With the acceleration of social aging, more and more young people begin to realize the importance of financial management. Reasonable asset allocation and effective liability management are the keys. The core purpose of personal financial management is to maximize the value of personal assets while meet current and future spending needs. Therefore, we should treat some people as investments to increase asset value, and treat some expenses as bills to control liability risks.
Assets generate cash flow while liabilities consume cash flow
From the perspective of personal financial statement, assets and liabilities represent two sides of the same coin. Assets such as stocks, bonds, funds and real estates could generate sustainable cash income flow. In contrast, living expenses, credit card debts and other expenditures are typical examples of liabilities which consume cash flow continuously. Maximizing return on assets while minimizing costs of liabilities is the optimal asset-liability strategy.
Nurture interpersonal relationships just like managing investment portfolios
Some people are worth investing because they could bring sustainable social and economic returns, such as business partners, helpful friends and mentors. We should nurture these relationships patiently and persistently, just like managing long-term equity investment portfolios. On the other hand, some costly interpersonal connections should be cut off promptly, if they constantly consume energy and money rather than creating values.
Balance living standard upgrade with financial sustainability
As income grows, it’s reasonable to upgrade consumption expenditure on clothing, food, accommodation and transportations. However excessive liability burden could easily result in financial crisis when income source is disrupted suddenly. Hence families should strike a balance between better life style and long term financial sustainability.
In personal financial management, assets generate value while liabilities destroy value. Maximizing return on investments in assets and people, while minimizing costs of liabilities and inefficient relationships, is key to accumulating long term wealth.