Do accounting principals apply to my personal financial life?
Answer
Absolutely! See below for a few ideas...
Analysis
Bookkeeping and accounting really only refer to the tracking of financially-related transactions over the course of the life of a financial entity. That entity can be a company, a government, or a person/family - to anything that conducts any sort of business, accounting applies. Of course, as the complexity of the entity increases, so do the challenges of recording those transactions and making sense of the resulting information.
One of the ways we see how this applies is in the preparation of tax forms. When filling them out, you are essentially asked to account for income that's been made (from various sources and it matters where money comes from because the tax treatment can change based on the source). Alongside that, you are also asked to account for specific types of expenses - say for instance mortgage interest - because those monies spent are treated as deductions (and again, the reasons for those payments will determine how the tax calculations are done). For most people, taxes are a nightmare requiring frequent sleepless nights, gathering information. However, if an accounting system is implemented and used throughout the year, the burden (physically and mentally) of filling out the forms would be greatly decreased.
Another place accounting shows up in a household is through budgeting (company's call it financial forecasting or some such other term). What is anticipated that will be made in income? What is anticipated that will be spent? Is the income number bigger than the expenses number???
And one more place I'll mention is in the area of Needs vs Wants - or the making of financial decisions. For instance, while there is a need for a car, does that mean you need the newest Mercedes? On the other hand, is it financially better to buy an old clunker, given that it'll need more repairs and work?
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Comments and questions always welcome!
Hi Sweetie!
ReplyDeleteWorld, please meet my wife. Wife, please meet the world.
And I agree with you on a vehicle - the best value you can get in a car is often not in an old and cheap car (which will often take up more money in repairs and added fuel costs), and not in a new car (the dealership is trying to make a bunch of money on it), but in a newer car (bought used). It won't need the repairs so quickly of the old car but the "newness" of the car will have been worn down a bit and that will help take dollars off the price tag.
That said, oftentimes the first place where people go wrong is in not identifying their needs. If someone thinks they need a huge pickup (great as a work truck but takes a lot of fuel) but in reality can do with a small sedan, then a lot of money will go into a vehicle that just didn't need to in the first place.