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Money Lesson #1: Basic Finance, Cash Flow, and Risk Management

Money Lesson #1: Basic Finance, Cash Flow, and Risk Management

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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:

Finance Basics

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:

  1. 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).
  2. 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.
  3. 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.
  4. 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.

Other lessons:

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Chris
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Chris

I really need to follow along with you as you do this with your wife. Between myself and my husband, I’m the one who’s financially challenged, knowing how to spend but not really knowing how to develop a way to pay down the debt so we can enjoy more of the cash. The last five years we’ve been married have been torturous financially. We’ve accumulated a lot of debt, maybe not so much in dollars, but in quantity of creditors we owe. This includes medical expenses during all the years we couldn’t afford health insurance. It also includes the 4… Read more »

KCLau
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KCLau

Hi, I think you are doing very well. Maybe you can add in some chart illustration to show her how money flow. Such as using the cash flow chart and net worth diagram.

I’ve written a post about hacking the charts.
https://kclau.com/wealth-management/hacking-your-cash-flow-net-worth-chart/

Chris
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Chris

Hey Pinyo, could you help clarify something for me regarding your REAL simple categories? I’m having trouble seeing what the dividing line is between an expense and a liability. When you said this above ” If we do not manage our money well — i.e., our expenses exceed our revenue — we will have more debt, or have to sell some assets to cover the expenses…”, would the category “liabilities” also be part of this equation? Liabilities must also decrease your net worth, along with expenses; however, I think I’m having trouble differentiating between what is an expense and what… Read more »

Chris
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Chris

Yes, Pinyo, that helped a lot. The word “debt” cleared it all up for me. To recap, debt is something we actively have chosen to incur whereas expenses are inescapable, whether we choose to have them or not, i.e, taxes, food, medical care. It is a fine line, sometimes, because we might deem it an expense (or necessity) to find a way to work and so we incur a debt (or liability) by financing a vehicle in order to fulfil the “need” of getting to work.

Thanks, Pinyo. Looking forward to lesson #2. (I hope your wife is, too!)

Jonathan
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Jonathan

In business it is often not lack of income that kills a business but the lack of cash flow. You can have all the income in the world but if people aren’t paying up and you don’t have the money in the bank then it doesn’t matter. I believe that the same is true of personal finances and it is often what leads us to have to use credit cards etc because of poor planning.

Emptypenny
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Emptypenny

Expenses are outflows of cash. For example, the money you will spend on groceries, a health bill, or any other purchase is an expense.

An expense becomes a liability when it is financed. For example, Jack buys a house and must borrow $600,000. He decides to take a mortgage out and pay a monthly payment of $5,400. The monthly expense or budgeting purposes is $5,400. The liability is $600,000 less the total amount paid toward the loan.

Money Lesson #1: Basic Finance, Cash Flow, and Risk Management

by Pinyo time to read: 2 min
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