Over our lives we all have to handle money at various times and in varying amounts. My first job was a paper round, delivering the Herald-Sun around the suburb where I grew up in Geelong, Victoria. For doing this 6 days a week I got the princely sum of $10. Each week I would then buy $2 worth of mixed lollies and save the remaining $8. It was rewarding to watch the sum, which I kept in a jar in my bedroom, grow.

As you get older you get other part time jobs while at high school, perhaps also at uni or perhaps you go straight into full time work. As you rise in the level of the work force your pay increases and so you have to learn how to handle larger and larger amounts of money.

Most single people handle a weekly budget of around $250-$500, while families may be slightly higher, say up to $1500. I was reading a book once by an Australian author who writes about property investment, Jan Somers, the book was called Story by Story. Jan had written a number of property investment books before this one and so had received quite a few stories from her readers about their property investment experiences over the years. She put this book together then as a compilation of stories about the different experiences that everyday people had had with property investment and how they had dealt with them. In one story, though I forget which one exactly, the man relating it observed how since getting into property investment he had had to get use to dealing with very large sums of money, as he would routinely be dealing with 5 and six figured sums as he bought and sold his properties, had them renovated, checked on rental incomes etc.

Most people however have very little preparation in how to handle money. It is increasingly being realised that this is a very important skill to have, particularly as the amount of consumer debt is currently at record levels, being estimated to be around $39.6 billion as of June 22, 2007. It was for reasons such as this spiralling debt that on November 5^th 2005 a national frame work for introducing a program of financial literacy into the Australian school system was endorsed by the Australian Education Systems Officials Committee. The need for financial literacy in general, but in particular in the school systems is outlined in the 114 page discussion paper posted on the ASIC web site, entitled Financial Literacy in Schools.

Most people simply handle money on an as needs basis. It comes in, you pay your bills, buy your self some nice shirts, see a movie, pay off some more of the car and/or mortgage, pay the fortune in road tolls that travelling anywhere in Sydney lumps you with, then wait for the next pay cheque to come in.

But if you want to be more in control of how the money is slipping through your fingers, or if you want to demonstrate to banks what your current expenditure is so you can get a loan or just to see for your self how you are doing in this crazy game we call life, there was a great tip on pg 83 of Story by Story. Here Jan describes how you take a piece of paper and divide it into quadrants. In the top left hand quadrant you write “Income”, in the top right hand quadrant you write “Expenses”, in the bottom left quadrant you write “Assets” and in the bottom right quadrant you write “Liabilities”. In each of these quadrants then you list these details. So all your income in the top left quadrant and all your expenses in the top right. When you subtract your expenses from your total income, that is how much spare money you should have available to you.

In the lower left quadrant list all your Assets, these assets are NOT possessions as most people think of assets, but rather the things that earn you money, they are your properties, your shares, your bonds, your coin collections etc. In the lower right hand quadrant list all your liabilities, like bank loans, credit card debt, car repayments, store credit etc. When you subtract your total liabilities from your total assets, what you have left over is your Net Worth. This is a very good measure of how well you are doing financially.

The reason I point all this out is that if you are thinking of starting a business, as I am, then you need to know how the money flows through that business. If you don’t even know how money flows through your own bank accounts then you will likely find it difficult to manage the greater, and more complex cash flow associated with a business.

When I read about this method of producing a personal financial statement I started keeping records of all my spending, my income and my assets (no liabilities yet). At the end of each year I print a copy of my financial statement as a snap shot of how I was doing on the 31st of December each year.  I find that it is very satisfying to watch my Net Worth increasing each year. More than that, as you have it laid out before you exactly where all the money is going you can begin to make plans as to how the growth of that Net Worth can be maximised. For instance if you have a Net Income of $14,000, that is you earn $14,000 more than your expenses for living, then you should be able to add that $14,000 to your Net Worth the following year. As the value of your assets increase, you should also start to notice an income from your assets starting to increase.

I have attached the excel spread sheet I use to keep track of my finances over the year. The first worksheet is the Financial Statement, while the next four sheets collect the data used on this statement. Some items like incomes and assets I enter directly onto the sheet, while Expenses come from the worksheets in this file. At the end of each year I copy and paste the Financial statement into a separate excel spreadsheet to keep for my records.

One tip, it is very easy to get behind in entering your data. It is a huge effort to bring it up to date again, just because of all the receipts you have to keep and date, and not loose. Whereas if you make it say a 10 minute ritual on Sunday evenings then it is actually very easy to keep these very useful records.