Master your personal finances
Basic accounting concepts are not only useful for analyzing a company’s financial situation, but they are also fundamental for any area related to finance, including your own personal finances.
There is a saying that goes:
“To manage 100,000 €, you must first learn to manage 1,000 €”.
So, as a first exercise, ask yourself:
- Is the way you manage your money really the most appropriate?
Keep this in mind: most people know perfectly well how much they earn, but only a few have clarity about how much they spend.
The money cascade
In general, the flow of money can be represented as a kind of cascade, with different levels:
Money inflow: These are usually your main income: salary, business profits, or investment income.
Obligations: Outflows of money that you cannot avoid: taxes, rent, mortgages, loans, etc.
Basic needs and lifestyle: Also outflows, but with more room for control. They include food, water, transportation, leisure, etc.
Surplus money: This is the most decisive level. This is where you ask yourself the big question:
What are you going to use it for?
Will you spend it on something unnecessary to satisfy a momentary desire,
or will you use it for something that really adds value to your life?
Each level of this cascade is important. In some you will have more control, in others less. The essential thing is to have them well defined and know exactly what comes in and what goes out in each one.