Financial Management is not Rocket Science-

Do you have numerous bank accounts, various credit cards and personal budgets, but no overall plan? Are your financial management strategies haphazard?

Lack of proper organization and planning normally leads to short -term financial disaster and long-term less than optimal results. You should tread carefully when it comes to managing finances, in order to avoid huge losses that can leave your finances staggering.

Fortunately, there are tips that can help you in restoring order to your financial life. If you integrate them into your daily financial life , you have a much better chance of keeping the money you have worked so hard for. The first key of sound financial management is to know how much you have i.e. know your Net Worth.

What is Your Net Worth?

Document Your Assets- List all the assets that you own and document them. All stocks, bank accounts, investments, savings, petty cash, real estate, retirement accounts, Cars, boats, furniture and any other assets must be included when doing this, so that you can be able to plan accordingly. For things like furniture, tools and jewelry you must list them at what you could sell them for (i.e. Yard Sale prices) not what you paid for them. This will give you an idea of what you OWN.
Document Your Liabilities- The next step is to document what you OWE. List things like the balance of the mortgage on your house, current credit card balances, car loans, payday loans, money borrowed from relatives or friends… everything.
Subtract what you owe from what you own- This is called your Net Worth. It is the amount you would have if you sold everything and paid off all your debts. This can be a frightening experience if you discover that you have a negative net worth. At one point during a real estate collapse, Donald Trump, was walking down the street and he realized that he was poorer than the homeless man on the street. The homeless man had a net worth of zero while Trump’s net worth was Millions in the Red. But a few years later Trump had recovered and was once again worth millions (in the Black this time). See: Trump: The Art of the Deal

The next step in proper financial management is to calculate your Cash Flow.

You might be tempted to hire the services of a professional accountant at this stage but don’t worry it isn’t really that complicated.

Track Your Income- This should be fairly easy simply look at your Paystub and look at the “net amount” you were paid. If you are self-employed or have interest or dividend income you will have to add those sources in as well.
Track all expenses- You should know exactly how much you spend every month. If you buy everything on a credit card (which you pay off every month) it will be easy to know what you spend and where you spent it. You can also use a debit card. You will probably need some cash so just track how much you have at the beginning of the month, how much you added or withdrew from the bank and how much you end the month with.
Start the process immediately by recording each day’s expenditure for a period of one month. The written results will enable you to manage finances appropriately in future, since you will be wiser. When writing down the list, include mortgage payments, purchases made by credit cards, utility bills, loan repayments and even other smaller expenses like movie outings. Note the areas that you overspend and cut back on them. There are numerous tools to assist you in this process, and technology provides you with budgeting software.
Subtract your expenses from your income- This is your cash flow. If you spend more than you make you have a negative cash flow. This is not good.

If you have a negative cash flow or want to save more than you currently are:

Devise actionable goals- It is mandatory to create financial goals that are actionable. When doing this, always remember that the amount meant for each goal should be specific. In general, it’s advisable to break down the goals into specifics, such as tuition payments for kids, retirement fund and savings. Post the goals at a location in your house where you will be able to glance at them periodically. This will help in making sure that they stick to your mind. Prioritizing the goals, as basic and secondary, will come in handy for ease of execution.
Manage debts- The distinction between good and bad credit must be made sooner than later. Items like college education and a home are vital so it’s best to ensure that loans are only acquired for such needs. Make the distinction between good debt and bad debt. Avoid accumulating debt for luxuries like vacations and food delicacies. Pay off the largest debt owed and seek financial assistance from professionals when credit card debt consolidation is the only option you have left.
Communication-Families should develop strategies which will open up communication between them with regards to finances. Ensure that it’s done in an honest and calm manner. Limits must be set for each member’s expenditure. Focus needs to be maintained as well, so that accusations can be avoided in case of overspending. There is always a solution for financial problems, so make sure that your energy is focused on finding them in order to facilitate efficient strategies implementation.

All in all, earning money and keeping it are two major challenges faced by most individuals. You must track not only your Income vs. Expenses but even more importantly your Assets vs. Liabilities. Income vs. Expenses is important but it is only the small picture. Tracking Assets vs. Liabilities every month (or two) will help you focus on the big picture and see whether your net worth is increasing or decreasing. All you have to do is follow these tips, and enjoy your hard earned money. If you would like to see a sample Excel Spreadsheet that will help you calculate your net worth see: How to Download Net Worth Spreadsheet .

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Photo Credits: By swanksalot | It’s not just rocket science

Financial Management is not Rocket Science-

What is Your Net Worth?

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