Many people fail to make an accurate assessment of their financial situation. In order to honestly take stock of the reality of personal finances and thus consider future financial planning, it is necessary at times to draw up a summation of total assets and debts. Interpreting the findings accurately involves understanding the difference between liabilities attached to perceived assets, something many homeowners failed to measure correctly during the housing crisis.
For some it can be a simple task to evaluate financial standing. The person who lives from pay check to pay check and owns little in the way of assets, is only too aware of their situation if they are also honest about any outstanding debts.
Assets are classified as the things one owns which have value. Savings, gold and silver, and pension plans represent assets. Property, land and personal possessions are assets if they can realise a resale value. Often however people may consider their home an asset whilst it still has an outstanding mortgage. Until it is owned free and clear it is in fact a liability.
This negative misconception contributed greatly to the wave of home foreclosures. So many people believed that the perceived value of their home represented equity they could cash in on in the form of home equity loans and second mortgages, failing to realise that equity is not a fixed asset. Borrowing against ones home releases capital that unless invested wisely may never be replaced.
A property with a fully paid off mortgage is an asset. A vehicle with no outstanding loan is an asset. Anything purchased on credit with a debt balance still outstanding is a liability. Prudent financial planning should consider a total reduction of debt combined with plans to hold assets free and clear.
When assessing personal finances all outstanding loans and credit cards debts should be taken into consideration. Many people carry debt which is met easily from salaries or income but one needs to consider what would happen if income levels dropped. Reducing debt levels aggressively by paying down loans early is an excellent way to make a saving on future unnecessary interest payments which. This in turn will facilitate future spending without using loans or credit.
It is also vital to give thought to any emergency situations such as unforeseen medical expenses, and honestly assess if a savings cushion is in place to cope or if debt would have to be incurred through credit. Although returns on savings are pitifully low at the moment it is nevertheless an excellent habit to always pay oneself first via a savings plan.
Most people would rather not make adjustments to their lifestyle but if an assessment of finances shows a lifestyle beyond ones means then measures should be taken to rectify the situation. Living for the moment can be financially dangerous if there is no provision put in place for the future.
Whilst some financial emergencies may be of such magnitude they can never be prepared for, it is prudent to always have a nest egg in place in preparation for the worst. Astute financial planning can result in a comfortable life free of the necessity of wage slavery. The benefits of a debt free life will inevitably lead to more disposable income as monthly financial obligations no longer need servicing.