Adventures in Personal Finance
When we work hard to earn more and spend less, we are not just doing it for our health. The idea of accumulating wealth is an important part of your finances, but it can feel elusive over time. When we do the right things financially, our net worth increases. My favorite way to track that is with a tool I call the personal balance sheet.
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In Fight Club, Tyler Durden famously said that “the things you own end up owning you.” I have written about how hard you have to work for your possessions once before, but I decided to take it a step further and find out how much time I have to work every month to pay bills.
It turns out that I spend nearly 75% of my time at work for recurring bills, including rent, student loans, and utilities. That means only about ten hours every week are for the things I like to do, such as eating and entertainment.
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You can also build a calendar like this. I have put together a free spreadsheet on Google Docs to help you figure out how much of your paycheck goes to fixed bills. From that spreadsheet, I created a second Google Calendar that I used to input the work days per month. It turns out that my biggest fixed expenses are taxes, rent, and student loan payments.
This was an eye opening exercise. Take a run through and let me know how it goes in the comments.
About a year ago, I wrote about the importance of having a personal income statement, personal balance sheet, and personal cash flow statement. I then tied it all up with a look at what personal financial statements mean.
To recap what I said in that post, here is a brief rundown of what each statement means from last year’s post:
The Personal Balance Sheet gives us our liquidity position. To analyze the information here, take a look at the quick ratio and acid test. If your current assets do not meat or exceed your current liabilities you need to make a quick change to your financial situation.
The Personal Income Statement tells you how much you are making in a given period in the form of a net income. A high net income means you have a good income/spending gap. A negative net income means you are spending more than you make and should make a quick lifestyle change.
The Personal Cash Flow Statement gives you a breakdown of your cash position in a period. It is okay for you to have a negative cash flow in some instances, such as paying down debt. If you do this for too long, however, you will end up in trouble with debt.
What they can tell you is still as relevant as ever:
Stock analysts grade companies every day and give them ratings for credit worthiness and investment grade. Compare yourself to publicly traded companies by calculating their quick ratio, return on assets, and profit margin. It is a fun exercise to see your total financial health.
In the comments, tell us what your stock would be worth. Would Jim Cramer be bullish on an investment in you?
Surprisingly, spending $5,000 on a class/trip in New York lowers your cash and net worth! [sarcasm] But seriously, $1,000 per credit hour is expensive tuition for anyone. I am only two quarters from graduation! That means I also have two quarters left to pay for. About half of my tuition goes to student loans, I pay for the rest.
Just remember, your net worth is your personal balance sheet. Your “net worth” is your equity in your own personal finances. Here is this month’s update, which included one class paid for out of pocket.
To wrap up the series on Personal Financial Statements, we are going to explore what the results really mean and 
recap the findings.
The Personal Balance Sheet gives us our liquidity position. To analyze the information here, take a look at the quick ratio and acid test. If your current assets do not meat or exceed your current liabilities you need to make a quick change to your financial situation.
The Personal Income Statement tells you how much you are making in a given period in the form of a net income. A high net income means you have a good income/spending gap. A negative net income means you are spending more than you make and should make a quick lifestyle change.
The Personal Cash Flow Statement gives you a breakdown of your cash position in a period. It is okay for you to have a negative cash flow in some instances, such as paying down debt. If you do this for too long, however, you will end up in trouble with debt.
Stock analysts grade companies every day and give them ratings for credit worthiness and investment grade. Compare yourself to publicly traded companies by calculating their quick ratio, return on assets, and profit margin. It is a fun exercise to see your total financial health.
In the comments, tell us what your stock would be worth. Would Jim Cramer be bullish on an investment in you?
The goal here is to minimize cash outflow from operations (living expenses). You also want to see the final “Total Cash Flow” be positive.
Continuing the series on the personal financial statements, we are going to look at the Income Statement. A corporate income statement is laid out with these major figures. The statement on the right is from Google Finance’s view of Research in Motion, maker of the Blackberry.
So, what does that translate to for us? Here is a personal income statement based on a hypothetical situation. This is made up for educational purposes:
I am such a great guy I made that spreadsheet public here: Google Docs.
So, a net income is what you keep after everything you earn and spend. Your net income rolls into your balance sheet as cash or assets.
There is not right or wrong net income. There is only one rule, IT HAS TO BE GREATER THAN ZERO! The bigger the better. You should put that net income into savings or retirement. You could even put savings as a category under expenses or a deduction of income in the revenue section.
If you have any questions about preparing your personal income statement, please let me know in the comments.
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