Happy New Year! First, I would like to wish you and yours a very happy, healthy and prosperous 2020. It’s hard for me to believe that it is 2020. I can’t believe it was 20 years ago that everyone was worried about Y2K and how it would affect our computers. Obviously, things have changed in our society since the year 2000; if nothing more, companies like Uber, Twitter and Facebook didn’t even exist, and the first iPhone didn’t come out until 2007. There is no doubt that lots of things in our society have changed. But what hasn’t changed is how important it is for everyone to take control of their finances. It was important then, and it’s even more important today.
One of the more popular New Year’s resolutions is deciding this will be the year you get your financial house in order. I think this is a wonderful resolution that everyone should adhere to. After all, being involved with your personal financial affairs is a hobby that can make you money. In that regard, I believe there are two things you should do to help you accomplish that resolution. These two things are a cash flow statement and a personal balance sheet.
A cash flow statement is nothing more than a listing of what monies are coming in and what monies are going out on a monthly basis. Having a cash flow statement allows you to know what your cost of living is. I cannot stress enough how important it is to know what it costs you to live on a month-to-month basis. After all, in any sort of financial planning, such as planning for your retirement, knowing what it costs you to live is essential. What is also important about doing a cash flow statement is that by doing one at least twice a year, it will allow you to also see what your personal inflation rate is. The government may report inflation, but you and I know that our individual inflation rate is different. Therefore, by doing a cash flow statement at least twice a year, it allows you to know what it costs you to live a month and what your personal inflation rate actually is. Once again, these numbers are essential in any future financial planning.
The other document you need this time of year is a personal balance sheet. A personal balance sheet is nothing more than a listing of assets and liabilities. Once you determine your assets and your liabilities, you then can determine your net worth. By doing a personal balance sheet at least twice a year, you’ll have a better understanding of where you stand financially.
Whether it’s doing a cash flow statement or a personal balance sheet, it is important that you don’t just guess the numbers but rather, actually put some thought into it. It doesn’t do you any good if you put together a cash flow statement that shows it costs you $3,000 a month to live when, in actuality, it’s $4,000. Therefore, in doing your personal balance sheet and cash flow statement, it is important to be accurate and use realistic numbers. You may think your house is worth a quarter of a million dollars; however, if it can only be sold for $200,000, that is what it is worth. To overvalue assets may make you feel good, but it won’t help you accomplish your goal of getting your financial house in order.
As we enter 2020, we all must recognize that personal responsibility when it comes to our finances is more important than ever. Therefore, I encourage you to spend some time organizing your finances. I can assure you the time you spend today with your personal finances will pay dividends well into the future.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org.