by Pamela S Thibodeaux

Created on: February 03, 2010   Last Updated: February 04, 2010

Whether you're a business owner or an average person there are three keys to becoming financially savvy. These are major components to any budget or financial program and it is imperative for you to understand them.

*Know Your Assets: Assets are fixed objects of value and include office building or home, furniture, electronics, inventory and vehicles. Other forms of assets are cash-on-hand, sources of income and accounts receivables for businesses. An asset many people overlook is life insurance policies that accumulate cash value. Land – including burial plots- is considered one of your greatest assets.

Some assets appreciate (grow) in value (land, buildings, homes) and others depreciate or lessen in value – automobiles, furniture (home and office), electronics. Accounts receivables fluctuate in their value with the ebb and flow of business. Unless you constantly take the money out of a life insurance policy, it too grows in value. Stocks, bonds, and savings accounts are also assets which, under normal circumstances grow in value.

Liquid assets are those easily and quickly disposed of – cashing in an insurance policy, selling stock, savings, etc. Some are more easily liquidated than others – for instance you may get quick cash by selling stock or cashing in your life insurance policy compared to selling a home or business.

*Know Your Liabilities: The basic definition of a liability is any bill you owe. For a business this could be office rent or note, bills for stock or inventory, utilities, payroll expenses, insurance, etc. For individuals some of these liabilities are the same; house note or rent, utilities, auto expenses, insurance costs, groceries.

In simpler terms,  objects you own that have value is an asset and money you pay out on a regular basis is a liability.

*Know Your Expenses (fixed and other) & Spending: A ‘fixed’ expense is an expense you will always have. Utilities, insurance, and groceries (or inventory for the business owner) are prime examples of fixed expenses. Other expenses like house payments are long-term and should be included in this category until the time the mortgage is paid off (if you’re buying). If you are renting or leasing the home or building that houses your business – this monthly amount should be included in your list of fixed expenses.

Although technically a “short term expense” car payments are sometimes considered a fixed expense depending on the length of the note or terms of lease agreement.

Now that we’ve determined what fixed expenses are, how do we pin down our spending?

Monitor it!

Every day for the next thirty days write down every penny you spend – use the how, why or what for, and where method. Did you spend cash or use credit (how)? Where did you spend the money and why or what for – Lunch, Clothing, Auto maintenance or fuel, gifts or charitable donation, impulse buy (where why/what for)?

Once you’ve done this then examine your spending habits and categorize them.

Should some of those expenditures be included in ‘fixed’? Which are regular, monthly expenses and which are not? Which can be reduced or eliminated?

Knowledge is important for proper money management and everyone should employ wisdom when it comes to managing their finances and becoming financially savvy.

Learn more about this author, Pamela S Thibodeaux.
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