Money Lesson #1: Basic Finance, Cash Flow, and Risk Management
, on September 21, 2007
A few nights ago, it dawned on me that being the sole handler of our family finance is our biggest liability. That is a huge risk, if something ever happens to me. Even if I take out an insurance policy large enough to support my wife and our son, it will not help if she does not know what to do. Basically, she will be stranded.
As any good businessperson would do, I created a risk management plan. I discussed this risk with my wife, and we agreed that I should teach her money management; specifically our family finance.
This post will be the first in a series where I share with you the learning journey that my wife and I are taking. Our first lesson revolved around finance and cash flow basics. Here are the points I covered with her:
I first posted about personal financial basics in Wealth building made REAL simple. I told her that the foundation of our finance can be grouped into 4 categories:
- Income – This is the money that flows into our family. Our income sources consist of my salary, her wage, investment income, and the money that my parents and her brother give us for their share of household expenses (we all live together in the same house).
- Expenses – This is the money that flows out. Our expenses consist of taxes, housing expenses including utilities, transportation, food, clothing, insurance, health-related expenses, entertainment, etc.
- Assets – These are money that we own in various shapes and forms. Our assets include our house, cars, savings, investments, and other items of value.
- Debts – This is money that we owed to other people. Our debts include of our home mortgage, car loans, and credit card debt.
Cash Flow Basics
- Good Cash Flow – If we manage our money well — i.e., keep our income higher than expenses — we will have money left over. We can save this money and buy more assets that could appreciate in value and generate more income.
- Bad Cash Flow – If we do not manage our money well — i.e., our expenses exceed our income — we will add to our debt, or have to sell some assets to cover the expenses. Either case, we are eroding our wealth and its growth potential.
Well, this was all I got in before she fell asleep. I will have to work on being a more captivating teacher. How do you think I did for the first lesson? I think my next lesson will be about financial goals.
If your spouse does not know anything about your family finance, I invite you to join me on this learning journey. I also encourage you to leave a comment, or blog about your own lesson.
Give them the gift of education today, so that they have the financial intelligence to survive without you.
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