Personal finance is how you manage your money and plan for your future. All of your financial decisions and activities have an effect on your financial health. Every Thursday this month of October, I will be sharing with us what to do to be financially healthy.
Do the Math—Net Worth and Personal Budgets
Money comes in, money goes out. For many people, this is about as deep as their understanding gets when it comes to personal finances. Rather than ignoring your finances and leaving them to chance, a bit of calculation can help you evaluate your current financial health and determine how to reach your short- and long-term financial goals.
As a starting point, it is important to calculate your net worth – the difference between what you own and what you owe. To calculate your net worth, start by making a list of your assets (what you own) and your liabilities (what you owe). Then subtract the liabilities from the assets to arrive at your net-worth figure. Your net worth represents where you are financially at that moment, and it is normal for the figure to fluctuate over time.
Calculating your net worth one time can be helpful, but the real value comes from making this calculation on a regular basis (at least twice in a year). Tracking your net worth over time allows you to evaluate your progress, highlight your successes, and identify areas requiring improvement.
Equally important is developing a personal budget or spending plan. Created on a monthly or an annual basis, a personal budget is an important financial tool because it can help you:
- Plan for expenses
- Reduce or eliminate expenses
- Save for future goals
- Spend wisely
- Plan for emergencies
- Prioritize spending and saving
Once you’ve made the appropriate projections, subtract your expenses from your income. If you have money left over, you have a surplus, and you can decide how to spend, save, or invest the money. If your expenses exceed your income, however, you will have to adjust your budget by increasing your income, getting another source of income, or by reducing your expenses.
To really understand where you are financially, and to figure out how to get where you want to be, do the math: Calculate both your net worth and a personal budget on a regular basis. This may seem abundantly obvious to some, but people’s failure to layout and stick to a detailed budget is the root cause of excessive spending and overwhelming debt.
Most people who make more money end up spending more money, a potentially dangerous phenomenon known as “lifestyle inflation.”
This post was first posted in our Facebook Group: Money Mathematician Network
Till next week…Start today to create the future you desire.
Temi Alade- Mustapha.
Your Finance Coach.
