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Measuring Your Financial Progress

I am a numbers guy. I feel that if you can accurately represent a situation with numbers, then you have something realistic to base decisions on and measure performance.

This has led me to create some tools for measuring my financial well-being. It ends up being very similar to financial statements used by companies around the world today. The first is a balance sheet and the second is an income statement.

I won’t release my current spreadsheet setup as I think it would confuse most of you as I have let it get rather messy with a bunch of other calculations and measurements I’m interested in. I will look at getting something up that you can use for your own benefit.

Balance Sheet

This basically a financial “snapshot” of what you or a company is worth. A list of all your assets (real estate, vehicles, investments, cash in the bank, other valuable items) and a list of all your liabilities (debt like mortgages, lines of credit, and loans).

When you add up the asset and subtract the liabilities, you will have a number that represents your net worth. So if you take this “snapshot” each year at the same time, you can see if your net worth is going up or going down. You can also see if the allocation of it changes over time. A great way to measure the change of the past year.

Income Statement

This is a breakdown of how you got from one balance sheet to the next balance sheet. How much money did you earn, how much money was paid in interest vs. repaid the principal amount of a loan, what items you spent your money on to live, how much did your investments go up or down, and the list goes on. If you were to take a balance sheet and add all these items to the numbers in it, you should get it to equal the next balance sheet.

It is valuable because it tells you “what” happened and generally “why”. I like it for myself because you can see where you money comes from and where it goes. And ultimately, how much of it you retain in savings. It doesn’t matter if that number is big or small, or even if it is getting bigger/smaller over time. But it is nice to know what it is doing to confirm that you are doing what you actually think you are.

A number I like to get out of it is to add up how much money I earn from “passive” sources that aren’t my job (like rental properties and stocks) vs. how much I spend on just living. If these numbers ever became equal, then you are approaching independently wealthy and don’t really need to work. Sort of an invigorating feeling and definitely a feeling of freedom from your job. Not that you would quit, but that you are truly there because you want to be and not for a paycheck.

Here is an example of a net worth calculation. Very basic. Assets on one side and liabilities on the other. The difference between the two is your net worth. Example Net Worth Calculation.

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