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Spring is finally here! Flowers are beginning to bloom, the days are longer and the weather is starting to get warmer.
This time of year inspires people to give their homes a thorough cleaning. After being cooped up inside all winter, it’s nice to enjoy a fresh start and feel accomplished after tackling your to-do list.
However, your house isn’t the only thing that needs a deep cleaning at least once a year. Now is the perfect time to spring clean your finances.
Regardless of your financial health or individual goals, a good place to start is taking a closer look at your cash flow and net worth. That will force you to honestly assess the status of your finances and, if necessary, make changes to help you achieve your future goals. Think about this process like cleaning out your closet and getting rid of clothes that no longer fit, aren’t in style or don’t jive with your current lifestyle.
In that same vein, your current financial plan might be out of date and may not reflect major changes, like getting married, having children or changing jobs.
Here are some tips on how to “clean up” your finances by first tackling your cash flow and net worth.
Simply put, your cash flow is what you make versus what you spend. It’s the foundation of every financial plan. In terms of household tasks, this one is as necessary as taking out the trash. Imagine what would happen if you never took the trash out – things would be out of control and quite messy.
If you take a close look at your cash flow, you’ll know if you are moving in the right direction. You should strive to have a surplus, meaning that you are bringing in more money than you are spending. Obviously, a negative cash flow is problematic and could lead to debt.
There are two solutions if you find you have a negative cash flow: make more money or spend less money. While it sounds simple, the reality is that some people live beyond their means, which will likely lead to trouble down the road.
Taking a close look at what you are spending your money on might lead to some uncomfortable realities, but it’s essential to helping you achieve your future goals.
Think about cash flow as more of a day-to-day thing, whereas net worth is the big picture. A lot of people assume that because they’re not “rich,” they don’t have a net worth. The reality is that we all have a net worth, even if it is negative.
To determine your net worth, add up all of your assets: the value of your home, your car, the account balances in your retirement plans, investable assets, etc. Once you have that number, subtract anything you owe – your mortgage, credit card debt, car loans, student loans and other liabilities.
Your net worth will change every year. Ideally, you want your net worth to increase every year as you pay down debt and increase your assets, either through contributions or appreciation. If you find your net worth is decreasing year-over-year, it’s important that you understand why and determine if you need to adjust your financial choices.
Going back to the first step of this process, if you find yourself with positive cash flow, that excess cash can help you increase your net worth by reducing your liabilities or investing in assets that have the potential to appreciate. For instance, you can take that excess cash and invest it. Start by increasing your 401(k) contribution if you have one available at work. If not, you can open up an Individual Retirement Account (IRA). Proactive, intentional use of positive cash flow can help increase your net worth.
The purpose of these two “spring cleaning” exercises is to help improve your financial well-being by taking control of your day-to-day habits so you can have more confidence in your ability to achieve your future financial goals.
While it might not be necessarily enjoyable to spend time cleaning your house, think about how nice it looks after you put in that effort. You’ll get the same result after you spring clean your finances.
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Conducting cash flow and net worth analyses may lead to a whole host of decisions that can help you improve your financial situation.”
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