1. KNOW THE PULSE OF YOUR $

Why do you go to the doctor?

You go to make sure things inside your body are operating well, you’re healthy, and no major problems exist.

Now, why don’t a majority of people do the same when it comes to their finances?

Is it because they don’t want to face the truth, don’t think it’s worth it, are lazy, or possibly don’t know how to…?

Whatever the reason is, I’m here to help change that.

Personal finance should ABSOLUTELY be held to the the same standards as your health because bad finances will lead to bad mental & physical health and can even cause the strongest of relationships to break.

So what do I do to check the health of my $?

At the end of every month, I reconcile ALL my finances (e.g. credit/debit cards, bank/brokerage statements, passive/active income, real estate, private/public investments, taxes, utilities, food, etc.) and compile it into a spreadsheet to paint my financial picture across 6 main categories.

These 6 categories enable me to know EXACTLY what’s going on with the health of my $.

If you leave with anything from this post, these 6 things are all you need to know!

The categories are Assets, Liabilities, Equity, Cash Inflow, Cash Outflow, Net Cash Flow.

So let’s get to it. 🔥

ASSETS are things you OWN, like a house, investments, cash, etc.

LIABILITIES are things you OWE, like a mortgage, car loan, student debt, etc.

When you net these two (assets - liabilities), this is your EQUITY, this is your skin in the game.

Let’s take a simple example.

A house is something you OWN, so it’s an ASSET, let’s say it’s $100,000.

Now if you have a mortgage on it, you OWE, so it’s a LIABILITY, let’s say it’s $40,000.

The EQUITY portion of the home is $60,000 ($100,000 - $40,000). This is your skin in the game ($60,000), while the other part the bank owns ($40,000).

Think of ASSETS, LIABILITIES, and EQUITY like a screenshot at a single point in time, in regards to how big your body is, whether it’s growing or shrinking.

CASH INFLOW is cash that goes INTO your account like salary, rental income, dividends, interest income, etc.

CASH OUTFLOW is cash that goes OUT of your account like food, rent, mortgage interest/principal payment, etc.

When you net these two (cash inflow - cash outflow), this is your NET CASH FLOW that is either going in or out of your account, which ultimately increases or decreases the cash portion of your ASSETS.

So let’s take a simple example.

You have $1000 in cash at the beginning of the month which you OWN, so it’s an ASSET.

Salary is cash coming INTO your account, so it’s a CASH INFLOW, let’s say it’s $2,000 in a month.

Rent is cash going OUT of your account, so it’s a CASH OUTFLOW, let’s say it’s $500 in a month.

So the NET CASH FLOW is $1,500 ($2,000 - $500). This is the extra blood that flows into your body and thus increases your ASSET position to $2,500 ($1,000 existing cash + $1,500 new cash), ultimately making your body grow.

You can think of CASH INFLOW/OUTFLOW like blood flow inside your body that keeps your heart & muscles pumping and if it’s a net positive, it makes your body grow & get stronger, while if it’s a net negative, it makes your body shrink & get weaker.

Long term, you want to grow your EQUITY. Preferably by the time you retire you have a large pool of equity that you own outright 100%.

How can you do this? Invest in quality, growth assets (e.g. real estate, companies) and/or pay down liabilities (e.g. mortgage, student loans, debt), etc.

There is no short-medium-long term goal when it comes to NET CASH FLOW.

You ALWAYS want your NET CASH FLOW to be consistently in the positive, which means you are more than covering your expenses every single month and therefore saving & growing your ASSETS.

How can you do this? Build active income (get a job, build a business, have a side hustle that generates cash), and/or create passive income (e.g. rental income, dividends), etc.

There are many more ways to build EQUITY & NET CASH FLOW than the ones I listed above, but the main point I want to drive home here is understanding what these concepts mean so that you can apply it and take action to build on these key metrics during your financial journey.

As appreciation to my followers, I’ve attached my own spreadsheet (w/ hypothetical numbers) that I personally use to check the health of my $ on a month-to-month basis so that you can use it for your own personal situation and take action!

Simply all you need to do is add your info in the yellow cells of ASSETS, LIABILITIES, CASH INFLOW, & CASH OUTFLOW and everything else will be auto-calculated & generated for you.

I HIGHLY recommend filling out this spreadsheet at the end of every month, without ever skipping, EVEN if you believe that everything is fine.

MAKE IT A REQUIREMENT IN YOUR LIFE, SO IT BECOMES A HABIT.

Let me know on Twitter how it goes and any questions/comments you have!

-TESLACONOMICS

(click image to download)