Family (MP) Although most wealthy families have accountants that doesn’t mean they don’t learned accounting for themselves. While it’s good to have others count your money, you should know how to do for yourselves. Your family like most families is in business whether you realize it or not. Or least you should be… Why? Like all businesses your family has assets, liabilities, income and expenses. And just like a business – your family produces or should produce a monthly financial statement.
The details of a family’s poverty or wealth lies inside the accounting statement, such as savings, investments plus how much debt you have outstanding. Your family’s financial statements are words that tell the story of where you guys are at. Whether your growing rich or growing poor you guys should be “Talking About Money.” By taking a hard look at the numbers and discovering what they mean, you’ll be better positioned to identify where changes can be made to get you back on the road to wealth.
BASICS OF FAMILY ACCOUNTING
ASSETS AND LIABILITIES
In accounting an asset is basically a single item of ownership having exchange value. Really it’s any item of ownership that’s convertible into cash; total resources of a person or business, as cash, notes and accounts receivables, securities, inventories, goodwill, fixtures, machinery, or real estate (opposed to liabilities ). For our purposes here it’s what puts money or income inside of your pocket. Liabilities are everything you borrowed from creditors: mortgage, auto loans, credit card debt outstanding, etc.
YOUR FAMILY’S ASSET(s)
⇒Debt (iou’s) owed to you
⇒Net value of businesses you own
⇒Net value of income-producing real estate you own
YOUR FAMILY’S LIABILITIES
All liabilities take money away from your pocket or bank accounts. Because it is debt owed. All debt is a liability which is money owed to someone else. But about debt there is good debt and bad debt: Bad debt is money borrowed to buy clothes, jewelry, and cars. You don’t quite make money with bad debt. Good debt permits you to buy assets such as real estate and get a monetary return. Your tenant’s monthly payments will pay off the loan and deliver you additional cash. The wealthy always carry good debt and if you’re ever going to be rich — so should you.
Now, the sum you pay every month on liabilities is considered an expense related to the liability. For our particular accounting purposes here when referring to the term expense, I’m talking total payments, including principal payments and related interest:
⇒Credit card balances
INCOME & EXPENSES
Again like with any business, household accounting would be incomplete absent a complete picture of your income and expenses. It’s called cash flow management and people who can’t manage their cash flow always work for others. Permit me to put it this way: People who can control their cash flow work for themselves and have others work for them. Why is this lesson so important? Because if you can’t manage your own family’s household accounting, then how in the world can you hope to ever own a business that employs others.
Income is describes as money that you bring into your household. The three main types of income are earned, passive and portfolio.
1. Earned income, which is taxed at a higher rate than other forms of income, is salary or wage your employer pays you. Other earned income includes tips and self-employment money. This sort of income rarely leads to wealth unless your earning top 1% wages, you know executive salaries.
2. Passive income is money generated by a business or real estate property. Passive income simply means you’re not actively engage everyday earning the money. You’ve invested money in business or property or online and it’s working itself to bring you monthly income. Let me stop and endorse Pat Flynn’s Smart Passive Income blog. It’s a great place to learn about online income (Not an affiliate link).
3. Portfolio income is sought like passive income except it comes from income such as stocks, dividends, bonds, mutual funds, and royalties from patents and license agreements. Passive income simply means you sit back and let your assets work for you. Until you get this down wealth will be a never realized dream. No serious MoneyPacers is having any of this so create passive wealth now.
Your income sources should include:
⇒Wages, tips or salary (for the moment)
⇒Interest on investments
⇒Rent from real estate
⇒Distributions from businesses
⇒Capital gains on investments
YOUR FAMILY’S EXPENSES
Within the accounting process expenses are characterized as money leaving your bank account. Because you live in a household our purpose must show a per person breakdown of general bills. It includes the amount paid for housing, food consumed within the home, utilities paid and other expenses. The sum of all the expenses is then divided by the number of family members residing in the house in order to find each member’s part of the total expense. These include:
⇒Home mortgage payments
⇒Car loan payments
⇒Credit card payments
⇒All other expenses the family incurs
We’re almost done but before you add everything up you first need a place to list them. Here is where it all goes down:
BALANCE SHEETS AND INCOME STATEMENTS
Balance sheets and income statements are accounting reports on the condition of your family’s financial makeup and profitability. To understand this financial report, it’s as simple as understanding how much money you have and how much money you owe to creditors. The difference will decide your net worth. Here’s the formula: Assets – liabilities = net worth. Simply, your net worth is how much money you have remaining after you pay off all the creditors (bills and loans).
YOUR BALANCE SHEET
The balance sheet is snapshot of the balance of the value between your assets and the value of your liabilities. Simply put one half of the balance sheet list your assets while the other lists your liabilities, the difference is your net worth.
YOUR FAMILY’S INCOME STATEMENT
The simpler of the two is your family’s financial report which is the Income Statement, or Profit and Loss Report. The income statement lists only the income and expense accounts, and their balances. The income statement then calculates the difference to arrive at Net Income Before Taxes. In other words one section of the statement lists all income – either passive, earned or portfolio –while the other lists all expenses. Get free income and expense templates and your accounting is done.