First things first, I’m not an accountant and I don’t claim to know the wizardry they employ to protect us, grow our business wealth or maximise tax. However, my work does mean that I see and take a lot of learnings from financial statements. These statements can be your most valuable diagnostic tool when it comes to business, so I began to wonder, why is it any different for an individual? Spoiler alert: it shouldn’t be and I’m breaking down why.
You don’t need me to tell you the power of a budget. We love to make them, try and stick to them and sometimes bin them. I too have a love hate relationship with them! But as an individual, your budget is your profit and loss, your ins and outs over the month, 6 months or year you chose to track it. For those who work and have tax taken out of their pay, your profit and loss is essentially your cashflow and is generally where we focus our efforts. You change banks, review insurance, cut down on your beloved Uber eats (*cries*).
What about your personal balance sheet? This is your savings, car, super loans, credit cards and any other debts (mortgage anyone?). How often do you really track these? You may know the values but have you tracked them year on year? I bet, like most, you do on the odd occasion but thinking critically about your balance sheet is a long term game. It’s the most important. In finance you are taught that a strong balance sheet provides the backbone for a healthy business. It can help you sustain all business dramas, liquid funds (cash to pay for things), long term growth assets (property, machinery, shares) and this is the same for an individual. For me the fundamentals of my balance is based around property, and as I get more seasoned I think about how risky that is, how diverse my assets are, how much debt I have associated against this and what it may look like in 10 or 20 years when I stop working and my profit and loss has declining income (hopefully by my choice to retire).
Managing your profit and loss and balance sheets is as critical for an individual as it is for a business owner. I’m not saying you need all the fancy graphs, formulas and reporting around it, but the concept holds true. Manage your profit and loss and translate that into a strong balance sheet. Learn like business owners do to adjust short term for the benefit in the long term, and think about the assets that will help you get there. And yes, I have a bias towards property assets.
Not sure where to start? Want a copy of a budget and personal balance sheet? Get in touch and I will send help. No graphs (yet), I promise.