Thursday Dec 29 2011
Start new year by calculating your net worth
By: Paul Apfel Inside Lincoln Correspondent
Personal finances column
Personal financial planning is a dynamic process, one that never ends. But experience suggests that most U.S. taxpayers do not have a formal, written financial plan. Instead, they struggle with a plethora of financial statements issued by their employers, financial institutions, the Internal Revenue Service and the California Franchise Tax Board. The data and information is too often not captured and recorded in any way that makes sense in achieving the financial goals so necessary for your individual or family’s success. First, do not follow the example set by your state or federal governments. They are notorious for routinely spending more than they take in. Successful businesses on the other hand must keep their income and spending under scrutiny and control. They have to bring in more than they spend or they go out of business. Think of yourself as a small business because business financial principles apply equally to individuals and families. So, Mr. or Ms. Reader, you are a small business. Do you know what your net worth is? Have you analyzed your cash flow? And do you have a spending plan in place for 2012? Reports you will need Although companies spend lots of money on accountants to come up with these reports, most of you can figure these out with pad and pencil and a little bit of your time. And now as we end one year and begin another is the perfect time to start. Calculating your net worth is simply determining the difference between what you own and what you owe at a given point in time. You get to that number by writing a personal balance sheet that captures your assets and liabilities. So begin by figuring out your net worth as of Dec. 31, 2011. Remember, this is a snapshot in time. Assets should include the following: cash on hand, in the bank and in money markets investments real estate personal items such as jewelry and cars. Liabilities include the following categories: credit card balances other bills payable mortgage balance car loan(s). Subtract your liabilities from your assets to arrive at your net worth. This should be a positive number. Increasing your net worth over time is a reasonable goal. Next perform a cash-flow analysis to measure your cash inflow and outflows to show your net cash position for a specific point in time. Start with a monthly report. Use December 2011’s bank statements and bills as source documents. In your income section, include the following: Wages and commissions Pensions Dividends and interest Other money sources Under expenditures, you should list: personal savings rent or mortgage payments car payments Utility bills (city of Lincoln water, sewage, garbage), PG&E communications (telephones (cell and land line), Internet cable or other TV connection gas for vehicles Insurance Tax set-asides. Combine the tools; create a budget With these two reports, you’ll have a reasonable foundation to begin developing your annual spending plan, also known as a budget. Remember, consider yourself a small business. All successful businesses we can name have budgets. You should be no different. Remember, everyone can use a budget, no matter how modest your assets and revenues. And, if you’re underwater now, good planning may help get your head above the waterline. Most of your spending plan is going to be based on your cash flows so that report is critical. Where they differ is that one is a report of income and spending activity that has already taken place and the other - the budget - is a plan for the future. But, while their form may be similar, your budget may include more detail and text regarding goals and objectives while providing rationale and justifications for the various income and spending issues you plan to encounter. As you gather data to prepare your taxes for 2011, this is a perfect time to transfer some of that data onto your personal balance sheets and cash flow reports while preparing your basic personal financial plan for 2012. If you have a more complicated financial life, your complete plan may include separate folios for risk management and insurance, tax and estate planning plus investment planning and execution. I’ve covered these and other related personal finance issues in earlier stories and will continue to update you in future columns.