clarify the difference, because it is another pillar on why richer people are able to make more money:
– Investing refers to purchasing assets, and the key difference is that when we invest, we expect a return, and we are able to calculate or estimate it
– Spending is referred to spending money
Therefore, if I am a freelancer and I buy a car to go visit my clients, it is an investment (because it gives me back time or saves me money on uber), while if I upgrade my car to a better one because I like it I am just spending money on a car.
Therefore, anything that you allocate money that you cannot measure or see a return should be seen as an expense, while when you allocate money with the intention of obtaining a return, it should be seen as an investment.
Therefore, even if you are saving money and putting it in a savings account but you are planning to spend it later on; in essence would be almost the same as if you spent all your money every month. It does not make you better with your finances that you are saving money to spend later on a bigger purchase. It is a step in the right direction that you manage to put some money aside, but it is not going to improve your financial position.
What the richest do is that they invest their money into assets (not expenses) that produce them returns, and they even put the returns into purchasing more assets that will create even greater returns.
But if you are watching this video, you are probably seeing all this quite far and you are wondering what can you do right now to improve your financial situation.
1st step is to try to pay off any debts: avoid having any liabilities associated with expenses. Try that our liabilities are associated with assets and that the return of those assets is able to cover their liabilities. Therefore, your top priority should be getting rid of student loans, credit card debt, overdraft and any other sort of debt.
2nd step is to balance your income and expenses. Either by creating more income or decreasing your expenses, you should be able to have some money at the end of the month once you have paid all your expenses.
3rd step is to invest this amount left into different assets that produce some return. Index funds, or any other sort of investment that is able to generate you some return.
Although this is just an introduction, I hope now you have a better understanding of personal finance, its main terms, what financially successful people do and what can you do to improve your situation. You will find more videos on each of the topics in my channel, so feel free to check them out.
I hope this content is useful and that you enjoyed it. Do not forget to LIKE and SUBSCRIBE
0:59 ABCs of Personal Finance
2:51 Successful vs Average People Income
4:42 Investing vs Spending
6:47 Saving Money
10:29 3 Tips for Starting in Personal Finance
*Disclaimer* I am not a financial advisor. The ideas presented in this video are for entertainment purposes only. You (and only you) are responsible for the financial decisions that you make.
For any inquiries, you can reach me at [email protected]