Types of personal finance:
- Daily or Operational Type
- Revenue (Salary, Deposit Interest, Dividends)
- Expenses (Consumer goods, Loan interest)
- Capital Type
- Assets (Cars, Houses, Buildings, Savings)
- Funds (Earnings, Bank loans, Credit cards, Mortgages)
Daily or Operational Type
This type of personal finance is one of the most commonly used and easy to identify. All non-repayable income received from outside can be classified as personal revenue. The opposite condition is applied for a personal expense, which means all non-refundable expenses made for consumption.
Personal revenue can be described as money inflow. Salary, wages, interest, dividends, bond coupons, and other earnings from investment activity are personal revenue. All earnings belong to this type. It is important to distinguish between this type and personal funds.
If you get a loan from a bank, you cannot classify it as a source of income because it is a source of funding/financing. But if you sold the property or an asset at a price higher than you paid for it, then this difference can be taken into account as personal revenue.
This type of personal finance includes expenses on groceries and consumer goods, fuel for a car, utilities, rent, taxes, airplane tickets, media content, end etc. All cash spent on consumption or for operating activities can be classified as expenses.
The difficulties may occur when we try to classify a payment on a loan. Generally, the payment consists of two pieces: the principal and the interest. Principal reduces the amount of debt, and this is a capital type. Interest is a personal expense that you pay to the bank. Interest is debt service costs, and it is a personal expense.
Personal revenue and borrowed funds invested in property and financial instruments acquire the status of personal assets. Money spent on capital expenditures may be returned in the future. Property and financial instruments may be sold.
Real estate, cars, savings, and investment portfolios with stocks, bonds, and other securities are personal assets. All personal property can be classified as assets. It is important to distinguish between spending on assets and consumption to manage personal finance.
You can watch video instructions on accounting for an asset.
Funds are sources of financing for assets or daily personal expenses. A savings account is an asset, and its source is funds. Funds can be formed from personal income or can be borrowed. Earnings, Loans, House mortgage, Credit cards are personal funds. They can be used for capital expenditures, assets acquisition, property purchase, or daily expenses.
Funds are sources of financing assets. You can pay for the car with the money that you earned. In this case, earnings will be the source of financing. You also can get a car loan and pay with borrowed funds. In this case, a loan will be the source of financing.
There is a particular video guide on accounting for a loan.