Ever been stunned looking at your bank or credit card statements, wondering where all your money went? For a clearer picture of your financial state, and to strategize future budget planning, maintaining personal financial statements just like businesses do can be the master key. Two such financial statements every individual can utilize are the personal cash flow statement and the personal balance sheet.
The personal cash flow statement is all about your cash ins and outs, measuring your net cash flow within a certain period. Cash inflow often consists of any type of income - surprises springing from asset sales like a house or car sale could be a part of it too. Cash outflow, on the other hand, represents all that goes out in the form of expenses, regardless of how big or small.
Understanding your cash inflows and outflows is pivotal for calculating your net cash flow, arrived at by deducting your outflow from your inflow. When the result showcases a positive net cash flow, it's time to rejoice - you've earned more than you spent. Conversely, a negative net cash flow indicates a financial hiccup, reflecting that your expenditure has surpassed your earnings.
The personal balance sheet is your go-to guide representing a snapshot of your wealth at a particular time. It outlines what you own (assets) and owe (liabilities), hence deducing your net worth.
Assets, classified into three categories, and liabilities, including credit card balances, loans, current bills, etc., crystallize the details of your balance sheet. It's interesting to note that strategies like the 'debt avalanche' and 'debt snowball' styles have proven efficient in paying off liabilities notably credit card debt.
The magic figure - net worth is the determinant of wealth, reflecting the difference between assets and liabilities. At the risk of sounding alarming, a negative net worth implies owing more than owning.
Enhancing your net worth is achievable by either beefing up your assets or slicing down your liabilities. While purchasing a house might uplift your assets, concurrently, securing a mortgage for it can inflate your liabilities. Increase in net worth via asset augmentation only works when the asset growth outweighs liability expansion, and vice versa while decreasing liabilities.
Indispensable tools for monitoring expenses and elevating net worth are personal financial statements. They work collaboratively. Your net cash flow can pave the way for asset acquisition or liability reduction, provided you have a positive net cash flow in a given period, thereby contributing to your net worth journey.
It's essential to keep an eye on non-liquid assets, which are not readily convertible to cash like real estate, automobiles, art pieces, jewelry, etc., remembering they could depreciate when sold in a rush.
According to the U.S. Bureau of Labor Statistics, average annual household expenditures rose 9% to $72,967 in 2022, overshadowing the 7.5% growth in pre-tax average income. Guidance from the U.S. Securities and Exchange Commission suggests having a cushion of six months' worth of income saved. Paying off high-interest credit card debt as a priority to create savings, rather than being optimistic for investments to yield returns, is also advised.
If negative cash flow is currently your dilemma or you aspire to augment positive net cash flow, reevaluating your spending habits is a must. Heightened awareness of your spending patterns and net worth stemming from your personal financial statements can steer you toward enriched financial comfort.