Any physical structure is more stable when it has 4 legs or pillars. Our homes have four corners, tables have four legs and the Eiffel Tower also has four iron pillars to support it.

The wrought-iron structure is composed of four immense arched legs, set on masonry piers that curve inward until joining in a single, tapered tower.

So how does it relate to Personal Finance? A stable personal finance system too has four important pillars.

• Income
• Expenses
• Debt
• Savings

A personal finance system is an interplay or balance between all these four elements.

Income

One of the basic building block of personal finance is the Income. Without a decent income, there is no financial wellbeing. The Income does not have to be earned income, it could be passive or investment income too.

But income is a must. That is why unemployment is so much talked about and its rate is a measure of the health of the economy.

Like any pillar of a structure, the stability of the income is a must for a personal finance system. A highly variable and unstable income (100% due to commissions) may cause more difficulty in managing personal finance.

The growth of your net worth or the health of your personal finance system is fueled by a growing income.

Expense

This is the opposite of Income or rather the drain on the income. But you have to live your life, so this is not completely unavoidable. And avoiding it or making it too less will mean this pillar is weak. To have a rich, fulfilling life you need to spend on things that matter to you and your family.

No matter how much frugal you try to be, cutting down mercilessly on Expense will mean sacrificing lot of important life goals. Which we do not want to do in a well balanced personal finance system.

So embrace your true expenses, and spend according to your values. As the income rises, this pillar will also need to grow since your lifestyle and responsibilities in life will not stay stagnant.

Just be aware that this is proportional and not wasteful or spending out the entire income. Then this leg or pillar will tilt the balance and no amount of income will be enough to keep a stable structure.

Debt

Debt is considered harmful for a personal finance system. At least Dave Ramsey will shout at you if you have any kind of debt other than a 15 year fixed rate mortgage.

But debt can be used very strategically and depending on the interest rate, purpose and tenure of the loan, it can help us reach our financial goals faster.

Imagine you need a good car to go to work or for your work. (trucks are used by contractors for carrying out their business work). Now the car payment may sound like a drag (it is due to the depreciating nature of the truck or car) but it enables you to use your money in other places. While you also may be able to deduct the car expenses from your business taxes.

Another good example is using a long term 30 year fixed mortgage. At very low rates like 3% before 2022, it is a much better use if the extra money is invested elsewhere than taking out a 15 year mortgage or paying off the mortgage earlier.

Although debt is one of the less desirable pillars, it is a sharp one and should be used with caution. When managed properly and in tandem with your income and other expenses, it can be a powerful tool in your personal finance.

Savings

This is the most stable pillar of the structure. Without savings, even a high income and controlled expenses will continue to expose the fragility of the personal finance system.

An emergency, a medical bill or natural disaster can derail the other three pillars. When emergencies hit or you are forced to pay a large sum of money, you will wish you had saved up more.

Savings can mean emergency funds, funds for insurance deductibles and expenses coming up at the end of the year.

It could also mean medium to long term savings and investments like saving for a college, retirement and wealth building.

Conclusion

The stability, understanding and control of the above four pillars will keep a personal finance system robust.

I have seen imbalances in all four areas which are inefficient or dangerous to a personal finance situation.

• Someone with low or no income OR someone chasing more money at the cost of health and relationships.
• Someone spending a lot without any plan OR someone living a miser life trying to reduce all expenses.
• Someone in a lot of debt, especially credit card debt OR someone waiting to buy a home with cash.
• Someone with zero savings and investments OR someone with lot of savings but with no plan on how to allocate that.

The key to a joyful and progressive personal finance system is to develop a robust financial system which balances the above 4 pillars to achieve all your financial goals.

I help ambitious people recognize the potential in their finances and restructure to enhance their quality of life.

Email me at info@startyourfinancesright.com for more information.