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Net worth and an income statement are two of the big three or the three most important areas of business accounting. The third is cash flows.
Cash flow is just the actual money you can track. It overlaps somewhat with your income statement and has elements of a budget. However, it captures important information directly from your income statement and may provide you with a much better view of your family's financial health then your net worth number.
What cash flow represents is money in and out of your bank account that could at least theoretically be spent on something. In comparison, a cash flow is not physical dollars. As an example of this suppose your house increases in value so your balance sheet would show that as a larger asset but, of course, no cash would actually change hands unless you sell the house. The net you/net of this is that your net worth number could shift but not your statement of cash flows. Here's another example of how this works. Let's say that you were to buy a car but instead of financing the whole thing you put $5000 down and then financed $12,000. Your statement of cash flows would capture both the outflow or amount of money that went for the down payment and any payments and your financing. However, your net worth would not change as the change in assets and liabilities would offset each other.
Get some tools
If all of this sounds a bit complicated it can be simplified. We live in the age of apps and there are many options available for tracking your spending and analyzing your personal finances – on the web or via your smartphone. Two of the most popular of these are the free Mint.com and its paid cousin at Quicken.com. There are also some good alternatives such as Blueleaf.com that you could use if you have a relationship with a financial advisor that participates in the program.
However, all that most households really need is just a spreadsheet like Excel or the free Google Sheets. This can be particularly true if your bank and credit card company offer the ability to export or download your activity reports in a spreadsheet format. You as the household CFO could spend a little time customizing that data and then do some pretty serious organization and tracking of your family's income versus expenses, network and cash flow accounting. And once you get all this information organized you’ll have your finances under control, you'll know exactly how you stand and you won't have to worry about ever becoming an Enron.
If you’d like to know how to set up a family budget as a precursor to determining your net worth, etc., here’s a short video that will help.