Goal setting plays a powerful role in helping individuals
achieve what they want out of life. Research suggests that
setting goals increases the probability of achieving
objectives from 5% to 70% and increases productivity by an
average of 19%. In order to set realistic financial goals,
you first need to understand your current financial
picture. Filing enables you to organize your finances and
give you real confidence when making financial decisions.
There are three steps to determining your financial picture:
1. Filing
2. Completing a Profit and Loss Statement
3. Completing a Balance Sheet
At this point it is easy to say that doing this type of
work is just too boring - who can get excited about filing
and bookkeeping, right? However, stop and think about why
it is you are saying this. Is it really because it is too
boring or is it because you are reluctant to see the
reality of your current financial situation? Remember, as
Brian Tracy says, "Every minute you spend in planning saves
10 minutes in execution; this gives you a 1000 percent
return on energy!".
1. Filing
Create a filing system to track all of your monthly income
and expenses. This will form the basis of your profit and
loss statement and balance sheet. Within income set up a
separate file for each area of income you receive:
Pay slips Interest payments Dividends Rental income
Royalties Other
Similarly, for expenses set up a file for each regular
expense item:
Mortgage
Credit Card
Utilities
Car Food
As we organize many of our day to day expenses by direct
debit it is useful to have our bank statements listed
alongside our income and expenses.
You will also need files for
Important personal information (birth certificate, marriage
certificate, passports)
Insurance policies
Legal Documents (wills)
Pension
Tax
2. Completing a Profit and Loss statement
Profit and Loss statements are also known as "income
statements". When you track your income and expenses every
month, right down to the cash you take out of the cash
machine, you can instantly see whether you are making or
losing money each month. This is incredibly empowering yet
so few people undertake this.
Profit and Loss statements list all of the income you earn
and all the expense you incur each month. Include as much
details as possible. The amount in your income column
should balance with that in the expense column. What
you're left with is your profit or loss.
Analyse the profit and loss statement:
Are you living within your means (income greater than
expenses) or are you getting further and further into debt
(expenses greater than income)?
What are you investing in? What are you throwing your
money away on? Where is your income coming in from? Are
you totally reliant upon one form of income?
Do you know what you're spending your cash on each month?
Finally, what should you be spending your money on to
achieve your life goals?
3. Completing the Balance Sheet
Unlike the Profit and Loss statement, a balance sheet
provides a snapshot of your worth at a particular time. As
such it reflects your past financial habits.
A balance sheet includes everything you own - your assets -
and everything you owe - your liabilities.
In the liability column, learn what constitutes good and
bad debt. Good debt is attached to an asset and you
acquire good debt as you grow wealthy. An example might be
a mortgage on an investment property which is producing
positive cash flow through rent. 'Bad debt' is consumer
debt and it's attached to your lifestyle choices. For
instance, an outstanding balance on a credit card which has
been used to purchase a nice pair of shoes or an expensive
night out would be considered 'bad debt'.
Subtract the total amount of your liabilities from the
total amount of your assets to determine your net worth.
Analyse your balance sheet:
Where is your money tied up? What major assets do you own
besides your residential home?
What percentage of your liabilities is made up of bad debt
and what percentage is made up of good debt?
Finally, what should be the sum of your net assets to
provide you with the income you desire in retirement?
Only once you've prepared your balance sheet and income
statement is it then possible to set some financial goals
and targets which are both realistic and meaningful.
Filing, as the first step, may indeed be boring but it is a
critical first step in this process.
----------------------------------------------------
Pam Kennett is Founder and CEO of WealthBeing. WealthBeing
is a wealth education and coaching company which helps
individuals develop practical skills and knowledge in
wealth building. Pam has trained with Loral Langemeier, the
Millionaire Maker in the US and is based in London, UK. For
free resources and downloads visit
http://www.wealthbeing.co.uk or contact Pam direct at
pam@wealthbeing.co.uk
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