Economy is greek and literally means managing a household, and can be divided into quite a few subcategories. In this intro text, however, focus will exclusively be on personal finance and surrounding areas. This is not a theoretical approach to economy, but a guide to how personal finance should be handled and understood practically. So even though economy amply is about numbers, we will let them be for now and only look at the fundamental principles.
Personal finance
As usual when learning new material it is necessary to start by learning and understanding the most important terms within the specific topic. There are of course plenty of other important economic terms then below, but we will wait with those till later.
As a starting point your personal finance consists of;
- Income
- Expenses
- Assets
- Liabilities
Income
Income is your pay check, potential government grants, received insurance sums, money gifts and all other monetary funds you received from others. If you win in gambling or lottery should that also be included in the income category. Remember that it is only relevant what your income after tax is, meaning the money you have available after the tax authorities have taking their share. Fortunately, in Denmark is it for most employees simple because tax is subtracted automatically, and we only see our income after tax.
Expenses
Expenses consist of rent, food purchases, transportation and all other things you have chosen to spend money on. It is important to emphazise that your income as a overriding rule of thump must be higher than your expenses. Once again is it only important what you pay for stuff after VAT and tax charges, when they form part of the price anyway.
Assets
Your assets are all your belongings that would also carry a value for other people, and could be exchanged for money or other values.
To be exact, it is not until the use of the values (food, car ect.) that the expense occurs. When you buy milk in the super market it will still carry value until it has either been drunken or has aged.
Liabilities
Liabilities are all your monetary obligations towards other people, such as a loan obtained in the bank or by a friend or a family member. In short, what you owe others.
What is left when expenses have been subtracted you income will, if positive, be your surplus, and if negative, be you deficit. Your assets deducted your liabilities will be your fortune which can be positive or negative.
One of the most effective ways to create overview of your personal finance is by making a budget and regularly follow up on it.
When you have made your budget it is easy to see how much you can afford spending on pleasure and other less necessary items. As already stated it is important afterwards to adjust your budget if you income or expenses change, or simply if you have overlooked something in the first place.
As described, on the top line we have your income which is the basis for your personal finance. It is your income that the rest of your finance most form basis from. If you have a large fortune that also carry value, but as a starting point you income forms the fundation for your finances and way of living.
This means that your income on average always most be higher than your expenses, but does not have to be every single month. That is why looking at your bank accounts is not the correct way to access what you can and cannot accord. For single cases it can be fair and might even necessary, but the main rule should be that your budget forms the fundation for what is available financially.
To understand and improve your tax return it is necessary to understand the difference between personal income, capital income and your deductibles, and how they together form the final tax bill. Read more about your tax return here. Even though the tax calculation happens automatically and electronically in Denmark, it is still relevant to know the rules so you make sure to use the right deductibles and predict your income tax as precise as possible. A punitive tax is fun to receive the year after.
For most people by far purchase of real estate will be the biggest investment they make during their life time, and the investment will be leveraged. That is why it is important to understand the essential conditions that influence the investment and the loan.
Investment is postponement of current consumption with the intent of having the possibility of an even larger consumption in the future. That will be possible if your investment provides a larger yield than the inflation.
It is a very good idea to invest if you have the possibility, as it can improve your future financial possibilities and help creating security and might even freedom.
Too few people have an overview of their pension savings, even though for most people they will represent the majority of their retirement. That is why pension together with real estate are the most important financial decisions most people make in their lives. In contrast to a real estate purchase retirement funds are ongoing and continuos through monthly payments.