Principles for the allocation of assets and liabilities in a personal or family budget. Kiyosaki classification and correct accounting classification.
The cornerstone of financial literacy lies in making the right personal or family budget. If you decide to tidy up your finances - you need to start with this. As with any business unit (enterprise, city, state, etc.), for an individual or family, the budget consists of two categories: assets and liabilities, which, according to a key accounting rule, should be equal to each other. The budget balance must converge. What relates to assets, and what to liabilities of the personal budget - this will be discussed further.
Personal budgeting by assets and liabilities has gained popularity thanks in large part to the popular financial literacy literature. In particular, the world famous author of bestselling books Robert Kiyosaki writes about this.
According to Kiyosaki, personal assets are everything that is a source of income for a person or family, and that does not generate income or brings only expenses - are liabilities.
For example, according to Kiyosaki's classification, assets are:
- Money on deposits;
- Securities;
- Real estate for rent;
- A car used to earn money, etc.
And the liabilities, from the point of view of Kiyosaki, are:
- Debts and loans;
- Real estate used for personal needs;
- Personal car, etc.
Such a classification, despite all the authority and merits of its author, cannot be called correct, and here's why. If you divide the budget into assets and liabilities in this way, the balance will never come together, that is, assets will not equal liabilities. The main accounting principle is violated, and a budget drawn up in this way will not give a clear idea of the financial situation of an individual or a family. Then how do you correctly identify the assets and liabilities in your budget? That's how.
You should start with liabilities. Liabilities are sources of origin of funds. This is where a person or family got their money from. Liabilities can be of two types:
- Own - those that the person himself earned or received free of charge.
- Borrowed - those that a person borrowed and must return.
A person can use both those and other liabilities to invest in assets. Assets are ways of investing funds. This is what sources are allocated to. They can also be of two types:
- Cash - stored or spent in cash.
- Property - owned in the form of property.
With this classification, the balance sheet will always be respected - assets will always be equal to liabilities. A person cannot distribute more or less funds than there is in his sources.
In turn, the monetary assets of a person or family can also be divided into several categories:
- Funds for current needs - the money that is spent to cover monthly expenses and is not saved;
- Reserve fund (financial safety cushion) - a personal reserve intended for use in the event of force majeure situations;
- Savings (savings) - monetary funds created to pay large expenses that a person cannot pay from his monthly income;
- Investment (capital) - money invested in income-generating assets.
If we compare such a correct accounting classification of assets and liabilities with the classification of Robert Kiyosaki, then we can say that assets can be:
- Profitable - generating income;
- Consumable - not generating income, generating expenses.
But all these in any case are assets - ways of distributing funds, and not liabilities, as Kiyosaki claims.
In conclusion, remember a few important rules for the formation of assets and liabilities of the budget.
Rule 1. With an increase in the share of own funds in liabilities, the financial stability of the budget and the level of financial condition increase.
Rule 2. With an increase in the share of retained funds in assets in relation to those spent on current needs, the level of financial condition and wealth increases.
Rule 3. With an increase in the share of earning assets, the level of financial condition increases.
Now you know what is assets and what is liabilities. Start organizing your finances by properly allocating your budget to assets and liabilities.
