Whoever you are, and whatever income or debt you have, I think it is important to try to think of yourself like a business entity. Like a business you will have income and expenses. A balance sheet and an income statement tell a business what they are worth, defines income and spending, and also helps the firm set and measure goals. Both of these tools are useful for long term planning. A business is often measured by profits, and your budget is the same way. Since the ultimate goal of personal finance is to make yourself cash positive each month, it is important to get rid of as much frivolous debt as possible. Any of your income that is financed by debt is temporary, and any of your income used to service debt payments …show more content…
Now minus the Total Liabilities from the Total Assets
When a business gets a negative number they have to increase their income, cut expenses, or borrow money to stay operational. With personal finance, the outcome is the same, except borrowing more money should not be one of the options. Now, refer to the discretionary money number that you calculated earlier. Does the number have more clarity now? Just like a business, long term assets can be sold to add cash to the short term assets, and long term liabilities can be retired quicker with cuts in short term liabilities.
To begin the income statement you will need to classify and notate all of your income and expenses. Your income may come from multiple sources or only one, but it is still just income. Your expenses can be either “fixed” or “variable.” Fixed expenses are those that do not change no matter how much you use them. Variable expenses are those that increase or decrease with how much you use them. Take a moment and write down the following…
Set debt …show more content…
With everything laid out on the balance sheet and income statement there may be some obvious areas to target. Obviously, trimming short term liabilities/obligations is a good place to start. The next two exercises should help you analyze your long term liabilities/obligations. The balance sheet and income statement may seem similar to what you did before. However, these are more robust versions that allow you to analyze your assets and obligations in a different way. When analysts look at firms, they don’t compare every firm equally. Some firms need more assets than others to operate. Yet, by doing so the majority of its cash flow is tied up in those assets. If a downturn occurs, firms like this are less liquid (can come up with cash quickly). How bad do you want to achieve that goal? If you ended up with negative cash flow, cutting some expenses or eliminating debt should be your first goal. After those adjustments are made you can easily do some projections with the chart in this chapter to retire your debt load earlier than expected, and also measure how quickly you are doing so. If you have positive cash flow you should begin to dedicate a percentage of your discretionary cash to funding one of the goals on your