To get what you want out of life, you need to set some goals. But that can be hard to do when you're not sure where all your money goes or how much you even have. Getting financially organized can bring clarity to your money situation so you can develop achievable goals that make sense for your life.
But where do you start? From good old pencil and paper to cloud-based platforms that keep track of all your accounts, there's no shortage of options for anyone who wants to get his or her financial house in order. The good news is that you don't have to spend a penny to start organizing.
That's because what it all comes down to is whether you understand two simple reports and you don’t need to be an accountant to understand them either!. Once you have these under your belt, you'll be better prepared to leverage whatever financial tools you like. Soon you'll be on your way to setting realistic goals, pursuing them, and eventually reaching them.
Knowing where you stand financially is as simple as understanding these two personal financial statements:
1. The Balance Sheet
2. Cash Flow
1. Your Balance Sheet
A personal balance sheet provides a snapshot of your net worth. It provides a simple framework for you to understand what your net worth is and the difference between your assets and liabilities.
Assets – Liabilities = Net Worth
Assets are items you own such as your home, investments, and cash you have in your bank account. Everything you own is totaled up into one number.
Your liabilities represent everything you owe like your mortgage, credit card balances, and student loans. These are totaled up and subtracted from you assets to give you your net worth.
Now, if you are a young doctor just out of school, chances are your net worth will be negative. This is ok, because you have only been building up liabilities in school for the past 10+ years and haven’t had a chance to grow your assets. However, if you were a doctor (or anyone for that matter) in their late 50’s with a negative net worth I would be very concerned.
Knowing your balance sheet is important, but it’s only half of the equation and can’t be looked at alone. Time to start examining your cash flow.
2. Your Cash Flow
Cash flow represents the difference between your income and your expenses, usually measured on a monthly basis.
Income – Expenses = Cash Flow
You either have positive or negative cash flow (or very rarely breakeven). Cash flow can only be improved by making more money or spending less, that’s it. Simple to understand, hard to execute on.
Cash flow measures how we are doing over a distinct period of time, whereas a balance sheet is a one-time snapshot that shows the accumulation of a lifetime of saving, investing and spending.
The easiest way to track your money is to sign up for a free service like mint.com. Mint takes feeds from all of your accounts and automatically categorizes them for you. It takes a little setup time, but you will soon have a clear understanding of where your money goes, and, more importantly, if your’re spending is aligned with your values.
Arguably, the most effective thing you can do to ensure your financial success is to live within your means and spend less than what you earn. This makes total sense, but in today’s world it’s often difficult to do.
Putting the Two Together
The balance sheet and the cash flow statement are two different pictures of your financial health. They work in synergy: one affects the other.
All things being equal, if your cash flow is positive, your net worth should go up. If you made $1,000 more than you spent last month, that money would go into your bank account and increase your assets, thus increasing your net worth.
Likewise, if you spend more than you make in one month and rack up credit card debt, your liabilities (credit card debt) on your balance sheet will increase. This will result in your net worth dropping.
Why is This Important?
Unless you're a genius at creating wealth like Richard Branson or Warren Buffet, you have limited financial resources available to you for achieving your goals. Like the dieter who doesn't know what weight he started at, you won't know how much you are gaining or losing unless you get a clear picture of where you stand. You will have no way to know if what you are doing is working.
Start today with a clear understanding of your resources to help you improve your finances. Once you know where you are, you can make the best financial decisions to help you move in the direction you want to go and reach your goals.
- January 2018
- Dec 11, 2017 The Psychology of Saving Money: Why some do it successfully and others struggle Dec 11, 2017
- Nov 27, 2017 Why Your Child's 529 Plan Should Be Direct Nov 27, 2017
- Nov 13, 2017 Get on the Road to Financial Success with These 4 Behaviors Nov 13, 2017
- Oct 30, 2017 Know the Lingo - the daily market recap and how it affects you Oct 30, 2017
- Oct 16, 2017 The 3 Unbreakable Rules for Financial Success Oct 16, 2017
- Oct 2, 2017 Follow These Steps When Selecting a Financial Advisor Oct 2, 2017
- Sep 18, 2017 Why You Should Choose a Fiduciary as a Financial Advisor Sep 18, 2017
- August 2017
- Jul 24, 2017 How Am I Doing? Jul 24, 2017
- Jul 10, 2017 Do I Pay Off (Student Loan) Debt or Do I Invest Instead? Jul 10, 2017
- June 2017
- May 29, 2017 Diversification: The Right Way to Manage Risk May 29, 2017
- May 15, 2017 Having a tough conversation and helping your aging Parents May 15, 2017
- May 1, 2017 What Everyone Should Be Doing Post-Tax Season May 1, 2017
- Apr 17, 2017 Want to Raise Financially Savvy Kids? Try These 5 Steps Apr 17, 2017
- Apr 3, 2017 Inflation: What Every Investor Needs to Know in 2017 Apr 3, 2017
- March 2017
- February 2017
- January 2017
- Dec 26, 2016 5 Steps to Get Your Finances Ready for 2017 Dec 26, 2016
- Dec 12, 2016 How Much Should I Invest In My Company Retirement Plan? Dec 12, 2016
- Nov 28, 2016 How About What Not To Do With 401(K) Contributions Nov 28, 2016
- Nov 14, 2016 Keeping it All Together: How to Balance Personal Financial Goals with Running Your Business Nov 14, 2016
- Nov 1, 2016 Nervous About The Election And Your Investments? Nov 1, 2016
- Oct 16, 2016 30-Somethings: Why are You Wasting Time Following the Stock Market? Oct 16, 2016
- Oct 3, 2016 Will 30 Year Old's Ever Get To "Retire"? Oct 3, 2016
- September 2016
- Aug 8, 2016 Why Budgeting Doesn't Need to Be a Dirty Word Aug 8, 2016
- Jul 18, 2016 What Does a Financial Planner Do? Jul 18, 2016
- June 2016
- May 16, 2016 It's Urgent, But Is It Really Important? May 16, 2016
- April 2016
- March 2016
- February 2016
- January 2016