In the previous column I introduced the importance of budgets and balance sheets (two primary financial statements or simply “financials”) to maintain balance among competing financial interests. This subject is so important to proper stewardship of God’s wealth I want to dig a little deeper this time.
Recall that financial mistakes are made by thinking, “I can afford the payment; it must be okay.” For those who have shopped for a home, you may have heard the realtor say, “Oh, you can afford a much larger home.” So the rule of thumb when it comes to budgets: just because you can, doesn’t mean you should. Having stated that, I must also caution to never forget our first principle or best practice: maintain balance in all decisions and never place yourself in a position of looking back someday with regret.
How can we use budgets and balance sheets as tools for wise financial decisions? First, think of them as a sort of financial scorecard to measure your progress. Most financial planners recommend at least annually reviewing your budget and updating your balance sheet to see if your financial situation is moving forward or falling backward. In other words, is your net income more or less than it was last year at this time (income – expenses = net income)? Is your net worth more or less than it was last year at this time (assets – debts/liabilities = net worth)? If they are both positive or have increased, you are on the right track to building wealth and achieving financial freedom. If they are negative or have decreased, this is a sign something is not right and if unattended, will create future problems. Call it a financial blood pressure test.
The appropriate management of these two financial statements is also the means toward the next concept: financial freedom. This term has been used in different ways and can mean different things to different people, but what I mean is no longer needing to rely on others (parents, friends, employers, government, etc.) to meet your financial needs. In other words, by keeping your expenses at a minimum, paying off existing debt and increasing your financial assets (income-producing balance sheet items), in time your income- producing assets will be enough to cover your monthly expenses. At that point, you have achieved financial freedom. You can do what you want, including no longer having to work if you choose, and your lifestyle can be maintained.
Obviously, managing your financials in this way will come easier to some. A lot of it has to do with your financial philosophy or worldview and self-discipline. If you are wired to save, rather than spend, you will build wealth and achieve financial freedom sooner than others. Regardless of how long this may take, and it can take a lifetime for some, holding financial freedom as a goal (as I have defined it here), serves as another best practice for stewards of God’s wealth.
Regardless of the philosophy you were raised with, take heart: it can change over time to meet changing circumstances.