As the brilliant Bob Berger once said, “The best thing money can buy is financial freedom”.
Achieving financial freedom is only possible if you have a strong financial foundation. Unfortunately, many of us overlook this simple yet crucial fact when building our financial future.
Building a strong financial foundation doesn’t happen overnight, but a good place to start is with the four pillars of personal finance. This is a fundamental framework that we all fit into, regardless of income level, overall wealth, lifestyle, debts, or investments.
Measuring and comparing your four pillars can help you to determine the state of your financial health and net worth, as well as provide you with a framework to manage your money.
When all four pillars are working in conjunction, your financial foundation will be strong. When the four pillars are askew, your finances will need some major adjustments to set them straight.
What are the four pillars of personal finance?
Pillar #1: Assets
Pillar #2: Liabilities
Assets and Liabilities
Pillar #3: Income
Pillar #4: Expenses
Income and Expenses
Four rules to live by
Spend less than you earn
Build an emergency fund
Prioritise getting out of debt
Distinguish between wants and needs
The Bottom Line
“The best thing money can buy is financial freedom” - Bob Berger
 "The Four Pillars of Personal Finance and How It Affects You | BigPay (1)")
What are the four pillars of personal finance?
Pillar #1: Assets
Assets are valuable items you own that can be liquidated into cash when needed.
This includes savings in your bank account, cash, properties, land, valuable jewellery, investments, and rare antiques.
Assets must have the ability to be converted into cash in a short amount of time, so while your baseball card collection might be the envy of all your friends, it’s best not to consider it an asset.
If you’re a homeowner, your house is likely your most valuable asset.
Pillar #2: Liabilities
Liabilities, or debts, is money that you owe to others.
They’re the opposite of assets and include things like your mortgage, student loans, credit card debt, bills due, taxes owed, and money you owe friends and family.
Accrued interest and principal on any loans are considered liabilities as well.
 "The Four Pillars of Personal Finance and How It Affects You | BigPay (2)")
Assets and Liabilities
Assets and liabilities give you a picture of your overall long-term financial health, and it also represents your net worth.
For example, say you own a home worth RM500,000 and have savings of RM60,000. But you owe RM200,000 on the home and RM10,000 on student loans to the bank.
Your RM560,000 assets minus RM210,000 liabilities gives you a net worth of RM350,000.
Debt isn’t always a bad thing, especially if it’s debt you accrued to further your education or create a stable home. However, it should always be your priority to get out of debt as soon as you can.
 "The Four Pillars of Personal Finance and How It Affects You | BigPay (3)")
Pillar #3: Income
Income is all the money you generate.
This includes your monthly take-home pay, payments from freelancing, rental from properties you rent out, dividends you make on your investments, pension, and tax refunds.
Pillar #4: Expenses
Expenses are all the money you spend.
This is self-explanatory for monthly expenses like food, transportation, rent, and bills. But don’t forget to include the expenses that may not occur as frequently, like haircuts, vacations, car maintenance, and gifts.
To gain an accurate total of your expenses, establishing a budget and using an app to keep track of every penny spent can help keep you on track.
Our BigPay app tracks and categorises all your finances beautifully on one screen. Download it here.
 "The Four Pillars of Personal Finance and How It Affects You | BigPay (4)")
Income and Expenses
Tracking your income and expenses can help you to understand your daily and monthly spending habits. These black and white numbers are the money you make versus the money you spend.
While these numbers may fluctuate every month, keeping your expenses in check is the difference between incurring more debt or tucking away more savings.
 "The Four Pillars of Personal Finance and How It Affects You | BigPay (5)")
Four rules to live by
Now that you understand the four pillars of personal finance, here are four rules to live by to help you achieve financial freedom.
1. Spend less than you earn
This one may sound like a no-brainer, but you’ll be surprised by how many people forget about it.
If you’re spending every cent that you earn each month, you’ll never make any progress towards achieving financial freedom.
And worse, you’ll be at constant risk of financial hardship. Any little bump in the road like an emergency visit to the dentist could derail you completely and risk putting you in serious debt.
Live below your means and create a realistic budget, like the 50/20/30 rule. You should also explore how you can increase your income.
2. Build an emergency fund
Spending less than you earn means you can build a safety net.
This emergency fund is what’s going to help you weather the storms life throws at you, like losing your job, your car breaking down, or a visit to the doctor, without having to resort to high-interest loans or credit cards, which will put you into more debt.
Aim to save at least 3 to 6 months' worth of your expenses.
3. Prioritise getting out of debt
Not all debt is bad, but it’s how people manage their debt that often gets them into trouble.
Mishandling your debt, such as late payments, will leave a bad mark on your credit history. This can have a negative impact if you’re applying for more loans.
Debt can also feel stressful as you worry about how you’re going to cover all the payments as well as other living expenses.
The sooner you get out of debt, the less stressed you’ll feel and the more freedom you’ll have to spend on things you enjoy without having to worry about interest payments.
Once you’re out of the cycle of debt, stay out of debt!
4. Distinguish between wants and needs
Wants are items and services that are nice to have but you could ultimately live without, such as the things you buy for leisure.
Needs are necessities that you require to live a healthy life, such as a roof over your head, food, water, and healthcare.
Mixing up these two concepts can wreak havoc on your finances, so make sure you don’t trade financial security in pursuit of your wants.
 "The Four Pillars of Personal Finance and How It Affects You | BigPay (6)")
The Bottom Line
Now that you’ve taken a hard look at your assets, liabilities, income, and expenses — how is your financial health looking?
Is it as healthy as a horse or is it looking a little rocky?
Seeing your four pillars in one place makes it easier to understand and plan a budget. Combined with the four rules to live by, you’ll be on your way to financial freedom in no time.
Want to learn more financial basics? Tune into our BigPay blog every week to improve your financial literacy.
