Thomas’s views on everyday transactions
Thomas: I think the concept of WEALTH we’ve been talking about is very powerful and important. I really believe that if you systematically apply this concept, it can change your life. You got me excited again.
Now I want to tell you how to apply the material wealth idea in your everyday life.
Wealth (on a certain date) = Assets – Debt
Wealth (for a period of time) = Income – Expenses
So, you could look at all transactions you have made, from the day you were born up to today. In that special case the equation looks like this:
Wealth (on a certain date – in this case, today) = Wealth (for a period of time – in this case, your whole life) which means:
Assets – Debt = Income – Expenses = WEALTH
This is the most important formula to remember, in accounting for each of your everyday transactions.
Sri Humana: I am thinking of getting this formula as a tattoo.
Double-entry. The most important principle in accounting is the principle of double-entry. Simply put, this means that each transaction you make (which can be measured in money) can be accounted for in exactly two dimensions, based on the formula above.
For example, if you have increased or added an asset, you have done one of the following four things:
- Decreased another of your assets. Example: You buy a laptop – adding an asset. You gave someone some of your cash to make the purchase – decreasing another of your assets (cash).
- Increased debt. Example: You buy an apartment – adding an asset. You pay for the apartment with money acquired through a loan – adding debt.
- Received income. Example: You receive your monthly salary payment – increasing your cash (an asset) and increasing your income category simultaneously (you will learn more about this magic a little later).
- Decreased an expense. (There are rare transactions in which you transfer initially recorded expenses in the cost of an acquired asset, for example, you receive plumbing services during construction of your house. You may initially record those as services – as expenses – but you should transfer them later on, to include them in the total cost of the house).
As you can see, every transaction in your life has a double effect on your wealth formula. It may impact two items from the same category. For example, when you buy a car with cash, it impacts two assets: you add one asset and decrease a different one.
Or it can impact an item in each of three other categories. For example, when you buy food with cash, you add an expense (food) and decrease an asset (cash).
Some questions for you:
- Have you seen someone confuse debt with income?
- Can you write out some of your everyday transactions using our WEALTH formula?