Most of us find the notion of creating (and sticking to) a budget about as appealing as spring cleaning chores. And, with the stress that usually accompanies tax filing hopefully behind you, you may not be inclined just now to tackle a financial reckoning.
However, since the tax season probably motivated you to get part of your financial house in order, why not complete the job with a little spring "photography?" There are two financial snapshots which are relatively easy to shoot. In addition to showing you where you stand (financially) today, they can provide the basis for important financial comparisons in the future.
Ready, Aim. . . Sharpen Your Pencils!
The two "images" you are going to create are a balance sheet (or net worth statement) and a cash flow statement. Although many personal finance books have sample worksheets for developing these pictures, you can easily construct your own.
To build 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 that you own, and liabilities are everything that you owe.
You can add a little structure by grouping assets in three categories: cash/cash equivalents (e.g., checking and savings accounts, money market funds, certificates of deposit); invested assets (e.g., stocks, bonds, mutual fund accounts, retirement accounts); and personal use assets (e.g., your house, home furnishings, autos, boats, personal property). Liabilities can be labeled short-term (e.g., auto loans, most personal loans, credit card debt) and long-term (e.g., home mortgages, home equity loans, some educational loans).
Just plug in all the relevant numbers (you might have to dig a little through your records) and add up the two columns.
Now for the cash flow statement. Again, divide a piece of paper down the middle and label one column Cash Inflows and the other Cash Outflows. On the inflow side of the ledger, list monthly (or yearly) income from all sources such as wages, self-employment, rental activities, 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, insurance premiums) and variable expenses (e.g., utilities, food, clothing, entertainment, vacations, hobbies, personal care). You might want to put taxes (federal, state, FICA) in a separate category.
Again, plug in the relevant numbers and total the columns.
Is a Picture Worth a Thousand Words?
A Bright Picture. . . Your balance sheet shows your assets exceeding your liabilities, the difference being your net worth; and your cash flow statement shows more inflow than outflow. This picture tells you that you are solvent and you are spending within your means. The degree of brightness depends on the size of your surpluses.
A Cloudy Picture. . .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. The degree of cloudiness depends on the severity of your deficits.
Two goals worth pursuing: increasing your net worth each year and keeping your annual expenditures under control. If your pictures are a little out of focus, you can take action now to brighten the view. (If you need to do some budgeting, you may have to do a little spring cleaning after all!) When you take new snapshots a year from now, and compare them to the previous years, you will be able to chart your progress at a glance.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This article was prepared Liberty Publishing, Inc.
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