If finances prior to COVID-19 were not top of mind, I’m sure they are by now. Everyone is feeling some pain or strain to some degree around their personal financial lives. And when your “CASH FLOW” might not cover current expenses we can feel out of control. But how can we take back control and feel a sense of stability during all this instability? Consider doing a personal Financial Fire Drill!
Get in the mindset of a business owner!
Consider your personal financial life like a business. Every month you have income and expenses like a business. The document created by a business to track these two items is called a Profit & Loss statement, or P&L. Start with a blank piece of paper or computer spreadsheet and list out what you anticipate receiving in the way of income month by month across the page for the next 3-6 months. On another piece of paper write down your overall monthly expenses item by item until you get a monthly total. Now take this total number and place it below each month’s income. Subtract expenses from income to arrive at your net income per month. This is your P&L statement.
Next Take stock of your Assets and Liabilities. In a business this is called the Balance Sheet. On a blank piece of paper, place a heading of “Assets” to the right of it a heading of Liabilities. List out everything you have that is an asset including retirement accounts. Do the same for your liabilities, include credit cards, mortgages, student loans, and any balances still owed on vehicles. You now have created a Personal Balance Sheet also known as a Net Worth statement.
Use the P&L and the Balance Sheet to make projections
If you are running a monthly income deficit you have two choices, lower expenses or dig into savings. Living expenses fall into 2 categories, desired or required. After you re-examine your living expenses through the lens of desired vs. required, maybe there are some areas in which you can reduce costs.
If your income is not covering all expenses you will either be going into debt or reducing your cash reserves. Wouldn’t it be helpful to know how long you can continue in this manner before cash reserves are wiped out or debt limits reached? If you want your financial future to change, you now have the basic information to make changes that can impact your financial life in a positive way. Taking time for a Personal Financial Firedrill may also be a stress reliever as you feel a greater sense of control over your financial future.