Imagine waking, disoriented, in the middle of the desert. You vaguely recall hearing of an oasis out in the wasteland, so you look to the sky, bravely pick a path and start walking. Unfortunately, the story doesn’t end well. Because you weren’t clear where you were when you started, you wander and starve before reaching your magical destination.
The same challenge exists in your financial life. Sun dials and wishes aren’t the solution. To meet your goals or gauge your progress, you must have a clearly defined financial starting point to anchor your direction.
There are two steps to creating a clear picture of your starting point. The first is to determine your Net Worth. To arrive at this figure simply add up the current dollar value of your Assets (“what you own,” such as a car, home, investments, savings accounts, etc.), and subtract your Liabilities (“what you owe,” such as the car loan or mortgage remainder, student loans, credit card debt, etc.)
The next step is to calculate your Average Monthly Profit & Loss (also referred to as monthly Cashflow, or P&L). This requires more time and effort, but is a critical element in understanding your financial baseline. In basic terms, your P&L equals your Income minus your Expenses. In other words, the amount you earn each month—for example, from entertainment work, residuals, “job” jobs and/or side businesses—minus what you spend.
Begin by gathering your receipts and bank and credit card statements for the past six months. Rather than totaling all of your expenses indiscriminately, arrange expenses first by Personal vs. Business and then by unique categories. Avoid the common trap of lumping similar groups together. Your “Food” category, for example, might be separated into Groceries, Dining Out, Starbucks, Baby Food, etc. Simply labeling everything “Food” won’t provide an honest assessment of where your money is truly being spent.
Total each individual expense category one month at a time and divide by six. (If you spent $400, $350, $425, $300, $375 and $450 respectively on Groceries, your average monthly cost for Groceries would be $383.)
Next, total your earnings over at least a six-month period (a year is preferable) and then divide by six (or 12) to determine your average monthly income. Here, it is also helpful to differentiate between different types of income, so you can see the amount that each of your earnings sources is bringing into your household.
Now subtract the total of your average expenses from your average income to figure out your P&L. If this number is positive, you’re earning more than you’re spending; if it’s negative, you’re “in the red.”
For additional guidance on how to work through this process, consider joining us for Budgeting—Nuts & Bolts. Offered monthly, this workshop is designed to help you get specific about the ways in which money moves in and out of your life.
Your success depends on the clarity of your P&L and Net Worth numbers. These answers insight into your financial behaviors. If you discover you’re overspending by hundreds or even thousands of dollars (which is common), celebrate your newfound knowledge. You now have an exact Cashflow Gap: the additional amount you must earn each month to meet your lifestyle choices. Once you know what it actually costs you each month to live, it’s within your power to either adjust your expense numbers and/or determine how you’ll acquire this income consistently.
The path to financial stability includes two points: A (Start) and B (Financial Goal). Armed with your true starting point you can now set concrete goals, determine milestones and map a course for the future. Follow these steps to clarify what your financial picture looks like today, so that you can begin to take the correct steps toward your oasis.
The Entertainment Community Fund offers a complete financial wellness program, free for everyone in performing arts and entertainment. We invite you to learn more and participate in our workshops, designed to support you in the implementation of a personalized financial plan of action. Learn more about our Financial Wellness Program.