Many times in the introductory stages of financial planning, it is necessary for advisers to know about the background of the individual or family for purposes of making suitable recommendations. In most instances, information provided from a tax return can be an invaluable tool for assessing the financial makeup of a person or family.
However, when dealing with young graduates right out of school and entering the workforce for the first time, nailing down needed financial information can be a little more challenging when there is no track record to base your numbers. Therefore, establishing a personal financial statement can become a very useful tool towards tracking financial progress in the months and years ahead.
Personal financial statements have been called the roadmap that guides us from where we are today — to where we want to be tomorrow. They also provide fixed points of reference from which we can measure progress over time. There are two basic personal financial statements that everyone should prepare, or have a financial adviser prepare, at least once per year; a cash flow statement and a balance sheet. Having these two items in place represent a critical first step in financial planning. Tracking a financial position and progress gives you a great sense of control, that being; knowing where you are headed financially. It also gives you the positive reinforcement needed in making sound decisions about financial matters … down the road.
Here are a few key issues for starters: “Cash flow” pertains to how you spend your money. A cash flow statement is an ongoing financial document that tracks your sources of income, uses of income and point out the differences between the two. If you keep a budget, you are, in essence keeping a running cash flow statement. Tracking your cash flow on a monthly basis can better prepare you to handle financial crises as they can and will occur.
Here are three key items to budget as you plan your monthly cash flow:
» Short-term expenses – these are your day to day expenses and standard of living items which can include such items as food, housing, utility costs, vehicles, transportation expenses as well as clothing along with childcare items if there are young children.
» Recurring expenses – these are periodic payments for items such as health insurance and property-casualty premiums, possibly life insurance premiums along with any retirement savings programs available through an employer.
» Financial emergencies – As your financial situation can permit, it is recommended to keep aside 3-4 months income set aside for contingencies that can occur. It is a critical part of your cash flow picture so as to provide “rainy day” money for financial events that can and will arise.
A balance sheet is a personal snapshot of your cash flow leading to a general indicator of your total net worth. Assets for this type of valuation include; cash in the bank, cash surrender values of any permanent life insurance policies, liquidation values of IRA Accounts or employer sponsored retirement plans. Also included would be value of a home, other investment real estate as well as personal property such as cars or and a boat.
On the flip side, total liabilities can include: A mortgage balance on your home, car loans, other bank loans as well as charge accounts, taxes owed and college loans. Hopefully, these type of liabilities will be less than your assets! After deducting these liabilities from your assets, we arrive at the difference — which is considered your net worth.
As I have written on previous occasions, one of my favorite modern day philosophers is Yankee baseball great Yogi Berra. Yogi has a knack for expressing personal observations in simplistic structure which has been described as “Yogism’s.” One of my favorites is, “You’ve got to be careful if you don’t know where you’re going because you might not get there!?!” Personal financial statements provide you directions towards “getting there” as Yogi would say –towards building a sound financial portfolio. Most importantly, keep a close watch that your plans stay well tuned both for today –and tomorrow
» Ike S. Trotter, CLU, ChFC is a credentialed financial adviser in Greenville. Securities and Investment Advisory Services provided through Woodbury Financial Services. Contact Trotter at 662-378-9550 or email email@example.com
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