Personal finances Difference between income, wealth and money
Being a very rich topic, I would like to direct the topic specifically towards the improvement of personal finances, I would like to extend the explanation a little more to the everyday reality of ordinary citizens.
Everything, absolutely everything you have is known as assets . A part of what you have is yours and you are the owner of it (equity) and the rest you have but is subject to a debt (liabilities). In this way comes the formula used in accounting.
Active = Liability + Equity
…Or what is the same…
Everything you have = What is yours + What you should
It is very easy to pretend to be rich by borrowing money and spending as if there were no tomorrow. But in the end you would have the problem of having to pay debts and that will tighten your finances so much that the life you would have at the end of debt would be a life of poverty, not wealth. Then we understand well that wealth is NOT debt.
For many, wealth is a golden chest (which was money in antiquity), but if that were the case, countries would be rich if they keep a large reserve of gold (money) in central banks, instead of being rich countries because They produce and sell a lot. Then we see that wealth is NOT money.
What is wealth then? Wealth is what is yours.
Everything you have = What is yours (wealth) + What you should
This way, if you get rid of debts, you have more chances of being rich than having many debts. For the only thing that would serve a debt would be if you are going to use the money in a business that yields a return higher than the interest rate of the loan.
When we talk about equity, what is yours, we see that it is affected by the income (income) and expenses of the period. In a period they have income, you receive money, usually for salary, although there may be other sources of money. If the income exceeds the expenses, you had profits, otherwise you had losses. The utilities pay taxes, so you’ll have to see how much profit you have after taxes.
Profits after taxes = Income (income) – Expenses – Taxes
When you have debts, the interest you pay for debts becomes expenses, which reduces your profits. Those profits at the end of the year become part of your assets, that is, your wealth. And since interests reduce those profits, they also reduce your wealth. If your intention is to reduce your wealth instead of increasing it, immerse yourself in debt. Otherwise, order and get out of debt.
Current assets = Previous equity + Income after taxes
Current assets = What was already yours (wealth) + Income (rent) – Expenses – Taxes
Everything you have = What was already yours (wealth) + Income (rent) – Expenses – Taxes + What you should
In this way, it is clear that to be rich, you increase your income, reduce your expenses, not get into debt.
Everything you have is divided into 3 types of things. There are those that change hands in less than a year such as cash, bank accounts and merchandise to sell (current assets), those that do not, such as real estate (fixed assets), and some intangible possessions (such as patents or key rights, for example).
Circulating + Fixed + Intangible = What was already yours (wealth) + Income (rent) – Expenses – Taxes + What you should
Money usually changes hands, it comes and goes, and it is one of the forms of current assets.
Money + other things you have = What was already yours (wealth) + Income (rent) – Expenses – Taxes + What you should
As you can see, the fact that you have money in your pocket does not mean you’re rich. To be rich, you have to have your own things and you occupy a level of income. That applies to countries as well as to people. That’s why having gold (money) in the vault of a central bank does not make a country rich, nor does it make someone rich if you carry a lot of money in your pocket.
Banks make money available on credit cards, but it is borrowed money, so having a lot of money ends up being confused with being rich, because wealth and debt are confused. But as we saw, the general debts interest expenses that reduce wealth and compromise your income.