By now, the Christmas tree has been put out on the curb and you’re close to finishing all the candies and cakes you didn’t need to begin with. Its time again for that annual ritual and you know what I’m referring to: New Years Resolutions, or, more to the point, financial resolutions for the year ahead. And the timing could not be better because in just a few days, you’ll be receiving those bills from Christmas purchases and reality starts to sink in; how to get them paid in a reasonable manner? The better question, however, to ask is; where do you start? More to the point; what will have to happen differently this year to make sure you stay ahead of your debts? A good beginning point to this exercise is in establishing a personal financial statement. Here are some good financial basics to the process that can help you get started in the right direction for 2012.
Without becoming complicated, a personal financial statement is simply a roadmap that guides us from where we are today — to where we want to be tomorrow. This process should also provide markers or reference points by which we can measure our progress over time. A good rule of thumb for this is by calculating your financial estate on a yearly basis. As an example, you could track your efforts each year from Dec. 31 to the next.
There are two basic components to a personal financial statement that need to be monitored at least once each year: a cash flow statement and a balance sheet. In the financial planning process, this is a critical first step. Just knowing your financial position gives you a better feeling of control and understanding as to the direction you wish to follow. It also gives you the positive reinforcement sometimes needed in making sound decisions about financial matters that will occur down the road. There are two parts to this process:
>> Component 1 — A cash flow statement will help illustrate how you spend your money. This statement can help you track your sources of income, how income is spent and help point out the differences between the two. If you keep a budget, you are, in essence, keeping a running cash flow statement. Since most of your bills are due on a monthly basis, tracking these expenses on a monthly basis can help you better prepare to meet financial situations as they can and will arise. By year end, you should have a clear picture as to the spending patterns you’ve formed. Here are a few examples to illustrate:
>> Short term expenses: These are your day to day expenses and standard of living items such as food, car payments, gasoline, utilities, clothing, childcare and etc.
>> Recurring expenses: this relates to periodic payments for items such as insurance premiums, medical and dental expenses as well as tax payments.
>> Financial emergencies: This means setting back money for financial emergencies that occur.
Most recommend at least three to four months of income set aside for this contingency.
>> Component 2 — A balance sheet is a personal snapshot of your cash flow leading to a general indicator of your total net worth. It begins by making a valuation of your current estimated assets. These assets can include cash in the bank, personal property, the value of your home and other real estate, the liquidation value of IRA’s or an employer sponsored pension plan as well as cash surrender value of life insurance policies.
>> Total liabilities can include: the mortgage balance on your home, car loans, any other bank loans, charge accounts, any college loans and taxes that are owed. After deducting these liabilities from your assets, we arrive at the difference — which is considered your net worth.
There you have it; a simple and concrete method for getting off to the right start in 2012. Many financial analysts tell us that establishing a personal financial statement is an essential element to building a sound financial portfolio. After all, if you don’t know what you have, how are you ever going to know what you may need in the future. Good or bad, having a clear picture of your financial situation can provide critical assistance in knowing when and how often you may need a “tune-up.” Starting now, starting this month in January would be a good time to get cranked off. Believe me, you’ll be very happy you did come this December.
Ike S. Trotter, CLU, ChFC, is a financial advisor in Greenville. Securities and investment advisory services provided through Woodbury Financial Services Inc., Member: FINRA, SIPC and Registered Investment Advisor, P.O. Box 64284, St. Paul, MN 55164. Tel: 800.800-2638. IKE TROTTER AGENCY, LLC, and Woodbury Financial Services are not affiliated entities. The information provided for this article is general in nature and not intended as specific financial advice Information and opinions expressed are those of the author and not necessarily those of Woodbury Financial Services Inc.
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