You go to the doctor once a year to check your physical health, right? Oh… once every two years? Five years? Um… well, in any case – you are familiar with the concept of a physical checkup, right? The medical report you get from your doctor tells you just about everything you would want to know about your health. It is just as important that you do a regular checkup when it comes to your finances. You need to know where you are financially before you decide what you want to achieve financially. If you do not know what your finances are, you could cause a lot harm to your credit history and bank accounts through over spending and getting behind in your payments. So, what exactly do you do to determine your level of financial fitness?
Determine My Budget or My Income Statement
First and foremost, know that you can use basic financial statements to help ascertain your financial fitness. I am talking about good old income statements and balance sheets. Not too scary, right? Believe you me, the process of beginning is tedious; you will need to dig out all applicable documents and get them organized in a proper format, and it is not a bit of fun. I can tell you, though, that once you have done this checkup, you will have a much clearer picture where you stand financially, and you can finally make the right moves to achieve financial freedom. Besides which, you will have more control over your money and understand how to spend wisely.
Begin by preparing an income statement (also known as a profit and loss statement). A basic income statement is going to consist of two sections: monthly income and expenses. For monthly income, include things such as salary, rent you collect on property, dividends, interest from savings accounts, royalties, etc. Expenses are things like food, clothes, utilities, car payments, loan payments, mortgage payments, medical expenses, entertainment, insurance payments, etc.
Calculate your total income and expenses in your two handy columns. Once you have finished that task, you are able to calculate your net income. Net income, of course, is the difference between your gross income and expenses. Gross income is your income before your taxes are taken out. Now, if you have a negative net income…well, that means you have a pretty big problem. Simply put, you will have to reduce your spending or increase your income. You can use this step to create your monthly budget.
Determine My Personal Networth or Balance Sheet
The next step is to set up a Balance Sheet. Just like the income statements, balance sheets also have two columns: assets and liabilities. Assets include cash, property, cars, bank accounts, stocks, bonds, retirement accounts or mutual funds, and businesses. Liabilities, on the other hand, include mortgages, credit cards and personal loans, car loans, and taxes. Prepare your balance sheet by listing all assets and liabilities, and then calculate your total assets and total liabilities.
The difference between your total assets and total liabilities is your personal net worth. By doing this simple exercise, you are one giant step ahead of most people because you know your level of financial fitness. Like what you see or is it time to hit the treadmill?
Josh Michaels is a freelance writer who survives on very little income and carefully considered financial decisions. This combination has allowed him to have fun, travel the world, and start a retirement account – all without the pleasure of holding a full-time job. He can be reached at: joshmichaelsmoney@hotmail.com
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