When it comes to health, you go for a medical checkup to see if
you're physically fit. The medical report will tell everything
about your health.
But when it comes to wealth, it's as important that you do a
regular checkup for your financial health. You need to know
where you are financially before you decide what you want to
achieve financially.
What do you do to ascertain your level of financial fitness?
You can use financial statements to determine your financial
fitness. They are income statements and balance sheets.
It sounded boring and alien to me when I first prepared my
income statement and balance sheet. The process is tedious as
you need to dig out things and get them organized in a proper
format.
But I can tell you once you've done this checkup, you'll have a
clear picture where you stand financially and you can take the
necessary measures to achieve financial freedom.
Besides that you'll be more in control of your money and know
how to spend your money wisely.
Let's get started to determine your financial fitness.
---------------- Income Statement ----------------
First, you can prepare an income statement. An income statement
is also called profit and loss statement. An income statement
consists of two sections: monthly income and expenses.
Your income would probably comprise salary, rent from real
estate, dividends from stocks and bonds, interests from savings
accounts, and royalties.
Your expenses would be food, clothing, utilities, car loan
payments, credit card payments, home mortgage payments, medical
expenses, entertainment, insurance payments, charity, taxes, and
education.
List down your income and expenses into each section
accordingly. Then calculate your total income and expenses.
Once you've done that, it's time to calculate your net income.
Net income is the difference between your gross income and
expenses:
net income = gross income - expenses
If you have a negative net income, it tells you that you spend
more money than you make. You'll have to have plans to reduce
your spending or increase your income.
------------- Balance Sheet -------------
Next step is to prepare a Balance Sheet. Like income statements,
balance sheets also have two sections: assets and liabilities.
Assets are your cash, real estate, car, bank accounts, stocks
and bonds, mutual funds, retirement accounts, and businesses.
Liabilities include mortgages, credit card loans, car loans,
personal loans, education loans, and taxes.
Prepare your own balance sheet by listing down your assets and
liabilities. Calculate your total assets and total liabilities.
The following step is to calculate your net worth. Net worth is
the difference between total assets and total liabilities:
net worth = assets - liabilities
Net worth is usually used to determine whether a person is
wealthy.
You deserve a pat on your shoulder if you've come so far with
me. By doing this simple exercise, you are one step ahead of
many people.
You'd have known the level of your financial fitness by now.
So, are you financially fit?
To help you with this exercise, you can use our free money
worksheet at
http://www.financiallyrich.com/wealth-calculator.asp
About the author:
PT Cheng is the owner of FinanciallyRich. Get excellent tips on
how to be your own boss, have more money, and free time. For
future articles, subscribe to his FREE newsletter at
http://www.financiallyrich.com/subscribe.asp and receive a BONUS
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