When we last visited I outlined some of the basic principles that need attention to more effectively chart our financial course in life. The start of any journey requires proper preparation, and that’s what ‘the beginning’ is all about. Today we’ll revisit briefly those concepts, put the pieces together and look at another exercise for the parents among us.
The four elements of financial living we’ve looked at are:
- What we have already
- What we owe
- What we earn
- What we spend
Knowing what we have and what we owe allows us to create a Balance Sheet. Our assets (what we have already) minus our liabilities (what we owe) show us our Net Worth. Understanding what we earn and what we spend allows us to create an Income Statement. Our income (what we earn) minus our expenses and other debt payments (what we spend) show us our Net Income. Each is a point in time snapshot of the key elements of our financial health. Ideally, over time our Net Worth grows and our Income Statement never goes negative, or ‘into the red’.
While both an accurate Balance Sheet and Income Statement are elementary tools, it’s surprising how few can produce either when asked. For those who handle their finances manually, the task of creating an Income Statement should be undertaken once a month. A Balance Sheet should be updated at least quarterly. Both should be maintained with your other financial records. Since family finances are a ‘team sport’ it is important for both spouses to review these documents, and it’s even better if both participate in creating them. Also, if there are children, these are worth sharing in an age appropriate way. Our children need to understand how money works. It’s vital to their better future.
As an alternative for doing this work manually, I’m a big believer in Quicken or other similar software programs that are available at a nominal cost. My family tracks EVERYTHING in Quicken, even logging cash expenditures and others at a very detailed level. At first, it was tedious and seemed overly time consuming, but today it’s become something we look forward to doing as we chart our progress forward. And it’s even paid us back, by allowing us to fully maximize our deductions at tax time and in a host of other ways.
Next, let’s look at the concept of budgeting.
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