My mind is gradually shutting down for the Holiday season. Goodness. The words on this page are dancing as sleazily as I will on the New Year.
My plan is to wrap my desk up in good time to head for my shagz in Kaplong, spend a couple of weeks with the folks and those cows they love so much.
I heard one of them recently gave birth. Congratulations. I wonder if my Ol’Man had a baby shower for her, that lovely cow.
The end of the calendar year is also a great time to wrap up your financial year. Prepare your profit and loss account, and your balance sheet.
A profit and loss is a summary of month-by-month income and expenditure. It is honestly a tall order if you hadn’t been recording transactions as they happened.
A balance sheet is easier to prepare because the figures are as at a particular date, say ‘As at 31st December 2019’. Statements from your financial partners assist a great deal.
Compute from your balance sheet your personal net worth. Your net worth is what you own versus what you owe.
That is, your assets less your liabilities. This simple figure tells you where you stand financially. It is like a weighing scale. Or an exam score.
A more comprehensive way to interpret your net worth is to compare it to last year’s and the year before that.
Comparatives give sufficient information to draw a trajectory of where your finances are heading. They allow you to join the dots.
Be honest when rounding up the figures. Do not overvalue your assets or push some liabilities under the rug. You can lie to anyone but you should not lie to yourself.
Use apps and websites to generate a balance sheet template for this personal evaluation.
List your personal assets: Your cash balances in all bank and mutual fund accounts, car and property values, and the cash value of all your insurance policies.
Also list investments such as bonds and bills, shares, chama and any other financial investments. (If you are a farmer like my Ol’Man, value your biological assets: your crops and cows.)
Then round up your liabilities. Liabilities are usually personal loans – mortgage, car loan, HELB and other student loans, credit card loans, shylock loans and any other loans from your friends and family.
Comparing your net worth to last year’s, here is what to make of it:
The gap has widened in the positive
You own more than you owe. You likely had an increase in income; you are able to invest in more assets. Assets generate income.
So more income ultimately means... more income (I am chuckling at how that sentence has panned out in such a silly yet precise way).
Another factor is time. Time is an investment in its own right. Your income could be constant but time is chipping away at your mountain of debt. Pretty soon it will be a pile of dust you will blow into the wind.
If by next year you are still in the positive, take up more good debt or invest part of your income in more assets. Grow your finances.
You and your finances are not maturing – you are not taking financial risks or exploring life.
Take some financial risks. Live a little. Put your ear on the ground for investment opportunities or set up a financial project.
Maybe a chama, a side hustle? A baby maybe? Something that will roll you out of that warm bed you are sleeping in.
You could also invest in yourself – go back to school, or take a short course. Hell, travel or spoil yourself with an extravagant purchase.
You are in the negative – you owe more than you own
You are accumulating more liabilities than assets. You may have taken on some good debt that needs time to return its investment.
Or bad debt brought on by a personal emergency or poor investment decisions. It could also be a factor of age.
Someone in their late 20s is more likely to be in the red than someone in their late 30s. Proper financial management and time steadily moves you out of that red zone.
Most importantly, it means you need to boost your income. Ask your boss for a pay rise; get a better-paying job or set up a business/project to supplement your income.
Bett Kinyatti is a certified accountant with ACCA and a former financial auditor