Money Management Newsletter: Managing Money
Your blueprint is where you want to be in ten or twenty years from now. Will you be working or retired, living in the same house or somewhere else? Will your children be going to college? Will you own a different car, or a new boat? What kind of lifestyle do you want to lead? Although sometimes difficult, projecting into the future is stimulating. Visualize your goals if you want to reach them.
What materials do you have to make that blueprint come true? Your financial inventory of materials is called your net worth, your assets minus your liabilities. It is helpful to further classify assets and liabilities into short-term and long term.
Short-term assets are cash and other assets which could be turned into cash within one year. These may include: Canada Savings Bonds (CSBs), Treasury bills, the cashable portions of life insurance policies, jewelry, cars, boats, stocks, bonds, mutual funds, art and coin collections, and furniture.
It generally is a good idea to keep four months salary in liquid cash reserves - Canada Savings Bonds, savings accounts, Treasury bills - to cover emergencies, including loss of employment.
Long-term assets may include: long-term GICs and property such as a house, cottage, building lot, or farm.
Professional appraisals of assets are helpful in determining their true value, especially for houses, boats, collections and furniture. Others may not value your jewelry as much as you do, or you may be pleasantly surprised that the broach you were given by Aunt Mary is worth a fortune.
Short-term liabilities are payable within one year and may include: outstanding taxes, unpaid credit-card balances, medical/dental bills, insurance premiums and utility bills. Long-term liabilities may include car loans and mortgages.
Determining your assets and liabilities gives you today's snapshot of your financial picture and may give you some ideas about adjustments for the future. Your first priority should be paying down debts such as credit card balances and personal loans. Then you may wish to rearrange your assets. For example, if 10% of your net worth is tied up in a boat that rarely sees the water, you may wish to sell it and invest the money in mutual funds that will likely grow. Now that you have your snapshot you are ready to make a movie. Several net worth statements, each a year apart, will tell you exactly which assets are growing and which are not. You may decide to sell some assets which are standing still and put the money into others which are performing well. Also, you should see your liabilities decreasing, or else your movie will end up being a cartoon.
The next step is an income statement, which lists all your income and all your expenses over the past year. If your income exceeds your expenses, you have the money to pay down debt faster or invest. If your expenses are higher you need to either increase income or reduce expenses.
In any case, a budget will help. While net worth is a present snapshot and an income statement reflects your past, a budget is your plan for the future. It includes anticipated income, anticipated expenses, and the amount you want to save for the future.
Take your latest income statement and decide if the amounts will change or stay the same. Usually, we have more control over expenses than income. In reducing expenses, it sometimes helps to pretend you are looking at someone else's income statement, then reducing some of your favorite expenses doesn't seem so personal.
Remember, a budget is a plan, and plans can change. If there are unexpected sources of income or expenses, rework your budget to account for them, don't just abandon your budget in discouragement.
Your greatest asset in planning for the future is a trusted financial adviser. An adviser can tell you what materials you'll need to build your blueprint. But you have to do your homework. If you know where you are now (net worth), whether you are living within your means (income statement), and your immediate plans (budget), then your adviser can help you determine how to make your future goals a reality.
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© , Fiscal Agents Money Management Newsletter