How often do you sit down to review your finances? Not just taking a glance at your latest statement looking for fraud, but really sitting down and analyzing your income, spending, savings, investments, and whether or not you are on track to meet your financial goals? If you are like most people, the answer is not very often. In fact, some people never take the time to understand their finances. They just complain and react without taking time to set goals and make a plan to achieve them.
As a Senior Financial Analyst at a Fortune 500 company, I spent my days doing this for $1 billion+ product lines to ensure we were on track to reach our goals for product profitability. If you want to reach personal profitability, you should look at your finances like a business. Read on to learn about three common financial statements and how you can use them in the pursuit of personal finance success.
For personal finances, one of the most important tools you have is a budget. Your budget isn’t a restriction on what you spend, it is a tool to plan for your income and spending to ensure you reach your financial goals.
Businesses use their income statement to understand and report income and losses for a specific period of time. Also known as a profit and loss statement or P&L, this is the most important tool you can use for your own financial planning.
Remember that an income statement includes both revenue and expenses. You can budget until you’re blue in the face, but you will never get rich if you don’t increase your income. My side hustle brought in $40,000 in 2014 in addition to my full-time job. It is easier to earn more on the side than you may realize, and having diverse income sources helps protect you from unexpected income losses in the future.
There are a handful of free budgeting websites and apps that you can use to connect your bank, credit, and loan accounts to automatically create a personal income statement every month. Also, if you want to make it simple, there are a few ingenious ways to track your spending that cost you nothing and take almost no time to do.
Big businesses use a balance sheet to understand assets, liabilities, and shareholder’s equity in a business at a snapshot in time. Public companies are required to report this information quarterly, but I look at my own personal balance sheet once a month, and have done so since July, 2008.
Looking at my personal balance sheet, I can get a quick view into my assets, debts (travel rewards credit cards I pay off in full every month), and financial health with less than five minutes of work every month.
Cash Flow Statement
A cash flow statement appears to be less related to personal finances than the others on the surface, but it also has an important role in your personal finance statements. This statement tells you where your money comes from and goes to within three major categories: operating, investing, and financing.
For our purposes, operating activities are any source of work or self-employment income and expenses. Investing is activities related to stock market and other investments, or investing in your own education and skills. Financing is debt related activity like buying a car or home with a loan.
Looking at your finances through this lens shows you how each part of your finances is working independently of the others. Maybe your investments are doing really well, but debt is keeping you from success. Maybe your job is supporting your investments and debt – that is very common.
There is no right or wrong here as long as you bring in more than you spend. However, looking at your cash flow into investing or financing, for example, can show how much you are doing to prepare for retirement or how much of your income is being eaten up by debt payments.
A Small Investment Can Pay Big Dividends
Putting together financial statements and taking the time to better understand your finances doesn’t cost you a cent! It only costs you a little bit of time. But don’t look at that time as an expense, look at it as an investment. By spending the time to understand your finances today, you know where to focus and work in the future. That can pay back huge dividends.
For me, it led to earning about one hundred thousand dollars in real estate. It led me to earning over six figures between a day job and a side hustle. It allowed me to quit my job to focus on my side hustle full-time and move to the beach in sunny Southern California. I now make more than double what I was paid at my old day job, but it wouldn’t have happened had I not started by understanding my finances.
Of course, everyone can’t expect to quit their job just because they understand their finances, but if you can get your finances under control and start working towards your goals, anything is possible.
So are you going to take action and understand your finances, or just let your finances happen like most people who drone forward in their day-to-day life wishing for something better? Stop wishing. Take control of your finances. It starts today with your personal financial statements. Who knows what tomorrow has in store?