How to analyze your current finances

Tips to help with budget planning and figuring your net worth

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Month after month, many individuals look at their bank and credit card statements and are surprised that they spent more than they thought they did. To avoid this problem, one simple method of accounting for income and expenditures is to have personal financial statements. Just like the ones used by corporations, financial statements provide you with an indication of your financial condition and can help with budget planning. There are two types of personal financial statements:

  • The personal cash flow statement
  • The personal balance sheet

Let’s explore these in more detail.

Key Takeaways

  • You can create your own personal financial statements to help with budget planning and to set goals for increasing your net worth.
  • The two types of personal financial statements are the personal cash flow statement and the personal balance sheet.
  • The personal cash flow statement measures your cash inflows (money you earn) and your cash outflows (money you spend) to determine if you have a positive or negative net cash flow.
  • A personal balance sheet summarizes your assets and liabilities in order to calculate your net worth.

Personal Cash Flow Statement

A personal cash flow statement measures your cash inflows and outflows in order to show you your net cash flow for a specific period of time. Cash inflows generally include the following:

  • Salaries
  • Interest from savings accounts
  • Dividends from investments
  • Capital gains from the sale of financial securities like stocks and bonds

Cash inflow can also include money received from the sale of assets like houses or cars. Essentially, your cash inflow consists of anything that brings in money.

Cash outflow represents all expenses, regardless of size. Cash outflows include the following types of costs:

  • Rent or mortgage payments
  • Utility bills
  • Groceries
  • Gas
  • Entertainment (books, movie tickets, restaurant meals, etc.)

The purpose of determining your cash inflows and outflows is to find your net cash flow. Your net cash flow is simply the result of subtracting your outflow from your inflow. A positive net cash flow means that you earned more than you spent and that you have some money left over from that period. On the other hand, a negative net cash flow shows that you spent more money than you brought in.

Personal Balance Sheet

A balance sheet is the second type of personal financial statement. A personal balance sheet provides an overall snapshot of your wealth at a specific period in time. It is a summary of your assets (what you own), your liabilities (what you owe), and your net worth (assets minus liabilities).

Assets

Assets can be classified into three distinct categories:

  • Liquid Assets: Liquid assets are those things you own that can easily be sold or turned into cash without losing value. These include checking accounts, money market accounts, savings accounts, and cash. Some people include certificates of deposit (CDs) in this category, but the problem with CDs is that most of them charge an early withdrawal fee, causing your investment to lose a little value.
  • Large Assets: Large assets include things like houses, cars, boats, artwork, and furniture. When creating a personal balance sheet, make sure to use the market value of these items. If it’s difficult to find a market value, use recent sales prices of similar items.
  • Investments: Investments include bonds, stocks, CDs, mutual funds, and real estate. You should record investments at their current market values as well.

Liabilities

Liabilities are merely what you owe. Liabilities include current bills, payments still owed on some assets like cars and houses, credit card balances, and other loans.

The “debt avalanche” and the “debt snowball” are two popular methods for paying off liabilities, such as credit card debt.

Net Worth

Your net worth is the difference between what you own and what you owe. This figure is your measure of wealth because it represents what you own after everything you owe has been paid off. If you have a negative net worth, this means that you owe more than you own.

Two ways to increase your net worth are to increase your assets or decrease your liabilities. You can increase assets by increasing your cash or increasing the value of any asset you own. One note of caution: Make sure you don’t increase your liabilities along with your assets.

For example, your assets will increase if you buy a house, but if you take out a mortgage on that house your liabilities will also increase. Increasing your net worth through an asset increase will only work if the increase in assets is greater than the increase in liabilities. The same goes for trying to decrease liabilities. A decrease in what you owe has to be greater than a reduction in assets.

Bringing Them Together

Personal financial statements give you the tools to monitor your spending and increase your net worth. The thing about personal financial statements is that they are not just two separate pieces of information, but they actually work together. Your net cash flow from the cash flow statement can actually help you in your quest to increase your net worth. If you have a positive net cash flow in a given period, you can apply that money to acquiring assets or paying off liabilities. Applying your net cash flow toward your net worth is a great way to increase assets without increasing liabilities or decrease liabilities without increasing assets.

The Bottom Line

If you currently have a negative cash flow or you want to increase positive net cash flow, the only way to do it is to assess your spending habits and adjust them as necessary. By using personal financial statements to become more aware of your spending habits and net worth, you’ll be well on your way to greater financial security.

How to analyze your current finances

This week we’ll ring in a new year. Millions of people will contemplate New Year’s Resolutions ranging from health to relationships to finances. These resolutions can be very motivating, if but for a short time. Before thinking to the future, however, we would do well to reflect on the past year.

The starting point is to evaluate the financial goals you set at the start of the year. Whether you wrote them down or not, take note of what you wanted to accomplish financially. Consider whether you achieved your goals and what, if anything, held you back.

Apart from your specific goals, here are seven key financial metrics to evaluate.

1. Net Worth

If you could look at only one metric to evaluate your progress, it would be your net worth (assets – liabilities). Our net worth reflects all of the financial decisions we’ve made throughout our lifetime. Think of it as your financial report card.

They key is evaluate the change in your net worth over time. Spend less than you make and your net worth goes up. You’ve saved the difference, used it to pay down debt or both. If you’ve spent more than you made, you’ve taken money out of savings, increased your debt, or both. Your net worth also reflects the performance of your investments.

If you are not tracking your net worth, start today. It’s easy to do with a spreadsheet or one of many free online tools. The free tool I use is Personal Capital. You can connect all your investment and bank accounts, credit cards, mortgage, and even your home value via Zillow. From there Personal Capital generates and tracks your net worth for you.

2. Debt Levels

The next step is to look at your debt and ask two questions. First, did your total debt go up or down over the past year? Second, and just as important, did you borrow money over the last 12 months? Some may have been able to reduce their overall debt, even though they borrowed more money during the year and then repaid it. The key to getting out of debt for good is simple–stop going into new debt.

Here it’s important to go beyond just the numbers. Seek to understand why you went into more debt, if that’s the case. Similarly, evaluate your finances to understand whether you can pay down your debt faster than you have in the past. In this regard, consider whether the interest rates on your debt can be reduced. Mortgage rates still remain at historic lows, and zero percent options for refinancing credit card debt abound.

3. Retirement Planning

At least annually we should evaluate whether we are on track to meet our retirement goals. A simple approach is to assess whether we are contributing the maximum amount allowed to 401k, IRA, and other retirement accounts. To go deeper, one of several free retirement planners can quickly assess where you stand.

If you like crunching the numbers by hand, Your Money Ratios by Charles Farrell provides excellent guidance. Farrell’s book gives you guidance on where you stand now and how much you should be saving based on your age and income.

4. Credit Report & Score

Checking your credit reports at least annually is important for several reasons. First, it can alert you to identity theft by showing your open accounts. Any accounts listed that you didn’t opened should be investigated immediately. Second, it’s not uncommon for creditors to report incorrect information. Regularly reviewing your credit report can catch these errors. Third, it keeps you focused on paying your debts on time and otherwise managing your credit wisely. You can get your credit report for free at annualcreditreport.com.

Beyond your report, it’s also important to keep an eye on your credit score. There are many ways to check your score for free. These services also provide helpful information on what is affecting your score.

5. Savings

There are two key aspects of savings that should be evaluated. First, consider whether your cash position is sufficient to handle all short term needs and unexpected emergencies. Three to six months of expenses is a common rule of thumb, although I prefer one year.

Second, consider whether you are getting the best interest rates available. You can find current bank rates here. I use a combination of Ally Bank and Capital One 360 and have been satisfied with both.

No financial assessment would be complete without considering education. For some that means evaluating 529 plans and other college savings accounts for children. For others it means evaluating options for consolidating or refinancing school loans (here are several options) in an effort to pay off the debt as quickly and inexpensively as possible.

7. Investments

Finally, the end of the year is a perfect time to analyze your investments. The starting point is to determine whether rebalancing your portfolio is necessary in light of your investment plan. It’s also a good time to determine whether you can lower your investment costs by switching mutual funds, investment advisors, or both. Lastly, consider whether you are taking full advantage of tax-advantaged retirement, education, and health savings accounts.

A thoughtful and thorough assessment of your finances takes some time. But an annual checkup is worth the effort.

When seeking investment quality, the balance sheet tells the story

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If you are a stock investor who likes companies with good fundamentals, then a strong balance sheet is important to consider when seeking investment opportunities. By using three broad types of measurements—working capital, asset performance, and capital structure—you may evaluate the strength of a company’s balance sheet, and thus its investment quality.

A firm’s judicious use of debt and equity is a key indicator of a strong balance sheet. A healthy capital structure that reflects a low level of debt and a high amount of equity is a positive sign of investment quality. This article focuses on analyzing the balance sheet based on a company’s capital structure.

Key Takeaways

  • Capital structure refers to a company’s mix of capital, which consists of a combination of debt and equity.
  • Equity consists of a company’s common and preferred stock plus retained earnings.
  • What constitutes debt varies, but typically includes short-term borrowing, long-term debt, and a portion of the principal amount of operating leases and redeemable preferred stock.
  • Important ratios to analyze capital structure include the debt ratio, the debt-to-equity ratio, and the capitalization ratio.
  • Ratings that credit agencies provide on companies help assess the quality of a company’s capital structure.

Capital Structure Terminology

Capital structure

Capital structure describes the mix of a firm’s long-term capital, which consists of a combination of debt and equity. Capital structure is a permanent type of funding that supports a company’s growth and related assets. Expressed as a formula, capital structure equals debt obligations plus total shareholders’ equity:

You may hear capital structure also referred to as “capitalization structure,” or just “capitalization.”

Equity

The equity portion of the debt-equity relationship is easiest to define. In a capital structure, equity consists of a company’s common and preferred stock plus retained earnings. This is considered invested capital and it appears in the shareholders’ equity section of the balance sheet. Invested capital plus debt comprises capital structure.

A discussion of debt is less straightforward. Investment literature often equates a company’s debt with its liabilities; however, there is an important distinction between operational liabilities and debt liabilities. It’s the latter that forms the debt component of capital structure, though investment research analysts do not agree about what constitutes a debt liability.

Many analysts define the debt component of capital structure as a balance sheet’s long-term debt; however, this definition is too simplistic. Rather, the debt portion of a capital structure should consist of short-term borrowings (notes payable), long-term debt, and two-thirds (rule of thumb) of the principal amount of operating leases and redeemable preferred stock.

When analyzing a company’s balance sheet, seasoned investors would be wise to use this comprehensive total debt figure.

Optimal Capital Structure

Ratios Applied to Capital Structure

In general, analysts use three ratios to assess the strength of a company’s capitalization structure. The first two are popular metrics: the debt ratio (total debt to total assets) and the debt-to-equity (D/E) ratio (total debt to total shareholders’ equity). However, it is a third ratio, the capitalization ratio—(long-term debt divided by (long-term debt plus shareholders’ equity))—that delivers key insights into a company’s capital position.

With the debt ratio, more liabilities mean less equity and therefore indicate a more leveraged position. The problem with this measurement is that it is too broad in scope and gives equal weight to operational liabilities and debt liabilities.

The same criticism applies to the debt-to-equity ratio. Current and non-current operational liabilities, especially the latter, represent obligations that will be with the company forever. Also, unlike debt, there are no fixed payments of principal or interest attached to operational liabilities.

On the other hand, the capitalization ratio compares the debt component to the equity component of a company’s capital structure; so, it presents a truer picture. Expressed as a percentage, a low number indicates a healthy equity cushion, which is always more desirable than a high percentage of the debt.

Optimal Relationship Between Debt and Equity

Unfortunately, there is no magic ratio of debt to equity to use as guidance. What defines a healthy blend of debt and equity varies according to the industries involved, line of business, and a firm’s stage of development.

However, because investors are better off putting their money into companies with strong balance sheets, it makes sense that the optimal balance generally should reflect lower levels of debt and higher levels of equity.

About Leverage

In finance, debt is a perfect example of the proverbial two-edged sword. Astute use of leverage (debt) is good. It increases the number of financial resources available to a company for growth and expansion.

Not only is too much debt a cause for concern, but too little debt can be as well. This can signify that a company is relying too much on its equity and not efficiently making use of its assets.

With leverage, the assumption is that management can earn more on borrowed funds than what it would pay in interest expense and fees on these funds. However, to carry a large amount of debt successfully, a company must maintain a solid record of complying with its various borrowing commitments.

The Problem With Too Much Leverage

A company that is too highly leveraged (too much debt relative to equity) might find that eventually, its creditors restrict its freedom of action; or it could experience diminished profitability as a result of paying steep interest costs. In addition, a firm could have trouble meeting its operating and debt liabilities during periods of adverse economic conditions.

Or, if the business sector is extremely competitive, then competing companies could (and do) take advantage of debt-laden firms by swooping in to grab more market share. Of course, a worst-case scenario might be if a firm needed to declare bankruptcy.

Credit-Rating Agencies

Fortunately, though, there are excellent resources that can help determine if a company might be too highly leveraged. The primary credit-rating agencies are Moody’s, Standard & Poor’s (S&P), Duff & Phelps, and Fitch. These entities conduct formal risk evaluations of a company’s ability to repay principal and interest on debt obligations, primarily on bonds and commercial paper.

All ratings by credit agencies fall into one of two categories: investment grade or non-investment grade.

A company’s credit ratings from these agencies should appear in the footnotes to its financial statements. So, as an investor, you should be happy to see high-quality rankings on the debt of companies that you’re considering as investment opportunities, likewise, you should be wary if you see poor ratings on companies that you are considering.

The Bottom Line

A company’s capital structure constitutes the mix of equity and debt on its balance sheet. Though there is no specific level of each that determines what a healthy company is, lower debt levels and higher equity levels are preferred.

Various financial ratios help analyze the capital structure of a firm that makes it easy for investors and analysts to see how a company compares with its peers and therefore its financial standing in its industry. The ratings provided by credit agencies also help in shedding light on the capital structure of a firm.

How to analyze your current finances

Everyone with even a little bit of debt has to manage their debt. If you just have a little debt, you have to keep up your payments and make sure it doesn’t get out of control. On the other hand, when you have a large amount of debt, you have to put more effort into paying off your debt while juggling payments on the debts you’re not currently paying.

Know How Much You Owe

Make a list of your debts, including the creditor, total amount of the debt, monthly payment, interest rate, and due date. You can use your credit report to confirm the debts on your list. Having all the debts in front of you will allow you to see the bigger picture and stay aware of your complete debt picture. Debt reduction software can make this process easier.

Once you have a handle on your debt and your income, you can calculate your Debt to Income ratio (DTI). This ratio tells you how much of your income is going toward debt payments. To find yours, divide your debt payments by your income, and multiply by 100. For example, $1,200 of monthly debt divided by $3,000 of monthly income is 0.4 x 100 = 40%. The lower this number is, the better, and tracking it can help you understand your finances more clearly.

Don’t just create your list and forget about it. Refer to your debt list periodically, especially as you pay bills. Update your list every few months as the total amount of your debt changes.

Pay Your Bills on Time Each Month

Late payments make it harder to pay off your debt since you’ll have to pay a late fee for every payment you miss. If you miss two payments in a row, your interest rate and finance charges will increase.

If you use a calendaring system on your computer or smartphone, enter your payments there and set an alert to remind you several days before your payment is due. If you miss a payment, don’t wait until the next due date to send your payment, by then it could be reported to a credit bureau. Instead, send your payment as soon as you remember that it was missed.

A budget can help you stay out of debt, and it can help you climb out. It allows you to see how much money you earn and where that money is going. Create a bare-bones budget that allows you to pay for necessities like your rent or mortgage and utilities. Set aside everything else to pay off your debt as quickly as possible.

Create a Monthly Bill Payment Calendar

Use a bill payment calendar to help you figure out which bills to pay with which paycheck. On your calendar, write each bill’s payment amount next to the due date. Then, fill in the date of each paycheck. If you get paid on the same days every month—the 1 st and 15 th —you can use the same calendar from month to month. But, if your paychecks fall on different days of the month, you’ll need to create a calendar every month.

Make at Least the Minimum Payment

If you can’t afford to pay anything more, at least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt. But, it keeps your account in good standing, which avoids late fees. When you miss payments, it becomes harder to catch up and eventually your accounts could go into default.

While you’re working on paying down debt, stop using credit cards. Start carrying cash instead. Stick to the budget you created and only buy what you can pay for with cash.

Decide Which Debts to Pay Off First

Paying off credit card debt first is often the best strategy because credit cards have higher interest rates than other debts. Of all your credit cards, the one with the highest interest rate usually gets priority on repayment because it’s costing the most money.

Use your debt list to prioritize and rank your debts in the order you want to pay them off. You can also choose to pay off the debt with the lowest balance first. This might cost a little more in the long run, but knocking off small debts first can build confidence.

Pay Off Collections and Charge-Offs

You can only pay as much on your debt as you can afford. When you have limited funds for repaying debt, focus on keeping your other accounts in good standing. Don’t sacrifice your positive accounts for those that have already affected your credit. Instead, pay those past due accounts when you can afford to do it.

Build an Emergency Fund to Fall Back On

Without access to savings, you’d have to go into debt to cover an emergency expense. Even a small emergency fund will cover little expenses that come up every once in a while.

First, work toward creating a small emergency fund—$1,000 is a good place to start. Once you have that, make it your goal to create a bigger fund, like $2,000. Eventually, you want to build up a reserve of three- to six-months of living expenses.

Don’t Confuse Wants and Needs

It’s easy to convince yourself that you “need” to purchase a new tv or that you “need” to go on vacation. The truth is, there aren’t that many true needs in life. You need food, shelter, clothing, transportation, and things like that. You want steak, a nice house in the suburbs, designer labels, and a luxury car, for example.

Recognize the Signs That You Need Help

If you find it hard to pay your debt and other bills each month, you may need to seen outside help, like a credit counseling agency. Other options for debt relief are:

  • Debt consolidation
  • Debt settlement
  • Bankruptcy

These each have advantages and disadvantages, so weigh your options carefully.

Learn how to assess and improve your budget

How to analyze your current finances

While creating a budget is the first step to taking control of your finances, it’s not a one-and-done activity. Your needs and goals will change over time, so the key to making your budget work is to treat it as a living document and periodically evaluate it and adjust it as necessary to ensure that it meets your current financial goals.

When you evaluate your budget, you compare what you spent against what you planned to spend.   Ideally, you should reflect on your budget at the end of every month and use that information to plan your budget for the next month. You should also sit down and assess your total budget and your overall financial goals at least once a year. Evaluating your budget requires a series of steps but is a low-effort process that doesn’t take as long as setting up your first budget.

Compare Actual vs. Planned Spending

After you create a budget for the month, you should track your spending throughout the month in a budget spreadsheet, software, or an online app like You Need a Budget, ideally on a daily basis.   With your budget and your expense tracking in front of you, assess whether you overspent, underspent, or stayed on budget for the month.

If your expenses exceeded what you had allocated, you may be able to reduce expenditures in any spending categories that were consistently higher than you had budgeted. Similarly, if you spent less than you had planned, there may be an opportunity to increase expenditures for the next month in any spending categories that were lower than you had budgeted. If you spent what you planned to spend, you’re on the right track, but your budget may still require changes depending on your financial picture for the next month.

Assess New Income and Expenses

Since a budget represents your spending plan for a given month, it’s important to ask yourself at the end of the month what your income and expenses are for the next month. These may be the same as or dramatically different from those last month.

Any lifestyle change can trigger an increase or decrease in income or expenses that next month’s budget should reflect.   For example, a job loss could produce a drop in income. If you are getting married or having a child, you might face an increase in spending in certain categories, such as food, utilities, and personal care products, to name a few. One-time or seasonal purchases like wedding gifts or holiday shopping can also cause a temporary spike in expenses.  

If possible, include planned splurges in your budget to avoid depriving yourself and give yourself an incentive to stick to your budget.

Review Your Financial Goals

Beyond fluctuations in income and expenses, your financial goals can also change from month to month.   For example, if you recently paid off debt, you may have a lot of extra money in your budget to redistribute to other spending categories. And if you want to build an emergency fund, your expenditures for saving could increase starting in the next month. Once you set a goal, it’s important to build it into your budget to achieve it.

If you are budgeting as a couple or a family, schedule a budget meeting a few times a week to reflect on how budgeting is going for the month. This can keep everyone in the household accountable for their spending and keep you on budget.

Modify Your Budget to Meet Your Needs

Once you establish a baseline of income, expenses, and financial goals for the next month, adjust your budget to reflect it.   This may be as simple as cutting unnecessary expenses and moving money from one spending category to another. But if any of these financial elements have changed drastically, you may need to significantly change your allocations to each spending category.

You can make increases or decreases to one, a few, or all spending categories. For example, if you find yourself debt-free and with hundreds of extra dollars each month, you can direct all of those dollars to a select few spending categories or divide the money equally across all categories.

Identify and Plug Budget Leaks

In addition to updating your budget to reflect your financial status, the process of evaluating your budget may reveal hidden problems in your spending, known as budget leaks. To solve them, you’ll need to put additional constraints on your spending.

For example, you might discover that you relied too much on a credit card or dipped into a savings account, in which case you might want to switch to a cash-only budget, leave your credit card at home (or even freeze it in a block of ice), or put your savings in a certificate of deposit (CD) so that it is more difficult to access the money.     Putting these self-imposed limits in place can help you rein in your spending throughout the month.

Likewise, if you struggled to apportion funds for different spending categories, consider switching to an envelope system, where you divide cash into separate envelopes for different spending categories.  

If you overdo online shopping, avoid storing your credit card information with retailers; the extra effort of having to enter your information each time will force you to reflect on the need for the purchase and forgo it if it’s unnecessary. It’s a good idea to think about a purchase for at least five minutes before you proceed.  

Review Your Budget Monthly and Annually

Assess your new budget at the end of the month to make sure that the changes are actually working. Routinely performing this monthly financial check-up won’t take up much time and will help you optimize your budget over time.

It can also be beneficial to set aside time once a year to look at your annual budget, which is a plan for how you will spend money over the next year taking into account your yearly income and expenses. Unlike a monthly budget, an annual budget also includes irregular expenses (car insurance and medical bills, for example) and reveals broader spending patterns.   Preparing this type of budget allows you to see where your money is going over time, which can help you prioritize your spending so that you can reach your long-term financial goals.

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It’s essential to analyze your money and finances to gain insight into your financial wellbeing. A complete analysis gives you a comprehensive overview of the state of your financial situation. The analysis includes assessing your assets, liabilities, credit, income, and expenses.

Many people create a budget or set financial goals without first understanding where they stand financially today. To be successful, you’ll need to determine your starting point and calculate real financial numbers. This will help you set better goals and a more effective budget.

Table of contents

  • Step 1: Calculate your net worth
  • Step 2: Determine your liquidity
  • Step 3: Prioritize your liabilities
  • Step 4: Calculate your monthly income
  • Step 5: Calculate your debt-to-income ratio
  • Step 6: Calculate your monthly cash flow
  • Step 7: Determine your credit health
  • Complete the Analysis

Let’s get started with my 7 steps to successfully complete a personal financial analysis

Step 1: Calculate your net worth

Net worth is the value of your assets, minus the total of your liabilities. If your net worth is positive, it means you have enough assets to cover your liabilities. Learn how to calculate your net worth >>>

Step 2: Determine your liquidity

Liquidity is a cash asset or assets that can easily be converted into cash. For example, a savings account is more liquid than a home. Knowing how liquid your assets are can help you access cash to cover expenses or when income decreases. Learn more about liquidity >>>

Step 3: Prioritize your liabilities

Liabilities include all your debts and monies owed. For example, your home can be an asset but the mortgage is a liability. The value of that asset is reduced with the mortgage balance. List your liabilities from most essential (mortgage) to discretionary (credit card debt).

Step 4: Calculate your monthly income

Your income includes money you earn and make or receive from any type of activity. List all your income sources such as a paycheck, part-time work, side gig, interest earned, dividends received, royalties, alimony, etc. Learn more on how to calculate your total income >>>

Step 5: Calculate your debt-to-income ratio

The debt-to-income ratio is the amount of debt compared to your overall income. Lenders use this ratio when determining whether to lend you money. A low debt-to-income ratio is more desirable. Keeping your debt at a manageable level is one of the foundations of financial wellbeing. Learn how to calculate your debt-to-income ratio >>>

Step 6: Calculate your monthly cash flow

Analyze your money by calculating your cash flow. Cash flow is a measure of the money you receive and spend. Calculating your cash flow involves understanding where your money comes from and where it goes. If your net cash flow is positive, then you have extra money to put towards your financial goals. If your net cash flow is negative, it may be time to cut back on expenses and increase income. Learn how to calculate your monthly cash flow >>>

Use a financial tracking app to help you track your spending.

Step 7: Determine your credit health

Credit health involves having a positive relationship with credit without a heavy reliance on usage or having many debt obligations. Having healthy credit means you’re a prime borrower that can receive the best rates and terms for loans you may need. Credit health can be easily monitored through credit scores giving you an overview of how you manage credit today and in the past. Learn more about credit scores >>>

Access your free credit score with apps like Credit Karma and others. Find more credit score options in the marketplace.

Complete the Analysis

You’ve made it through the seven steps to analyze your money and finances. Now, it’s time to sit back and start asking yourself questions.

Look at these calculations and ask yourself how you feel about what you’re seeing. What thoughts come to mind? Are you doing quite well and feel confident? Do you feel secure? Or are you feeling overwhelmed? It’s important to address these feelings and thoughts so you’re aware of the root reasons why it might be challenging to improve them.

Now, let’s focus on the numbers and give them some thought. Do the numbers make sense? Do you have enough assets to cover your liabilities? Can you easily turn assets into cash? Are your debts a big liability in a potential downturn? Do you have enough cash coming in? Are you solely dependent on one income source?

Don’t rush to analyze your money and finances. Ask as many questions as you can about what these numbers mean. It’s important you fully understand how you’re doing today as it relates to how you dreamed of living. This analysis will set you further ahead when setting your goals and creating your budget.

Jason Vitug

Jason is the founder of phroogal, creator of the award winning project Road to Financial Wellness, and author of the bestseller and New York Times reviewed book, You Only Live Once. Jason is a world traveler, certified yoga teacher, and breath work specialist.

It behooves investors to take advantage of the wealth of information provided in a company’s financial statements to help them evaluate the company as a potential investment. In terms of overall profitability, the net income is the obvious starting point when analyzing a financial statement. This bottom-line dollar amount on a company’s income statement is an excellent indicator of profitability because it puts a value on the amount a company takes in, once all costs of production, depreciation, tax, interest and other expenses have been deducted. However, net income shouldn’t be used exclusively when evaluating a company.

Operating Profit Margin

The operating profit margin is another important indicator of profitability and efficiency that compares the amount a company earns before interest, and taxes on sales are calculated. The margin helps analysts and potential investors gauge how successful company managers are at controlling expenses and generating revenue. A high operating profit margin strongly indicates that a company is shrewdly managing costs and generating sales.

Assessing Stock Price and Profitability for Shareholders

Financial statements can be used to assess the company’s stock price and profitability for shareholders. A variety of metrics are useful in this process. Earnings per share (EPS) is an indicator of return on investment, showing a company’s per-share profitability. The price-earnings (P/E) ratio uses a stock’s EPS, compared to its present share price, for evaluation purposes. The price to book (P/B) ratio is considered a foundational value metric for investors, as it reveals the market’s valuation of the company in relation to its intrinsic value.

Dividend Payout Ratio

The dividend payout ratio is another useful metric that measures a company’s growth, financial stability, and returns paid to stockholders. The dividend payout ratio calculates the percentage of company earnings paid out to equity investors, in the form of dividends. The higher the ratio value, the more reliable a company’s earnings can sustain dividend payouts, and the more stable a company is considered to be. Retained earnings, the number of profits not paid out to shareholders as dividends, shows what portion of profits a company is reinvesting in expanding its business.

Assets and Liabilities

The breakdown of assets and liabilities contained on a company’s balance sheet provides investors with a reliable snapshot of the company’s overall financial health, as well as its debt situation. Debt ratios, such as the current ratio, which can be calculated from the information provided in financial statements, let analysts assess a company’s ability to handle outstanding debt. Major capital expenditures can be used in evaluating a company’s current financial condition and can telegraph the potential for growth.

Learn how to assess and improve your budget

How to analyze your current finances

While creating a budget is the first step to taking control of your finances, it’s not a one-and-done activity. Your needs and goals will change over time, so the key to making your budget work is to treat it as a living document and periodically evaluate it and adjust it as necessary to ensure that it meets your current financial goals.

When you evaluate your budget, you compare what you spent against what you planned to spend.   Ideally, you should reflect on your budget at the end of every month and use that information to plan your budget for the next month. You should also sit down and assess your total budget and your overall financial goals at least once a year. Evaluating your budget requires a series of steps but is a low-effort process that doesn’t take as long as setting up your first budget.

Compare Actual vs. Planned Spending

After you create a budget for the month, you should track your spending throughout the month in a budget spreadsheet, software, or an online app like You Need a Budget, ideally on a daily basis.   With your budget and your expense tracking in front of you, assess whether you overspent, underspent, or stayed on budget for the month.

If your expenses exceeded what you had allocated, you may be able to reduce expenditures in any spending categories that were consistently higher than you had budgeted. Similarly, if you spent less than you had planned, there may be an opportunity to increase expenditures for the next month in any spending categories that were lower than you had budgeted. If you spent what you planned to spend, you’re on the right track, but your budget may still require changes depending on your financial picture for the next month.

Assess New Income and Expenses

Since a budget represents your spending plan for a given month, it’s important to ask yourself at the end of the month what your income and expenses are for the next month. These may be the same as or dramatically different from those last month.

Any lifestyle change can trigger an increase or decrease in income or expenses that next month’s budget should reflect.   For example, a job loss could produce a drop in income. If you are getting married or having a child, you might face an increase in spending in certain categories, such as food, utilities, and personal care products, to name a few. One-time or seasonal purchases like wedding gifts or holiday shopping can also cause a temporary spike in expenses.  

If possible, include planned splurges in your budget to avoid depriving yourself and give yourself an incentive to stick to your budget.

Review Your Financial Goals

Beyond fluctuations in income and expenses, your financial goals can also change from month to month.   For example, if you recently paid off debt, you may have a lot of extra money in your budget to redistribute to other spending categories. And if you want to build an emergency fund, your expenditures for saving could increase starting in the next month. Once you set a goal, it’s important to build it into your budget to achieve it.

If you are budgeting as a couple or a family, schedule a budget meeting a few times a week to reflect on how budgeting is going for the month. This can keep everyone in the household accountable for their spending and keep you on budget.

Modify Your Budget to Meet Your Needs

Once you establish a baseline of income, expenses, and financial goals for the next month, adjust your budget to reflect it.   This may be as simple as cutting unnecessary expenses and moving money from one spending category to another. But if any of these financial elements have changed drastically, you may need to significantly change your allocations to each spending category.

You can make increases or decreases to one, a few, or all spending categories. For example, if you find yourself debt-free and with hundreds of extra dollars each month, you can direct all of those dollars to a select few spending categories or divide the money equally across all categories.

Identify and Plug Budget Leaks

In addition to updating your budget to reflect your financial status, the process of evaluating your budget may reveal hidden problems in your spending, known as budget leaks. To solve them, you’ll need to put additional constraints on your spending.

For example, you might discover that you relied too much on a credit card or dipped into a savings account, in which case you might want to switch to a cash-only budget, leave your credit card at home (or even freeze it in a block of ice), or put your savings in a certificate of deposit (CD) so that it is more difficult to access the money.     Putting these self-imposed limits in place can help you rein in your spending throughout the month.

Likewise, if you struggled to apportion funds for different spending categories, consider switching to an envelope system, where you divide cash into separate envelopes for different spending categories.  

If you overdo online shopping, avoid storing your credit card information with retailers; the extra effort of having to enter your information each time will force you to reflect on the need for the purchase and forgo it if it’s unnecessary. It’s a good idea to think about a purchase for at least five minutes before you proceed.  

Review Your Budget Monthly and Annually

Assess your new budget at the end of the month to make sure that the changes are actually working. Routinely performing this monthly financial check-up won’t take up much time and will help you optimize your budget over time.

It can also be beneficial to set aside time once a year to look at your annual budget, which is a plan for how you will spend money over the next year taking into account your yearly income and expenses. Unlike a monthly budget, an annual budget also includes irregular expenses (car insurance and medical bills, for example) and reveals broader spending patterns.   Preparing this type of budget allows you to see where your money is going over time, which can help you prioritize your spending so that you can reach your long-term financial goals.