Making Your Finances “Picture Perfect”
While most people find the notion of creating a budget about as appealing as mowing the lawn or shoveling snow, most would agree that the yard work is well worth the effort once they’ve achieved picture-perfect surroundings.
Two financial pictures you can take at anytime to help view your financial landscape are a balance sheet (or net worth statement) and a cash flow statement. Along with showing you where you stand today, they can help provide the basis for important financial comparisons in the future. Although there are software programs available to help with budgeting needs, it can also be easy, and sometimes helpful, to create your own worksheets.
Assessing Your Net Worth
To create a balance sheet, simply draw a line down the center of a blank piece of paper and label one column “Assets” and the other “Liabilities.” Assets are everything you own, and liabilities are everything you owe.
You can add structure by grouping your assets into three categories: 1) cash or cash equivalents—checking and savings accounts, money market funds, and certificates of deposit (CDs); 2) investments—stocks, bonds, mutual fund accounts, and retirement accounts; and 3) personal property—your house, home furnishings, autos, boats, and other personal items.
Liabilities can be labeled as follows: 1) short-term—auto loans, most personal loans, and credit card debt; or 2) long-term—home mortgages, some home equity loans, and some educational loans.
Enter all of the relevant numbers and add up the two columns. We’ll examine the outcome later.
How Fluid Is Your Cash Flow?
Next, you will need to create a cash flow statement. Divide a piece of paper down the middle and label one column “Cash Inflow” and the other “Cash Outflow.” On the inflow side of the ledger, list monthly (or yearly) income from all sources such as wages, self-employment, rental properties, and investment income (e.g., interest and dividends).
On the outflow side, list all monthly (or yearly) expenditures, separating fixed expenses (e.g., mortgage payments, other periodic loan payments, and insurance premiums) and variable or discretionary expenses (e.g., utilities, food, clothing, entertainment, vacations, hobbies, and personal care). You might want to put taxes (federal, state, FICA) in a separate category. Again, fill in the relevant numbers and total the columns.
If your balance sheet shows your assets exceeding your liabilities, you have a healthy net worth, especially if your cash flow statement shows more inflow than outflow. This picture shows that you are solvent and spending within your means. The degree of your financial health depends on the amount of your surpluses.
Your financial outlook may be less positive if your balance sheet shows your liabilities exceeding your assets and/or your cash flow statement shows more outflow than inflow. This picture indicates that you are spending beyond your means, so it may be wise to assess the areas in which you can decrease your liabilities.
Two goals worth pursuing are increasing your net worth each year and keeping your annual expenditures under control. If your financial picture is a little out of focus, taking action now to sharpen the view will make your financial future far more promising.
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