Last month’s article dealt with step one in determining where you are financially. You learned that calculating your net worth/balance sheet (what you own minus what you owe) was the starting point in developing a biblically-based financial plan. This month you will become familiar with step two, which is calculating your summary of cash flow/income statement (what’s coming in minus what’s going out). This starting point will identify any obvious problems, financial strengths and some immediate steps that can be taken (i.e. spending less than you make).
If the statement of net worth is like a snap shot, then the summary of cash flow is like a movie. It is a measurement of cash inflows versus cash outflows over a defined period of time (usually a year). It can be backward or forward-looking. Since long-term goals and objectives are funded with the excess cash flow each year, it is important to run your finances like a profitable business. If your budget is not balanced you can increase your inflows (make more money), decrease your outflows (spend less money) or go deeper into debt (deficit spending) each year.
To calculate the inflows for the year, add up your gross (before tax) salary, business income, earnings on investments and pension and/or retirement income. These make up the “what’s coming in” part of the equation. Next, calculate the outflows such as giving, taxes, debt repayment (not mortgage), living expenses (includes mortgage payments) and savings. Finally, subtract your outflows from your inflows to reach your summary of cash flow number (Inflows – outflows = summary of cash flow). This will be either a positive or negative number. Now ask yourself, are you running your finances like a well-oiled and profitable business or more like a debt-riddled government?
What is the next step? You now know where you are financially; you know your net worth and you have a cash flow summary. This is the foundation of financial planning; the predetermined use of financial resources in order to accomplish certain goals and objectives. If you have a negative net worth and/or a negative cash flow situation, now is the time to address those issues. They will not positively correct themselves. Some immediate steps of action are in order (i.e. spending less than you make). On the other hand, if you have a positive net worth and a positive cash flow margin, it is time to establish your short-term and long-term financial goals. Long-range objectives can be financial independence, starting a business, financing college for your children or grandchildren, large giving, lifestyle changes (perhaps a second home home) and paying off debt. After you have established your goals you will need to decide what investment vehicles to utilize to reach those goals.
“We can make our plans, but the Lord determines our steps” (Proverbs 16:9).
According to Ron Blue, the author of Master Your Money and founder of Kingdom Advisors, “The difference in financial planning between the Christian and the non-Christian is the source of the goals and objectives.” God is the source of it all. There are over 2,000 verses dealing with money and possessions in the Bible. Obviously God has a lot to say about money management and our responsibility as stewards of the resources entrusted to us. Getting our finances in order is not only good business, it’s also biblical.
Please never forget that no matter what your finances look like, in God’s eyes you are clothed in royal robes and wear the family ring. You are the much loved child of the King. Jesus secured for you a treasure far superior to any riches on earth; you are wealthy beyond your wildest dreams.
If you haven’t done so already, prepare your summary of cash flow/income statement and get yourself equipped for next month’s article that will expound on goal setting.
Robert Audet is the President of Audet Wealth Advisors. which specializes in financial planning and investments. Please send questions and comments to [email protected] To learn more about Robert, please visit his website at www.robertaudet.com.