If’ you’ve ever watched the show Dragon’s Den or Shark Tank in the U.S, the presentations that get thrown out quickly are ones where the individuals come there with no sense of where they are in terms of profitability or the worth of their company. This is essential in business and a necessity in our daily lives. Knowing where you stand financially is Step 2 on the Road to Prosperity after taking ownership for your future. The best way to get started is to record all your “In’s and Out’s ” either on a spreadsheet or on paper. Use your bank statements and credit card receipts to determine your “Revenue-“i.e. Salary/Wages as “In’s” and detail your spending under various categories like House Hold, Automotive, and Maintenance with sub categories for more detailed purchases. What you are doing is understanding your spending and getting a feel for where your money is being spent. In today’s increasingly cashless society its easy to lose touch with your spending and how fast you are accumulating debt.
By tracking your expenses practically (not using cash in jars!) from electronic records and matching them against what you are bringing in, you are inadvertently producing a key financial report. You are developing your own personal Income Statement or as some of us Old-School accountants like to call it your Profit and Loss (P/L). This becomes handy when looking for loans or a mortgage as your banker will be impressed with how well you know your monthly Cash Flow. When you finish recording the months results you should see a positive number at the end, if you don’t you’re using borrowed money to sustain your current lifestyle. This is where debt is accumulated and becomes a burden and road block to your prosperity. You will need to be disciplined and patient at first, but if you keep at it, you will soon see trends and patterns that will help you understand and control your spending. I have worked with many clients who once thought they could never keep at it but grew to love their weekly ritual of planning their spending based on wages and upcoming bills. Staying in the “Black” or Positive becomes a great habit and helps you confidently manage your money instead of the money/debt managing you.
When you get comfortable with your own Income Statement (Income-Expenses) the next step is easy. Knowing your Net Worth or developing your Own Balance Sheet is simple. If you’ve mastered Revenue (Wages, Salary) and Expenses (Bills) the Net Worth statement is made up of Assets and Liabilities. An asset is anything you own or have of value that can be sold easily. Liabilities are outstanding debts or loans often used to buy those assets. Listing these in a spreadsheet or on regular paper and tracking their value month after month will show you how much progress you are making in becoming financially prosperous. Assets will include houses, cars, investments, chequing and savings accounts, while liabilities include mortgages, loans and credit card debt. The difference between total Assets minus total Liabilities is your Net Worth or Personal Equity. This is where you get to keep score and employ strategies to boost your net worth month after month. Knowing your numbers and keeping on top of your finances takes time. The more often you do it the faster and easier it gets. Anything worth having takes effort, the more effort you put in the more rewards you will reap.
Until the next step,