Strategies to increase your net worth

You can increase your net worth by increasing assets, decreasing liabilities, or doing both. One way to increase assets and net worth is to cut back on spending. Perhaps consider forgoing the cup of coffee or soda you buy each day as you head to class, as any decrease in spending leaves money in the bank as an asset. Reducing expenses on high-cost items such as housing and transportation will have an even greater effect on assets. A second way to increase net worth is to increase income to build assets or pay down debts. For example, as you earn more money, perhaps consider saving most of the difference between your new income and your old income rather than using the added money for more spending. Paying off debt, especially high-interest credit card balances, increases net worth.

The Cash-Flow Statement Tracks Where Your Money Came From and Went
The cash-flow (or income and expense) statement summarizes the total amounts that have been received and spent over a period of time, usually one month or one year. It shows whether you were able to live within your income during that time period. It reflects the flow of funds in and out. A cash-flow statement includes three sections: income (total income received); expenses (total expenditures made); and surplus (or net gain or net income), whentotal income exceeds total expenses, or deficit (or net loss), when expenses exceed

income. Such statements are usually prepared on a cash basis, meaning the only transactionsrecorded are those involving actual money received or money that was spent.

Income/Cash Coming In You may think of income as simply what is earned from salaries or wages, but there are other types of income that you should include on a cash-flow statement, such as the following:
• Bonuses and commissions
• Child support and alimony
• Public assistance
• Social Security benefits
• Pension and profit-sharing income
• Scholarships and grants
• Interest and dividends received (from savings accounts, investments, bonds, orloans to others)
• Income from the sale of assets
• Other income (gifts, tax refunds, rent, royalties, capital gains)

Expenses/Cash Going Out

All expenditures made during the period covered by the cash-flow statement should be included in the expenses section. The number and type of expenses shown will vary for each individual and family. Many people categorize expenses according to whether they are fixed or variable.

Fixed expenses are usually paid in the same amount during each time period; they are often contractual. Examples of such expenses include rent payments and automobile installment loans. It is usually takes quite an effort to reduce a fixed expense

Variable expenses are expenditures over which an individual has considerable control. Food, entertainment, and clothing are variable expenses, for example. Some categories, such as savings, can be listed twice, as both fixed and variable expenses. The following are examples of fixed and variable expenses that you might include in a cash-flow statement:

Fixed Expenses
• Savings and investments
• Retirement contributions (employer’s plan, IRA)

• Housing (rent, mortgage, loan payment)
• Automobile (installment payment, lease)
• Insurance (life, health, liability, disability, renter’s, homeowner’s, automobile)
• Installment loan payments (appliances, furniture)
• Taxes (federal income, state income, local income, real estate, Social Security, personal property)

Variable Expenses
• Meals (at home and away)
• Utilities (electricity, water, gas, telephone)
• Transportation (gasoline and maintenance, licenses, registration, public transportation, tolls)
• Medical expenses
• Child care (nursery, baby-sitting)
• Clothing and accessories (jewelry, shoes, handbags, briefcases)
• Snacks (candy, soft drinks, other beverages)
• Education (tuition, fees, books, supplies)
• Household furnishings (furniture, appliances, curtains)
• Cable television (beyond basic services)
• Personal care (beauty shop, barbershop, cosmetics, dry cleaner)
• Entertainment and recreation (hobbies, socializing, health club, tapes/CDs, videotape/ DVD

rentals, movies)
• Charitable contributions (gifts, church, school, charity)
• Magazine subscriptions
• Vacations and long weekends
• Credit card payments
• Savings and investments
• Miscellaneous (postage, books, magazines, newspapers, personal allowances,
domestic help, membership fees)

There is no rigid list of categories to be used in the expenses section, but you do need to classify all of your expenditures in some way. Rather than just use fixed and variable expenses categories, you might also separate expenditures into savings/investments, debts, insurance, taxes, and household expenses. The more specific your categories, the deeper your understanding of your outlays.

Cash Surplus (or Cash Deficit)

The surplus (deficit) section shows the amount of cash remaining after you have itemized income and subtracted expenditures from income, as illustrated by the following calculations using Equation (3.2), the surplus/deficit formula. (A business would call this amount its net profit or net loss.)

successfully and do not have to use savings or borrow money to make financial ends meet. When the calculation shows a surplus, that amount is then available (in your checking and savings accounts) to spend, save, invest, or donate. A surplus is not really cash lying around on the kitchen table; it is the cash value reflected in the accounts on your balance sheet. Figure 3.3 shows the typical personal financial situation over the life cycle in present value dollars, from the wealth accumulation years through retirement.

Sample Cash-Flow Statements Table 3.4 and Table 3.5 show the cash-flow statements for a college student and a couple with two children, respectively. Table 3.5 vividly highlights the additional income needed to rear children and shows the increased variety of expenditures that characterize a family’s