Quick, without cheating, what's the current balance in your 401(k) or other work retirement account? How much money is currently in your checking account? What did you spend on food last week?
Stumped? We'll assume so by that blank stare. We keep hearing about people who are unwilling -- or too terrified -- to look at their financial statements. If it's any comfort, you have a lot of company. Some of the nation's top brass haven't a clue about the inflows and outflows of the companies they're paid handsomely to manage.
Don't let executive-level laziness be the standard for your personal money management. Simply put, it's poor financial management. Look no farther than Warren Buffett for a model of a competent, hands-on CEO. Here's a guy who can practically recite his company's annual report -- and five years' worth of his personal checkbook entries -- verbatim. And we're only partly kidding. In a recent interview, Buffett recalled puzzling over a $4 income item on his latest tax return. A $4 item! By a guy worth $35 billion!
Step one in cleaning up your financial act begins with the balance sheet-- the snapshot of what you own, and what you owe. It'll take just 15-20 minutes to perform this self audit. Use your computer, checkbook, abacus, and all those under-used fingers and toes to add up your major assets and liabilities. Simply write down the balances of the following items:
- Checking accounts
- Savings accounts (includes money market accounts, CDs)
- Brokerage accounts
- Retirement accounts (including IRAs, old 401(k)s, that secret Bahamian stash)
- Home equity (if you own a home)
- Short-term debt (credit cards, student loans, auto loans)
- Long-term debt (mortgage)
Now see if you can answer these questions:
- Is your net worth increasing?
- Is your debt growing or shrinking?
- Are you shocked by what you see? Appalled? Elated?
If you can't determine what direction your money is going (up, down, or haywire), use your simple money rundown as a starting point for your personal audit, and repeat next month when you have a baseline for comparison.
Guess what? Now you have a snapshot of your personal balance sheet! You have an idea of your net worth, and a baseline from which to determine whether you're increasing the value of your empire over the years. This single piece of information puts you ahead of the majority of Americans, and maybe even countless CEOs. Now come on over to the Fools and Their Money discussion board for a hearty huzzah, if you've done this short exercise, or a helping hand from fellow Fools, if you need inspiration.
Next, we'll delve into analyzing your cash flow. After all, every good CEO (whether you're running a company or a household) should know how much is spent on necessities and niceties. -- Dayana Yochim (TMF School)