Becoming Enlightened

One thing that schools actually do teach about money is financial documents. The tough thing is that typically it's only taught in college level classes that focus on business management or accounting.

We wanted to cover a few documents that will help you keep track of your financial situation.

1. Balance Sheet

A balance sheet helps you determine your net worth. Have you heard the saying that your network is your net worth? I like it, it's a cute phrase, but when you go to get a loan the bankers don't care.

Net worth = Assets - Liabilities

Typically this information isn't just out in public. You need to use a software or work with a financial professional. If you're just starting, something like Excel or Google Sheets could be a good first step.

To find your net worth you need to start with total assets.

Add up everything that has a value. Banking Accounts, Investment accounts, property such as homes, cars, jewelry etc… Anything that has a positive value. You can list the sellable value of your car and home here.

Next for liabilities you add up everything that you owe. So, if you still have a car note or mortgage on your home, what you owe goes here. Other debts like student loans or credit card debt are considered liabilities.

Your Balance sheet in accounting terms needs to "Balance" because assets must equal liabilities + owners equity. That’s for business purposes, so don't get too worried about that type of balance sheet.

2. Cashflow Statement

It's pretty much a budget. The one difference is that you don't have to put exact dates on the payments due.

We're just putting down the cashflow in. For example, your monthly income. If you make $3,000 per month, then you put that as inflow.

List every single monthly expense, and add them up. This is your outflow. If you spend $3,200 per month, we're negative.

The difference can help you see short term and long term problems. For example, the monthly total may add up most months; but if you have a quarterly expense, then your annual cashflow statement may not add up. That’s where I see a lot of frustration.

This can help when looking at new purchases as well. A loan may be declined if they make their own cashflow statement of your income and realize that your annual cashflow won't support the loan each year.

3. Financial Statements

APR vs. APY is a big deal! APR = Annual Percentage Rate. For example 15% per year. APY = Annual Percentage Yield. This could be higher because most credit cards charge interest monthly. When compounded, 15% per month will add up to more than 15% per year.

Student Loan Statements

You can potentially refinance your loans either with an income-based repayment plan or even a different lender!

Student loans will often have APR and APY calculations and you can take that statement to understand your payment plans.

Investment Accounts

You want to see your performance. Just make sure that your account is doing what it wants from a performance perspective.

No advisor or company can guarantee positive returns forever, but if you're not seeing any growth at all, it's time to ask some questions.

The other thing to double check is fees. If you are paying 2% but could be only paying 1%, you want to have done your due diligence.

Tax Documents

We recommend you keep these for seven years. If you're a business owner, you want to keep physical copies; but for most people nowadays, you can scan them and keep them saved.

This helps in case of an audit or some sort of discrepancy in the future.

This could also help savvy financial professions help give you better advice. Sometimes, we see that our clients are getting big refunds each year and we recommend that they work with their CPS to adjust their withholdings and/or consider investing into some sort of tax-beneficial retirement account.

These are some of the basics for the types of financial documents and statements you want to keep your eye on. Once you get the habit of looking at them and saving them, it will be easier and easier to make wise decisions moving forward.

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