I was working for a major financial services company in Los Angeles out of college in a department that was the launching pad for careers of many of the company executives. That department was filled with type-A personalities all jockeying for the next promotion up the ladder. Every day we were competing against each other to try and stand out in the eyes of the higher ups – if one showed up to work a 7AM, another would start showing up at 6:45. If one person was given a special project, others would ask the higher ups to be volunteered for additional work as well so as to not get left behind. Naturally, not wanting to be left behind, I had to come up with my own strategy. I made an appointment to see the top executive, and when I met with him, I told him that I would like his mentorship. He looked at me and said be here in my office every Monday morning at 6:30AM.
Fast forward to Monday morning, and he hands me a piece of paper. I looked at the paper and see the phrase “Know your numbers”. As I pick my head up to look at him, he says “If you don’t know your numbers, nothing else that I teach you will matter.” In helping clients plan for their financial independence, I can tell you that knowing your numbers, while simple and boring, are one of the most important tools you have in your journey to financial independence.
You must know where you are before you start charting a path to your ultimate destination. This starts with understanding where your money is going – where do you spend money on a recurring basis and one-off basis. In the business world, financial statements are used to make decisions regarding the allocation of resources. Typically, the most common statements that are used are the Income Statement (Profit and Loss), Balance Sheet, and Cash Flow Statement. While most individuals generally have a good understanding of their personal balance sheet (assets and liabilities), most have never taken the time to prepare personal income statements let alone prepare a budget. With banks and credit cards providing downloads to transactions, this is easier than ever before. You can go online and download every single transaction and get an immediate snapshot into where your money is going.
There are countless tools available to help you prepare personal financial statements. If you like to use spreadsheets such as Microsoft Excel, you can search for templates on their website. If you like to write things out on paper, the Federal Trade Commission has a template you can use. If you would like professional help, you can ask your CPA or financial advisor.
We all want to get to our financial destintion in the most optimal way possible. Having a clear understanding of where we are allows us to chart the most efficient path to where we want to go.