Imagine you were applying to be the CFO (Chief Financial Officer) of your company. The CEO and the Board of Directors are quite impressed with you and it seems like you have a real chance to be selected for this prestigious position. However, they have just one more simple request before they make you the official offer: they want to see your personal finance records…
I’m pretty sure this would never happen (I imagine it’s not even legal), but play along with me for a second. What would your initial reaction be? Would you be afraid to show them your old student loans that you still haven’t paid off? Maybe you’re embarrassed by your outstanding car loan debt? Or, maybe you are completely confident in your financial history and wouldn’t be ashamed in the least to show them your complete portfolio of assets and liabilities. In any event, what do you imagine they would be looking for? And what on earth do your personal finances have to do with your decision making for the entire company?
CFO of You Inc.
What is the main goal of any company? No, it’s not to increase sales or reduce costs or even to improve the environment through their actions. The main goal of every single for-profit corporation is to make money. It’s as simple as that. Take the company earnings minus their expenses and if they are not left with a positive number (for their net income), then there is a real problem. If the company does not earn money with its operations, then it will ultimately crumble and go bankrupt.
Believe it or not, the same is true for your personal finances. You are the CFO or You, Inc., which is your household “company”. As the CFO, you should be watching your three main financial scorecards, the income statement, the cash flow statement, and the balance sheet. This may sound complex, but truthfully all of the details are fairly simple. Let’s take a look.
The Income Statement
This is often the most important financial scorecard of them all. The income statement shows your income minus your expenses, and at the bottom of the sheet you’re hopefully left with a a positive amount that can be deposited into your bank account (this amount is your net income). Below is an income statement from an actual company. After subtracting the expenses from their overall revenue, they were left with $21 million. Not too shabby.
So what does your income statement look like? How much do you earn with your regular paychecks each month? And how much money goes out during the month? Is there anything left when the month is through? If not, then your home will certainly not prosper because you are not earning money that can be used for the future. It might just be time to cancel your cable and get your butt out into the working world to get a second job. It won’t be easy, but your net income CAN NOT be negative.
The Balance Sheet
The balance sheet is really very simple. With this scorecard, companies track their assets and their liabilities (aka debts). If the value of their assets exceed the amount of their liabilities, this means that they have positive equity as a company, which simply means they have a positive net worth of “stuff” if they were to sell everything today.
For You, Inc. it can sometimes be confusing whether you are actually making progress or not. To be sure, all you have to do is take a look at your net worth. Add up the value of all of your assets (like your home, your cars, your cash in the bank, and your retirement funds) and then subtract out all of your debts (your home loan, your car loans, your student loans, your credit card debt, and any other debt that you have). If your resulting value is negative, then you had better get serious about your finances. After every month, your net worth should be rising, and if it’s not, then the CEO (aka, your spouse) might just start barking in your ear.
The Cash Flow Statement
When companies are making sales and receiving money, one of their important stats to track is their cash flow statement. They want to be sure that they are making money and that the cash is sticking around in their bank account until they are ready to invest it.
Your personal finances should be the same. When you have extra money at the end of the month, you really want to make sure that you hold onto it until you find your next investment opportunity. Watch your cash flow and keep it positive.
Whew, You Made It!
Wow, that was some pretty heavy stuff, but you made it through! Congrats! To get down to the basics and to sum it all up, you want to be sure to make more money than you spend, purchase assets that produce more money, and limit your debts. Stay consistent with this and you will become very wealthy at You, Inc.
How are you doing as the CFO of your personal finances?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.