The Fin-damentals
Assets
Assets are what you own, that have financial value. Like cash in your bank, a car, investments, gold or even your rare sneakers!
Liabilities
Liabilities are what you owe - debts and loans. For example, mortgages, personal loans, car loans, student loans, credit card balances and lines of credit.
Net Worth
Net worth is the difference between what you own (assets) and what you owe (liabilities). It’s a snapshot of your financial health at a given moment.
Projected Net Worth Statement
A projection of net worth over time can be made using reasonable assumptions of life expectancy, economic conditions, investment growth etc. Of course , things may not go as we think - life happens.
Cash inflow
Cash coming in — can include salary or income from self-employment, sales commissions, pensions, disability income, interest and dividends from investments and savings, income from rent, and other sources of income.
Cash outflow
Cash going out — expenses, such as groceries, mortgage or rent payments, utility bills (such as water, electricity, and heat), internet and phone bills, insurance expenses, car expenses, and contributions towards investments
Cash Flow
Cash flow can be calculated by subtracting cash outflows minus inflows by observing patterns over a month, three months or a year. Like net worth, cash flows can change over time. One's income may increase with career growth, expenses may increase during early years of building a family, and taper off as debts are paid off and children grow up. The main purpose of understanding cash flow is to understand our spending patterns, and make sure we can save surplus towards our goals. Like net worth, cash flow can be projected over time too with reasonable assumptions.
Personal Savings Rate
Your savings are just money in - money out as seen in your cash flow. Personal Savings Rate = (Money Saved/ Cash Inflow)* 100 This is the money you can put to work towards your goals. Net worth projections assume that savings are invested and grow at an assumed rate of return.
