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Map Out Your Financial Future

Create a map of your financial transactions and you'll see where your money actually goes each month. Preparing a monthly set of personal financial statements gives you the information you need to effectively manage your finances and improve your financial status.

The best way to keep track of your money is through the use of personal financial statements. These statements allow you to identify, measure, and record economic information about your personal finances. Financial record keeping can be as simple as recording your financial transactions on a piece of paper. Your entries should include the date of the transaction, its nature, and the amount of money involved. By keeping these records and creating financial statements, you can analyze your past financial performance, and better predict what may happen in the future. The three most common types of personal financial statements are cash flow, income statement, and balance sheet.

Cash Flow

Cash flow is a measure of your personal financial health, as it records the amount of cash coming in and going out over a given period of time. By preparing a monthly cash flow forecast, you can see the dollar amounts in the form of income and expenses you expect to earn and spend. When used properly, this will provide you with the means to keep your personal spending on track. A reliable cash flow forecast can bring a sense of well being and calmness to your life. There are three simple steps to preparing a cash flow forecast:

  • Cash Flow Revenues -
  • Your revenues will include wages and dividend payments on investments. Also included are any other sources of income you would receive in a given timeframe.
  • Cash Flow Disbursements -
  • The disbursements predict each of the various expense categories you would incur over a month. Remember, each month must show only the cash you expect to pay out.
  • Cash Revenues to Cash Disbursements -
  • This process takes the balance carried over from the previous months and adds it to the current month's revenues. To this figure, you will subtract the total of the current month's expenditures. The final figure will be carried over to the next month in the form of a surplus or a debt.

The following is an example of what your cash flow may look like over a period of three months:

 

Beginning

 

Balance

Revenues

Expenditures

Ending Balance

 

Wages

$11,400.00

Grocery

$ 900.00

 

Dividends

$ 600.00

Entertainment

$ 450.00

Bonus

$ 300.00

Rent

$ 3,000.00

 

 

Auto

$ 1,200.00

 

 

Misc.

$ 600.00

 

 

Debt Payments

$ 2,400.00

 

 

Vacation

$ 1,000.00

 

 

 

 

$1,000.00

Total $12,300.00

Total $(9,550.00)

$3,750.00

 

Now that you are able to make a cash flow statement, you may wonder how to improve your cash flow. This is done by accelerating your cash inflows, delaying your cash outflows, and minimizing your optional expenses. Be sure to look at some of the articles in our Article library for ideas on budgeting, making smart purchases, and managing expenses.

Income Statement

An income statement is very similar to a cash flow in that it allows you to view your current financial status. An income statement works by displaying the amount of money you will have available for savings, investments, or additional expenses. Income statements will highlight your revenues and expenses, and their overall affect on your net worth over a given period of time. The revenue portion of the statement is recorded as all of the assets attained for that period of time, and the expenses are recorded as the expenditures paid out. On most income statements, expenses are broken down into different categories, i.e., groceries, entertainment, rent, etc. By breaking down your expenses, you will be able to see exactly where all of your money is going. If you look at the previous example of a cash flow, you will notice that it, too, highlights the revenues and expenditures the same way an income statement does. The major difference between these two types of statements is that a cash flow uses the balance from the prior period, while an income statement does not. Using the cash flow example and eliminating the Beginning Balance column would give you an accurate picture of what an income statement would look like. The overall goal of maintaining income statements is to keep your income higher than your expenses, thus increasing your net worth.

Balance Sheet

A balance sheet provides you the opportunity to see your financial picture on a given day, as it lists assets, liabilities, and net worth. One side of your balance sheet will contain your assets, and the other side will reflect your liabilities. An asset is any item of value that you own. Some assets, such as cash, are easy to value, while others, like real estate, can be more difficult to value accurately. On the other side, a liability is the exact opposite of an asset, as a liability is an obligation to pay. As implied by the word "balance" in balance sheet, your assets plus your net worth must equal the liabilities, therefore keeping the statement in balance. Using a balance sheet will allow you to better assess your assets and liabilities, thus giving you a better understanding of your current financial situation. The following is a simple balance sheet. Yours may be more complicated, but it should give you the general idea:

 

 

Assets

Liabilities

Net Worth

House

$80,000.00

 

 

Auto

$10,000.00

 

 

Cash Savings

$ 3,000.00

 

 

Mortgage

 

$(70,000.00)

 

Car Loan

 

$ (8,000.00)

 

Totals

$93,000.00

$(78,000.00)

$15,000.00

 

What's In It For Me?

For you to better grasp your financial situation, some basic accounting measures can be taken. By simply recording all of your financial transactions, an map of where your money is going will be created. As this map is created, you will see your past performance, which allows you to better predict what will occur in the future. When you come to terms with your financial status, you can take steps toward improving it. The most important of these will be reducing unnecessary spending and placing your cash surpluses in the proper investment vehicles.

For a real-life example of a personal financial statement, see the blog article You, Inc.: How to Be the CFO of Your Own Life. You can keep keep your personal financial statements online at Wesabe, a personal finance community website.

Take control of your finances with our debt help tools. Use our calculators and budget planner for debt help.

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