The first step to smart financial planning is knowing where you are at right now. Having a clear picture of your present standing makes you aware of how much you are earning, how much you are spending, how much you end up saving, and how much you are setting aside for investing.
The choices that you make in the present will impact your future situation. What you do today with money—earning, spending, saving or investing–will change how much you will have years ahead. If you do not know much money you have and how much you are losing now, you will have a harder time estimating and taking control of your future.
Another reason to get to know your financial status is to have a starting point or a way to measure your progress. If it is your first time, you can use it to mark the beginning of your journey to be financially free. If you have been regularly reviewing your finances, you can use it to track your progress so far in relation to your goals.
There are two things that you must start and be comfortable doing:
1. calculate your net worth
2. make a cashflow analysis
Determine your net worth
You hear net worth of movie stars and wealthy businessmen mentioned so many times you think only theirs deserve to be examined. That’s not true. Everyone needs to know how much they are worth, no matter what the result will be.
A personal net worth is a measure of the things you own (called asset) against the things that you owe (called liabilities). It allows you to count your cash and the things that you currently possess, and list down the debts and other obligations that you are duty-bound to pay. This is called a balance sheet. Whatever is the difference between assets and liabilities from the balance sheet is your net worth.
Your balance sheet can reveal many things. It gives you a snapshot of all your possessions and debts, and whether you own more or less one or the other. If you have more assets than your liabilities, you are a in a better standing than if your asset is less than your liabilities.
The size of a net worth can be predicted by age. It is expected that you have less asset when you’re younger, and you will have more as you start working and earning and acquiring properties.
Make a cashflow analysis
Don’t let the name fool you. A cashflow analysis is simply a summary of income and that things you are spending it on. It is an estimate of the minimum amount of money that will enable you to maintain a standard of living that you are comfortable with.
Cash flow analysis lists of all your earnings and all your expenses. And that is why it is also sometimes called a statement of living expenses or income statement.
If you have more income than your expenses, then whatever left-over cash is called a surplus. On the other hand, if your income is less than your expenses, which means you are spending more than the money that you are earning, it means that you have a deficit.
The ideal situation is that you have a surplus that you can use for saving, getting insurance coverage, and investing.
The primary goal of knowing your present financial status is to understand your life from the stand-point of money. Find the time to determine your net worth and your cash flow. Your net worth provides a bird’s eye-view, while the cashflow analysis on the other hand tries to show the minimum income you should have to cover your expenses of your daily living. Together, they are your necessary bearings when you are defining your goals, the next stage of your financial planning.