Your Current Finances
I’m a strong believer in managing yourself like a business. The main goal of for-profit companies is to maximize earnings for shareholders. How do you do this, you maximize income and reduce expenses to get a maximum amount of positive cash flow.
In assessing the financial health of a company, there are 3 main financial statements that you look at; the Income Statement, Balance Sheet and Cash Flow Statement. You can’t look at just one of these statements to properly assess the financial health of a company. This can be applied to individuals as well.
The Income Statement is fairly simple. For most individuals it’s their pay check and any income from investments, child support and/or alimony.
The Balance Sheet Statement shows your total assets, minus total debt to determine your equity. Think of a house that is worth $150,000 (asset), minus the $50,000 balance of your mortgage loan (debt), thus giving you $50,000 in equity.
The Cash Flow Statement shows all the money you took in from operations (your pay check), financing (money you borrowed) and investing (money from your investments), minus the money you paid out.
Of all the financial statements, the cash flow statement is the most important because if it’s positive, your balance sheet will be ok and you are taking in income.