How to determine your financial position without accounting knowledge

One crucial factor differentiating the rich from the poor is that the rich are always aware of their financial position.

They are aware of how much they earn, how much they spend, save or invest. They are aware of what they own and how much they owe at a given point. 

The rich are also aware of how much they pay as interest if they do so? 

Awareness is the key; it is the first step towards change and growth. 

So how do you become aware of your financial position?

Just like a GPS shows where precisely on the map you are, likewise, the following two statements can help you understand where you stand in regards to your money;

The two statements are the income and expense statement and the net-worth statement.

These are the two most simple financial statements that do not need any accounting knowledge or fancy tools.

All you need is 30 minutes, a pen, paper and calculator or an excel sheet. You can start by listing your income, expenses on one sheet and the assets and liabilities on the other.

Income and Expense Statement 

The income and expense statement, also know as cashflow statement is usually drawn on a monthly basis, as most expats receive a monthly income. Even if you are a professional, freelancer or business owner, I recommend that you do the same.

On one side, list your income as shown here, and on the other side, list all your expenses. Convert all the yearly, half-yearly and quarterly income and expenses to monthly to keep the figures consistent.

Involve your spouse or partner if you have one, but don't judge or argue over money at this stage. Now it is time to record only; the analysis can come later. 

The difference between your income, mandatory expenses and payments is your discretionary income. It is the money you have leftover after paying for necessities like food, shelter, schooling, transportation, utilities, loan payments etc.,

Discretionary income can go a long way toward improving your financial situation, so it is crucial to use it wisely to enhance your financial wellbeing. 

For Expats, discretionary a higher income is essential, as this is the real income of an expat; the rest is only the living cost. As expats, we live and work in the UAE to maximize their discretionary income. 

Unless you have an income and expense statement, it isn't easy to measure and manage your discretionary income. 

Net-worth Statement 

A net worth statement shows how much you owe and own at any given point. It is also known as a personal balance sheet. 

Like the income and expense statement, you can build one by listing your assets and liabilities under two separate heads, as shown here. 

The assets are listed on the left-hand side and the liabilities on the right. You can further classify the assets and liabilities as shown below to understand your financial position better.

Assets

Fixed Assets like Property & Land

Retirement Assets - Pension plans, Gratuity, Endowment or ULIP plans maturing after ten years

Short to Medium term Investments - SIP, mutual funds, Stocks and Investment plans maturing within ten years 

Liquid Assets & Cash - Current account, savings account, short term bonds/bond funds, Fixed Deportis and gold deposits

Liabilities

Long term liabilities - Mortgage and Education loans

Short term liabilities - Car loan, personal loans, credit card outstanding and personal borrowings

The difference between the assets and liabilities is called Networth.  

When you calculate your net worth for the first time, you might be in for a surprise, mainly if you have only relied on your bank account to determine your wealth. Finding out your actual financial position can be a surprise - pleasant or unpleasant. 

The very purpose of knowing your net worth is being aware of your financial position and tracking it regularly to make sure that it is improving continuously. 

You can also download the cash flow and net worth statement template to determine, track and improve your financial position.