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How to improve your family’s financial picture

Well, your “family fiscal year” just ended, and a new one has begun. Are you pleased with your “profit and loss statement”? How about your “balance sheet”? If you don’t know what I’m talking about, read on!

Your personal finances are really no different than those of a business. You have income, you have expenses, and you even have a “net worth”. Net worth means the difference between the value of all of your assets (your savings, investments, equity in your house, the value of your car, and anything else that has value) and your liabilities, meaning debt. These days, many people may not have much or any equity in their house, but if you are making your payments and don’t need to move, then breathe a sigh of relief.

Regardless of whether you own or rent, you still want to take a look at your net worth in terms of all savings vs. all debt other than mortgage debt. Hopefully your net worth is increasing every year. It’s one of the best measures of your baseline financial health in the long run.

In the short run, you want to look at income vs expenses, just like a business does on it’s profit and loss statement. Benjamin Franklin is supposed to have said, “If your outgo exceeds your income, then your upkeep will be your downfall.” If your expenses exceed your income, you can’t pay off debt, you can’t save money, and you can’t get ahead. So it’s vitally important to know what your expenses are, and try to reduce them wherever possible. This means tracking your money and setting a budget (groans, I know, but there is no other way!).

Once expenses are cut as far as possible, the next area to look at is income. Sometimes the best way to pay off debt is to find extra work. It’s hard to do if you have a family, or if your regular work is very demanding. But if you can find a way to earn some extra money, and apply to it to debt, it’s amazing how fast it can go down.

There are lots of great tools to help you track your income and expenses. One of my favorite sites, zenhabits.net , posted an article a while back on 6 Great Free Alternatives to Quicken and MS Money. Some of the tools require you to enter financial information, some don’t. One, Wesabe, is out of business, and another, Mint.com, isn’t mentioned. (For an informative article on the pros and cons of using online banking software from smaller vendors, take a look at this article..)

What’s the bottom line? To get ahead, you have to reduce and eventually eliminate debt. That means developing disciplined spending habits, and being willing to really know where your money is going. It’s like anything else, a habit that takes time to develop, and may be quite uncomfortable at first, especially if it brings up old issues about money. Old baggage about money? That’s another article all in itself.

If you know of great tools, please post a comment, so others can learn of them too!

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