The Two Pieces of My Annual Financial Plan

When using a budget in tandem with a personal net worth statement, you can unlock a new level of power in your annual financial plan.

Happy 2021 friends!

I appreciate everyone who has stuck around since the last time Toonie hit your inbox. Three Fridays ago, I was writing an intense exam. Two Fridays ago, I was celebrating Christmas with my family. And one Friday ago, I was contemplating the year that was on New Years Day. (I was also doing some planning — more below.)

I guess you could say we were busy? But not really — nobody is really “busy” these days.

But here we are — back at it and ready for an exciting new year. Each new year is filled with potential, expectation, and hope. For 2020, all three were snuffed out quite early. Let’s hope 2021 makes it a little further into the calendar before any major global meltdown.

This week, I want to discuss two of the core pieces of my financial plan for the year. We’ll get into some details about each piece this week and next week I’m hoping to discuss some tools for helping you build out your own financial plan in the same way.

The Two Core Pieces of a Strong Financial Plan

I generally attempt to avoid accountant-speak, but I’m going to give in this week. The two core pieces of a strong financial plan include a cash flow statement and a balance sheet.

Or, in simpler terms, they include a budget and a personal net worth statement. Neither can live without the other, yet in tandem, the two become much more useful.

The Dreaded Budget

Everyone has heard of the tool behind Door #1. Budgets are the tool we all love to hate — they’re restrictive, they’re regimented, and they can be dreadful to adhere to.

Like terrible cough medicine though, budgets are necessary to gain an understanding of what’s coming in and what’s going out.

In accountant-speak, a “budget” is a “plan”. A budget is developed with current knowledge and current facts and is based on estimates about the future. There are all sorts of budgets: cash budgets, capital asset budgets, purchasing budgets, sales budgets, and more. Using budgets, you can estimate where you’re going to be financially in 6 months, 12 months, or longer.

Budgets are not income statements. By this, I mean that you don’t track your budget as you live your life each day and week. You need to track your results, sure, but you shouldn’t be comparing this to your budget too often.

I’m convinced this is why budgets don’t work too well for many people — they constantly compare their results to their budget and the slow, incremental grind of financial growth makes people impatient when looking at their results.

The less often you compare your results to your budget, the easier a budget is to follow.

The other key to sticking to a budget is knowing your delta — the change from where you’ve started to where you’ve finished.

This is where the personal net worth statement comes in.

The Personal Balance Sheet

A balance sheet, in accountant-speak, is a snapshot of your assets, liabilities, and equities at a particular point in time. A balance sheet may show you your amount of cash and savings, your properties, your personal assets like furniture and vehicles, and the amounts you owe others, like mortgages or credit cards. 

The difference between what you own and what you owe people is your personal net worth.

Easy peasy.

What’s important to understand for any strong financial plan is that you need to know where you’ve started (or, your personal net worth at January 1st of a specific year) and where you’ve finished (your personal net worth at December 31st of that year). 

How you get from January 1st to December 31st is your budget.

Personal net worth statements attempt to measure the value of all your assets and liabilities, including chequing and savings cash accounts and investment accounts, non-monetary assets like your home, your collectibles, your camera equipment, your furniture, and more. If you really want to get technical, you can add prepaid expenses like property taxes (generally paid once per year and utilized throughout the 12-month timeframe) or accrued liabilities (amounts you have utilized but have not yet paid for or have not yet been billed for, like property insurance). 

An extreme level of detail isn’t necessary for a personal net worth statement to be effective. The key is to be consistent in the things you include on the statement and to be consistent on the date you choose to measure on.

I think this personal net worth statement is the key to unlocking a level of freedom most people have never experienced with a budget.

Why?

Because there are many assets that grow without any effort. A home grows a few percentage points each year. Investment accounts change in value each day. Collectibles can increase in value each year. Without lifting a finger, these growing assets provide an “income” that is rarely considered when folks only utilize a budget.

Putting it All Together

So, when creating a financial plan for the year, the goal of the exercise is to measure where you’re at nowand where you want to be at the end of the year

Where you’re at now, that’s your personal net worth statement — what you own and what you owe at this very moment.

Where you want to be at the end of the year, that’s also your personal net worth statement, just at a different date — what you want to own and what you want to owe by the end of the year.

How you get from now to the end of the year is your plan, or your budget. Using the incomes you have at your disposal (like your wages, or interest paid on a savings account, or rent paid from a rental property, or growth in the value of your house), you can plan how much you need to save, how much you need to spend, and how much of a return you need on your investments to achieve your end of year goal.

The best part about using a personal net worth statement in tandem with a budget: You can unlock the “income” of appreciation. To get from Point A to Point B, you don’t need to rely solely on your bi-weekly paycheque. Instead, you can rely on good ol’ appreciation to help you achieve your goals. This can free up additional cash for you to spend on other things and remove some of the restrictive dread of a standard budget.


In the coming weeks, I’ll help you build a budget by providing some insight on reasonable net worth goals to set. I’m also going to help you understand that you make more money than you think you do, and that your budget doesn’t need to be as restrictive as you think it does.

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Until next week, I wish you and yours a healthy mid-January week. What a time to be alive!

JG