Understanding Your Current Financial Status - Part 1 - Cash Flow Statement

Understanding Your Current Financial Status:

You need below 2 statements to understand your current financial situation:

1.       Cash flow statement
2.       Net worth statement

1. Cash Flow Statement

Cash flow statement tells whether you are generating surplus income post taxes and life style expenses. This data should be taken for a financial year, as some expenses would be yearly.

Some professionals and business owners might at times have no clue if their expenses are exceeding their income, as their income is variable and people might fail in keeping track of all the inflows and outflows.

Now putting together a cash flow statement would tell you how much of investible surplus you have. And below simple formulas…which have been found to be useful, most of the time…. Could be used to finds the problem areas and take corrective steps.

And even if there are no problem areas, below ratios should be checked if our surplus is enough for us to reach our financial goals.

Savings/Take home pay= min 30% (saving for your long term goals such as kids higher education, retirement, etc.)

(Debt+All household expenses)/Take home pay=max 50% (households expenses would be ones like food, entertainment, education, fuel, rent)

Floating expenses=20%(Short term goals like vacation, car, electronics, etc. and emergency fund for medical expenses, etc.)

In Next Blog, we will talk about Net Worth Statement.