Manage your family finances like a business
Question: I want to prioritize my family’s financial habits and start making smarter choices. Do you have any tips or strategies for family finances?
A: The best advice we can give you is to start managing your personal and family finances the same way you would a business. Most people don’t think of themselves as “businesses” – trying to make a profit. Looking at your financial situation from this perspective can be helpful in determining where you could reduce your expenses, increase your cash flow, and generally improve your personal financial situation. This can be especially beneficial if you are planning a large financial commitment in your future, such as buying a home or starting a business. Here are a few tips.
Take a look at your financesWhen an executive can look at financial statements to get a sense of where the business is going, you can create or update a personal equity statement. Essentially a monetary scorecard, a net worth statement shows where you stand financially and whether you are on track to achieving your short and long term goals.
You can calculate your net worth by summarizing the present value of all of your assets, including cash and cash equivalents, brokerage account balances, retirement funds, real estate and other tangible capital and personal property. Then subtract your debts, including mortgages, personal loans, credit card balances, and taxes owed. The difference between the total value of your assets and your liabilities is your net worth.
Another very important calculation in business terms is your “cash flow statement”. Creating this statement is simply a matter of determining the monthly net cash inflows you receive from take-home pay (after withholding taxes), dividend and interest income, rental income, etc. minus your monthly cash outflows such as loan payments, expenses for food, clothing, education fees, taxes, etc. Creating a cash flow statement that compares your monthly cash inflows to cash outflows provides important clues about where your money is going and how you might reduce your expenses and increase your savings. Do you rely on credit cards with high interest rates? Could you reduce the cost of food or entertainment? These are just a few questions you need to answer to better understand how, sometimes, even small changes in your drinking habits make a big difference. Wealth is not created by what you do as much as what you keep.
Practice stronger risk management. To maintain the financial health of their business, business leaders also practice risk management. You can do the same by first evaluating the compensation and benefits choices. A major change in your life, such as a marriage or birth, may require updating your W-4 withholding tax benefits with your employer.
Unexpected medical bills can be a financial disaster if you’re not prepared. Review your health and disability insurance to make sure it offers the best value for your money. If you have a health savings account or a flexible spending account, be sure to use it to your advantage.
Also think about other insurance. Perhaps your home has appreciated in value, requiring a corresponding increase in your landlord’s coverage. Perhaps you no longer have enough life insurance to protect your growing family. Your insurance professional should be able to help you determine the correct amount of coverage.
Finally, proactively check your credit report. If you wait until something is clearly wrong, it might be too late to avoid serious damage. Federal law requires that the three major credit bureaus provide you with one free report per year. To take advantage of.
Think about retirement. Business owners need to think about succession planning. But even if you don’t own a business, you should be thinking about life after employment.
If your employer allows you to adjust your pension contributions during the year, consider increasing them to take full advantage of the tax-deferred composition and, if possible, the employer matching. Likewise, if you plan to make an IRA contribution this year, do so as early as possible to give your assets more time to grow.
Review your estate plan and, if necessary, update it. Financial priorities change, so make sure the beneficiary designations for your retirement accounts and insurance policies always match your wishes. Check your living will or trust and amend it if necessary.
Get started. It’s never too late to adopt good financial habits and master your current net worth so that you can take proactive steps to make changes that will build wealth for you and your family. If this is too difficult to do on your own, contact a trusted CPA or a knowledgeable Certified Financial Planner to help you get started.
Crystal Faulkner is a Cincinnati Market Leader with MCM CPAs & Advisors, a CPA and Consulting Firm providing expert advice and beyond thinking for today’s public and private businesses large and small. , non-profit organizations, government entities and individuals. Tom Cooney works at Wealth Dimensions, an investment advisory firm. For more information, call 513-768-6796 or visit online at mcmcpa.com. You can listen to Tom and Crystal daily on WMKV and WLHS on “BusinessWise,” a morning and afternoon radio show that features successful people, businesses, organizations and issues from across our region.