As you coordinate a system for your personal financial well-being, the hard task is finding out where to begin. A responsible person looking to save money should first understand and analyze one’s big financial picture. This should happen before trying to get into stocks and bonds or even life insurance
There are two useful tools that will help you to do that: A Cash Flow Statement and a Balance Sheet. These will let you take a detailed inspection of your financial state and create more reasonable decisions about what you choose to do next. It might take a little prep work, but developing these tools will get you started so you can make the harder decisions later.
Your Financial Balance Sheet
A thorough balance sheet is like a statement of your finances at the present moment. It consists of some key components, namely your assets and your liabilities, or you can put it simply as what you have or own versus what you might owe. To then figure out your net worth (or perhaps you lack of net worth) you device a simple equation of your assets minus your liabilities. This gives you a simple but effective balance sheet.
So let’s think of some of the things we can list on your balance sheet. First here are some examples of of your assets. These feature things like your house, cash, stocks, bonds, mutual funds, 401(k) plans, valuable jewelry or precious metal, checking and savings accounts and so forth. Really anything of value that you own. This, of course, is offset by what you owe or your liabilities. These would be things like your mortgage, student loans, credit card debt, car loans and all those other things that you might owe money on. If you have more in your asset column you’re left with your net worth. If you owe more, you’ve got some work to do…
Of course, the goal of people looking to save money and invest is to grow the asset side and decrease the liabilities. You want to increase the net worth in the equation. Your balance sheet is a simple way to clearly lay out where you’re strong and where you need to put your focus to increase your net worth. Once you’ve got the facts down on paper, your balance sheet, you’re in a better position to understand your goals. If you’re balance sheet is looking a little weak it might be time to cut out some of the debt. Conversely, if your net worth is strong it’s time to start thinking about your investments.
Your Cash Flow Statement
So, you now have everything down on paper and you’ve developed some goals. Now you have to figure out where to get money to put these goals into action. You can design a cash flow statement to better implement a plan to get you started.
Put simply, a cash flow statement gives you a complete picture of your money that comes and goes over an extended period. It shows your revenues, or what you are earning through income and investments, and also your expenses, or what you are spending your money on each month. You can determine your net cash flow by taking your revenue and subtracting your expenses.
A proper examination of your cash flow statement allows to recognize how to better cut your expenses and how to move your cash to better realize your financial goals. If the net cash flow is negative than you’ll be better able to see where to cut the expenses and turn this into a positive cash flow. This should be done before you try to begin investing or even saving.
Do the hard work up front, beginning with the basics of a solid balance sheet and a detailed cash flow statement, and you’ll be rewarded in the end with a good plan to realize your personal finance goals.
