Year end welcomes its deal of rituals. From New Year Resolutions to Past Year Review, I’ve tried many variations, with all sorts of associated accountability frameworks. Before we dwell in Past Year Review in a future post (definitely one of the most effective), I’d like first to encourage you to do two ultra-quick accounting exercices. This will ensure you start the year with your Finances on track – and adjust your Christmas Shopping according to what you can actually afford, not based on your credit card limit.
1 – Update your cash-flow statement
A simple income statement will do (monthly works best in my experience):
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Income: Salary, Investments Income, any other item that brings cash to your account
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Savings: yes, ensure you do have a clear target for savings
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Expenses: Rent, Mortgage, Groceries, Utilities, Gym, Transportation…
Income – (Savings + Expenses) will be your “Safety Margin” or “guilt-free spending” to borrow Ramit Sethi’s wording.
2 – Build your personal balance-sheet
Even if you did not take Accounting as a minor, this is a straightforward process: 1 page, 2 columns.
Left side: Assets
Cash & Equivalent: what’s on your bank accounts (including fixed deposit if any)
Investments: stocks, any saving plan, including voluntary contribution to a pension plan
Others: anything valuable that you will be able to sell easily (estimated at resell value)
Right side: Liabilities
Credit Card Bills yet to be paid
Unpaid Taxes
Mortgage
Other loans
Assets – Liabilities = Your Net Worth
Once you’ve prepared these documents, you’ve removed the guess-work out of the Financial Equation and you can start assessing your personal situation and taking relevant actions based on your goals. For instance, if you plan to travel to Central America next summer, you can adjust your next months cash-flows to ensure you have enough to make the most of this upcoming trip.
Most of us tend to overestimate both our “Safety Margin” & “Net Worth“, which can lead to Financial stress. Year End is a great time to take a fresh look at personal finances and ensure they won’t get in the way of your New Year projects. Simple systems can help you to stay on top of your finances, without any specific Taxes or Accounting knowledge. If you are new to this topic, I suggest that you order for Christmas a copy of Ramit Sethi’s I Will Teach You to Be Rich and in the meantime listen to his recent conversation with Tim Ferris.
As usual, keep in mind that I am not a qualified financial advisor hence make sure you consult relevant professionals before making any kind of financial decision.
Personal Optimum 