Step 1 - Anchor Your Financial Position
Module 1: Spending Plan and Net Worth
The first thing we have to remember is the basics of a financial statement for a family. This is probably something you’ve never learned because it’s really not taught in the schools. It’s the most important thing that you ever need to know for the future of your family’s finances. There are two basic measuring points for the financial health of family.
The first is called a spending plan and the second is a net worth. In business we call the first one income and expenses or profit loss and the other one we call a balance sheet. So this is the family conversion of the same terms and they work the same way. A spending plan has been used in the past a common negative thing called a budget. I don’t really like to call it a budget because it’s not really designed to be a budget. It really is the design of the plan to spend your money so I use the term spending plan. and when you’re “in control” you are determining exactly where you’re going to spend your money. You need to have a plan to spend it because without a plan you are planning to fail. Basically if you take a look at this graph you’ll see that it’s a range in time it is not a point in time. So it has to be from this time to this time. In other words it can be a weekly spending plan or a monthly spending plan or an annual spending plan. You need to at least develop these units on a consistent basis depending on exactly how you want your spending plan layout. During that period of time there are two categories, the income category, and the expenses and it’s pretty self-explanatory. Anything that comes in is income, and anything that goes out is an expense.
The second piece of financial documentation to find out the financial health of your family is basically the net worth. In simple terms the net worth is basically all of your stuff minus what is owed on your stuff. Whatever’s left over is your net worth. Unfortunately for families most of our stuff is not growing in value. Most of our stuff is actually shrinking because of use. In the past we’ve always thought that our greatest asset was our home and our retirement plan and our savings. However, with the economy and the financial meltdowns that have happened the home is not always a guarantee of an elevator ride to the top. The home should be considered primarily as the place to provide shelter for you and should be cost-efficient over renting. Then when you sell the home, should you sell it for more than your purchase price plus improvements, the excess is an asset gain. However, from a net worth point of view that is really the only asset that people come to understand. When we get into the step two module we will explain to you exactly what a positive asset is and what a positive liability is. We also cover what is a negative asset and a negative liability.
So, the difference between the Spending Plan and the Net Worth is that you need to take Net Worth like a snapshot in time. It’s not like the range of time with spending plans. For example as of January 1st this is my stuff minus what I owe and on December 31 this is my stuff minus what I owe. You can then compare the two to see if your Net Worth is growing or shrinking. In summary you need to understand the concept that net worth is a point in time like a snapshot picture and a spending plan is over time it’s it is from this particular time to a second particular time.