Understanding Your Household Budget and Balance Sheet

The first step in understanding your family finances is to fill out a budget and a balance sheet. The purpose of these two financial tools is to give you a financial snapshot of your finances. They are like anything to do with finances and computers. If you put clean honest data in, you will get a true picture of your financial situation.

The Personal Budget Worksheet will take a picture of your cash flow. The left side of the spreadsheet is cash flow in and the right side is cash flow out. Your Personal Balance Sheet is similar but it measures your stationary finances. It measures how much you have on the left side and how much you owe on the right side. This is the basics of personal finances.

When it is suggested that you get back to the basics of personal finances, they mean print out a blank budget and balance sheet and fill in the blanks with your personal financial information. The most basic of the basics is that you must be honest about the amounts you enter in the appropriate cells. I repeat this because you can’t be lying or bullshitting because the only one that you are bullshitting is yourself.

So when you put in your income amount put in the lowest amount that you would expect to make each month. I have worked with enough folks that make different amounts each pay period. I have found that when they talk about how much they make, I only hear about the best month or months. I never hear about the months when they made squat.

For things like rental income, never assume that you will get the full amount every month. When you put down the value of your car as an asset on the balance sheet, put the lowest net amount that you would expect to realize because that is the amount that it is worth if you have to sell it. If you have shares that are traded on equity markets, always value them low for your own protection. Your house value should be written down as the net amount you would receive after the sale is complete. Things are only worth the value realized when they are turned to cash.

The one concept that is most important and is the same for both your budget setup and your balance sheet is that the grand total on the left side should be greater than the total on the right side. In your personal budget worksheet, your income should always exceed your expenses. For balance sheet items, your total assets should exceed your liabilities. Any other scenario means that you need to take corrective action.

If your budget is in positive cash flow but your balance sheet indicates you have a negative net worth, it means you need to pay off some debts. You would have to stop spending, reorganize your debts and pay them down. This is not that bad of a situation as lenders will generally work with you to rectify this situation. Your banker will probably want to help you as banks should make more money helping you as you build your balance sheet. With positive cash flow you have very high potential.

Similarly if you have negative cash flow but a positive net worth, you have options as well. You can sell off some assets to reduce debt loads which draw high monthly payments from your cash flow. Or once again your lenders may wish to help you consolidate so that you can hold on to your assets but decrease the cash draw of the liabilities. This scenario may also be expedited by more restraint on personal spending in your budget.

Unfortunately, a lot of folks do not address their financial problems until they attain scenario #4 which is when both your budget and your balance sheet are negative. A lot of folks are caught in this scenario by this economy. Your budget may take a hit on the income side due to cutbacks and layoffs.

Your balance sheet is negative because the value of your house just dropped by a significant amount. It looks like major lifestyle changes are going to have to occur with few or no options. If this is your case, it is time for financial counseling and aide. It may be time to start again with the knowledge that you must learn to use and rely on the messages from your budget and your balance sheet. Keep them both in the black and never go back.

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