The most basic aspect of financial fitness involves planning for adequate cash flow to cover ongoing expenses and major purchases. Financially speaking, life can be viewed as a timeline with a series of cash inflows and cash outflows. For adults still relying on wages to provide income, prudent cash flow management helps facilitate the savings and investment needed to achieve the overriding goal of an increasing net worth over time.
In turn, an increasing net worth leads to the fulfillment of life’s most important long-term financial goals—buying a home, providing for a child’s education and funding retirement during a time when you’re no longer willing or able to rely on wages as a primary source of cash inflow. To that end, personal financial statements of cash flow (income minus expenses) and net worth (assets minus liabilities) are essential tools to evaluate and monitor your financial fitness at any given time, as well as your progress toward long-term goals.
Use the following as a guide:-
- Create a cash flow plan (essentially, your budget).
- Calculate your personal net worth (your assets minus your liabilities) annually.
- Determine your lifestyle goals (e.g., a comfortable retirement) and create a plan to achieve those goals.
- Determine how much money you’ll need for must-have, big-ticket items coming in the next few years, and set that money aside in a liquid, safe investment.
- If you’re retired, conservatively invest assets that are needed to cover your normal living expenses for the next few years.
- If you’re still working maintain an emergency fund.
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