TradeSmith CEO Keith Kaplan has shared another piece of timeless wealth advice: the importance of shoring up your core financial life, including your expenses and income. Kaplan asserts that getting your financial house in order is the top priority for anyone looking to grow their wealth long-term.
Kaplan introduces the concept of a “position audit,” a strategy that involves scrutinizing each of your investments to decide if they still deserve a place in your portfolio.
Regularly conducting a position audit can dramatically improve your results by forcing you to be objective and address minor mistakes in your portfolio before they become serious issues.
Kaplan suggests a similar strategy for your overall financial situation, a periodic “personal financial statement audit.”
The first step is to review or create your cash flow statement, comparing your monthly net income with your monthly expenses. The goal is to ensure that you have a healthy, positive cash flow that grows over time, meaning your net income exceeds your expenses.
If your cash flow isn’t as positive as you’d like, Kaplan suggests three primary ways to correct this: earn more money, spend less of the money you already earn, or a combination of the two. He recommends starting by reviewing your discretionary expenses, then moving on to your fixed or non-discretionary spending. If reducing expenses isn’t enough, you may need to generate more income.
Once your cash flow statement is in order, Kaplan advises moving on to reviewing or creating your personal balance sheet, which compares your assets (what you own) versus your liabilities (what you owe). The goal is to have a healthy, positive net worth that grows over time.
To improve your net worth, Kaplan suggests three primary ways: grow your assets, reduce your liabilities, or a combination of both. He emphasizes that the best place to start is almost always to pay down your debts, as investing to increase your assets always carries some amount of risk, whereas paying down non-productive debt provides a guaranteed return.
Kaplan acknowledges that calculating your personal cash flow statement and balance sheet requires some time and effort upfront. However, he asserts that reviewing these documents periodically is a quick and easy way to help ensure you stay on track to meet your financial goals.
He encourages readers to try this strategy, in addition to the position audit, and share their experiences.
Let us know what you think, please share your thoughts in the comments below.
