Every journey begins with the traveler identifying her current location and from there planning the best route to their destination. In the same vein, if you are seeking financial security, accessing your current financial situation is the starting point.
This entails two things – knowing what you own and what you owe as well as knowing where the money comes from and where it goes. The former can be liked to a balance sheet while the latter can be equated with an income/expense statement.
Estimating your net worth entails the computation of the value of all your assets – cash, bank balances, property, jewelry and then subtracting from it all liabilities – credit card debts, car loans. In computing the value of your asset, its best to estimate them using how much you could realize from them in the event of a forced sale. With this information you will have an idea of what you have left after selling all your assets and paying off all debt and you can track your progress from year to another.
The second aspect is understanding your cash flow. On one hand, you list income from all sources – salaries, bonuses, gifts, dividend etc. And then the most important part, tracking your expenses along the following major headlines – saving, investing, giving and spending. With this information, you can have a bird’s eye view of where your resources are going.