How to analyze and review your current financial state
Very few people actually take the time to sit down and regularly review their personal current financial state. Many people use the excuse that analyzing personal finances takes too much time or that they do not know where to start when it comes to getting your finances in order. But consider comparing your management of personal finances to the financial management techniques of a successful business. Would you notice any differences? Do you think that a business would be successful if no one was constantly planning and analyzing how to better use their money and resources? Of course we know that businesses need people who can manage money. But what does running a successful business have to do with my financial state? The answer is: a lot!
You may not be the chief financial officer of a Fortune 500 company, but you could probably learn a lot from what they do to manage their money. Your financial state has almost everything to do with your financial planning. You cannot expect to grow wealth by leaving your future up to fate. You have to create plans to achieve your goals. You may be concerned about planning for retirement, paying for college education, or you may have concerns about estate planning. Whatever your plans, you can benefit from the same simple profitability ratios and analytical procedures that business people use to analyze a company's present and future financial standing.
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A company has fixed costs, variable expenses and unpredictable setbacks to deal with. Likewise you have fixed costs of housing, car payments, insurance premiums, etc. You also have variable expenses such as some of your utility bills, your food and clothing costs, etc. You are probably also able to name a few costs that are less easy to plan for such as medical costs or the cost to replace a vital asset that has been damaged. Although we may not be making sales in the same way as a retail company or manufacturer are, we do have jobs that we perform and are paid for. Just as companies cannot be successful unless they produce a product that people want and are willing to pay for, we are cannot be successful financially unless we have a work ethic, professionalism, creativity, etc. that employers are willing to invest in.
Profitability ratios used in business compare the cost of producing a good to the cost of selling a good and anticipate that the difference will be a positive number. If a material costs more to make than people are willing to buy it for, the product is not considered profitable and a new plan must be formulated. This simple business principle of making sure that earnings exceed costs can teach us a great deal about reviewing our own financial state.
More than half of Americans spend more money than they make. Could you imagine what would happen if a business spent more money on their product then they were able to sell it for. This doesn't make any sense. Changes would need to be made if the company had any hope of staying in business. We likewise need to think of ourselves as a personal business. We cannot hope to succeed financially if we are not taking a close look at what we make versus what we spend.
If you are able to successfully manage the balance between earning and spending, the next step is to make a plan for your rate of return. Your rate of return is a measure of how wisely you have invested your assets. In order to continue to ensure that you remain in a positive financial state, you must also have a savings and investment plan.
