Have you ever wondered where all of your money is going to? Regardless of how much money you are making, do you find yourself wishing you had enough to survive for the month? Worry not!
We are going to uncover the secrets of getting hold of your personal finance in this series of articles.
It does not matter what you want to improve in your life, the most fundamental things to know is where do you stand at present. If you do not even know where you stand then it becomes nearly impossible to know where you should go to improve your situation.
To know the current situation of your financials, the easiest way to find out where you stand is to do fundamental assessments of your assets and liabilities. Let’s call is the baselining of your finances.
What are the assets and how to find your current assets?
Here while we are talking about the “asset” term, our main goal is not to become a financial guru. For the purpose of finding out where we stand in terms of personal finance, the term “asset” means something that you have which has some cash value to it. It could be the direct cash in your saving accounts or a stock/bond which has potential to give you cash when you redeem it etc.
You can use the below hypothetical table as a reference on how to assess your current assets.
After you have gone through the exercise of your asset listing, you will have fare idea about half of your financial baseline but, this is not the final baseline.
The other half of the financial baselining is to find out how much you owe others i.e. how much debt you have. In terms of finance, you need to know what your current liabilities is.
What are the liabilities and how to find your current liabilities?
By definition, the liabilities are something that you owe others that has some cash value to it. This could be some cash that you may have borrowed from somebody else or some other goods you may have bought with the promise to pay in the future.
You can use the below hypothetical table as a reference to assess your current liabilities.
Once you have gone through the exercise of assets and liabilities assessment then you should have a clearer idea of your current financial situation. By just comparing and subtracting the liabilities amount from your current asset’s values you can find out your current financial baseline which can also be termed in vague term as your current net worth.
Taking above example as a use-case, here the current net worth of this hypothetical entity is at INR ₹843,000.00
The next logical step in taking control of your financial situation is to assess your current income sources. How much money flows into your accounts determines the rate at which you can grow your assets, in another term it determines growth rate of your net worth.
Assessing Your Income Sources
By definition, income is the money that you get paid on regular basis for the good or services that you provide. It could be your regular salary, a regular return on investments, profits earned from business etc.
Here, it is important to understand that not all money that you get counts as income. For example, if you borrow some money from friends or family members does not count as income however, it counts as liabilities.
In another term, anything you get paid which only adds up your assets and does not affect liabilities could be counted as income.
You can use the following hypothetical table as a reference to assess and list down your income sources. Keep in mind that the main goal here is to know your current situation and not to feel good or bad about the same.
We are almost at the finish line of the personal financial baselining.
Assessing Your Expenses
Believe me, assessing your expenses is the most critical part of the baselining exercise and at the same time it is also the most complex one. If only there was a way to list down few items in the table and we are done with the assessment.
There are various methods that you can use to find your monthly expenses; some will give you an approximate figure while others can give you exact and clear picture of the same.
Method 1: Retrospective Assessment Using Reports / Statements
This way of finding out your monthly expenditures is not as true to its cause it we desire but this is the easiest of all. Here our assumption is that your entire monthly income is credited in one of your bank accounts and you use your bank account for all type of expenses for the month. If any part of your income involves offline cash, then it becomes little complex to figure out the exact expense. You will have to assess your offline cash utilization and complement the reports / statements.
Another key shortcoming of this method is that it will give you category wise expenditure and may not give you each item wise expense.
Here is how a typical bank statement looks like:
The above statement can be translated into the following expense table:
Method 2: Use Comprehensive Tracking for Each Expenditure
This is the recommended method to use in order to exactly know where your money is going to. Although this could be a painful exercise to complete but it is equally rewarding in terms of more clarify on your expenditure and possibility of applying correct control.
The easiest way to start doing this is to create an excel/spread sheet and start putting every day’s expenses. You need not note down every time you make a payment, but you should at least do it once at the end of the day while your memory is still fresh with those expenses.
You can also take help of various hi-tech tools available to support you in tracking.
Here is h\ow a typical expense tracker table looks like:
By now you should have a very clear understanding of all 4 key aspects of your personal finance including assets, liabilities, and income and expenses.
In the next episode of “Getting Hold of Your Personal Finance” we will dive deeper into full view of your finances and steps to start monthly planning and optimization.
Until then live longer and prosper!