To really understand how your financial situation, you need to do a financial health check. Having an awareness of where you stand financially will enable you to spend wisely and achieve your short-and long-term financial goals.
Many people ignore or fail to manage their own finances. Money comes and goes, living paycheck to paycheck, and result in constantly running out of money. When you assess your finances, you can make smarter decisions that prepare you for the future.
Personal Cash Flow Statement: Find Out Where Your Money Is Going
A personal cash flow refers to the amount of money coming into, i.e., cash inflows and going out, i.e., cash outflows to show your net cash flow over a period of time.
Cash inflow generally consists of anything that brings in money, includes salary, dividends from investments, or capital gains from sales of financial securities like stocks and bonds.
Cash outflow represents all expenses, include or mortgage payments, utility bills, groceries, entertainment.
Net cash flow is simply the result of subtracting cash outflow from cash inflow.
Net Cash Flow = Cash Inflow – Cash Outflow
- A (+) positive net cash flow means that you have some money leftover, you spent less than what you earned.
- A (–) negative net cash flow shows that you spent more money than you earned.
Personal Balance Sheet: Knowing What Is The Difference Between Assets and Liabilities
A personal balance sheet is a summary of your assets, your liabilities to determine your network (assets minus liabilities)
An asset is anything that has a value that can be converted into cash. Assets include saving accounts, deposits with financial institutions, investments, i.e., bonds, and life insurance policies’ cash value.
A liability is a debt or obligation you need to repay. Liabilities include current bills, payments still owed on some assets like cars and houses, credit card balances, and other loans.
Determine Your Net Worth
Net worth is calculated by subtracting what you owe, i.e., your liabilities, from your own, i.e., your assets.
Net Worth = Assets – Liabilities
- A (+) positive net worth indicates that your assets are greater in value than your liabilities.
- A (–) negative net worth signifies that your liabilities exceed your assets. In other words, you are in debt.
Your ultimate goal is to increase your net worth by either increasing your assets or decrease your liabilities. Spend less than you earn, and your net worth will go up.
How Your Net Worth is Affected by Cash Flow
A positive net cash flow improves your net worth. A negative net cash flow tends to reduce your net worth. Your personal cash flow statement and balance sheet are working hand in hand. If you have a positive net cash flow, this will mean you have extra money you can either save or use to pay your debt or both. The same goes for when you spend more than what you earn. You either pay using your savings, increase your debt, or both.
If you know how to apply your net cash flow toward your net worth, you will be able to increase your assets without increasing liabilities.
Creating Your Personal Cash Flow Statement
By now, you should be aware that you can use your cash flow statement in conjunction with your net worth statement to get a better idea of your overall financial health.
To accumulate wealth, you need to spend less than you earn to create a positive cash flow. Simple, you can’t build wealth if you are running a deficit. It is only when you know your money flows you are in control.
To create personal cash flow management involves understanding the components that make up where the money comes from, where it goes, and what choices are appropriate in creating your present lifestyle while working towards your short and long-term financial goals. It is an active process. It would be best if you began to categorize all of your incomes and expenses:-
- Sources of income – Often from salary, bonus, and investment sources.
- Fixed expenses – The costs you have little control over, i.e., mortgage or rent payments, loans, insurances, taxes, and utilities.
- Discretionary Expenses – Costs where you make choices, and therefore, you have control and can make adjustments for those discretionary spending, which is unnecessary. Examples are groceries, entertainment, clothing, gifts, hobbies, and gifts, etc.
- Savings – This depends on whether you make a regular and systematic saving plan. And if you can make better choices in the other categories, the more saving you will generate.
Let’s Take A Financial Health Check
To assess your financial health check, you will need to update your personal financial statements. Download the free excel worksheets are a good start to know your net worth.
Net Worth Statement (Download Excel)
List down your assets and liabilities to determine your personal net worth.
Cash Flow Statement (Download Excel)
List down your incomes and expenses, and categorize them to help determine your monthly and annual cash flow.
Pay Yourself First (PYF Savings)
Let’s be honest. It is not fun and easy being an adult. You need to build a career, and you need to engage yourself to manage your own finance’s ins and outs. Chances are, somehow there is never any or enough money left at the end of the month. Successfully managing your finance can be a little overwhelming if you are not armed with the right knowledge. Money management is a learning process, and there is a simple approach that you can adopt to free yourself and spend your money guilt-free.
Many people use the old and common approach to use your money first and pay yourself later. This means you pay for all your fixed expenses and entertainments, then save whatever was leftover.
Old Way: Save What’s Left Over
Net Income (after tax income) – Fixed Expenses – Entertainment = Save whatever’s leftover
This approach never works long-term, especially in the world we live in. We have too many reasons and chances to spend our money away easily and end up having nothing to save at the end of the month.
A shift of your mindset and follow the new approach to manage your money is “Pay Yourself First” instead of pay yourself later.
New Way: Pay Yourself First
Net Income (after-tax income) – Fixed Expenses – Pay Yourself First = Entertainment
For this approach, you need to automate your savings just like another bill you must pay every month. After deducting all the fixed expenses and Pay Yourself First, whatever remaining amount of money, you can spend all you want, guilt-free! Of course, you can’t spend more than what’s left over every month, and else you will be creating debt. The approach is meant to spend only within what’s leftover.
How much should I be saving each month?
If you can set aside 10-20% (or more!) of your net income, that will be a good start. This should help you build your long-term financial goals for the years to come. However, if you find this is too far stretched, you can start small, from 3%, and gradually increase to reach the desired level. If you like to know how to budget and the general rule of thumb, you can refer to the post here.
Pay Yourself First allows you to start saving easily. You need to take action and start by putting aside as little as $50 per month. Just make sure to make it automatic. You need to set a recurrence time, which once your monthly net income salary bank in, it will be transferred automatically to saving the account. Setting up automatic savings allows you to save and without feeling any guilt in spending what’s leftover. Once you have set up the automatic Pay Yourself First, you won’t even miss that automatically deducted money. This approach allows you to set yourself up for a successful financial future.
Yes, it would be best if you were responsible for your money. You need to stay on top of your finances, and you will thank yourself many years later!