Do I Have Enough Money to Seize Opportunities?

Understanding the basics of budgeting and balance sheets can help you plan for big purchases…and be prepared for the unexpected.

Imagine this: a once-in-a-lifetime opportunity presents itself to you. Perhaps it’s a new home or a dream vacation or an enticing business venture. You want to take advantage of this opportunity because you realize it might not be available again. But then reality sets in, and you ask yourself, “Do I have enough money?” Without knowing for sure, regrettably, you may have to wave goodbye to that once-in-a-lifetime opportunity.

To help answer this important question, we believe it’s critical to be familiar with the basics of budgeting and balance sheets. While you may have enough money for your day-to-day expenses, it’s the outliers—positive or negative—that often lead to the need to look deeper into your finances.

Budgeting basics

First, determine how much income you typically earn versus how much you regularly pay out in expenses. By tracking your total income and expenses, you can create a simple budget to quickly determine if you have money to spend or save or if you are living beyond your means and unduly accumulating debt. This budgeting can easily be done in programs like Excel or Google Sheets or by working with your Wealth Advisor. Budgeting helps you organize your finances and helps you be prepared for any financial emergencies.

Spotlight on spending

Having a budget can also help you determine if you incur any unnecessary expenses. It may also help you control your spending so you can allocate your money to the things that matter most to you. For many of us, we may want to buy that $5 latte every day as we head to work, but by having a budget, we often find that if we skip this expense, there will be $100 more at the end of each month for that special item or experience for which we’ve been saving.

Saving for the unexpected

Emergencies happen. We might not know what they’ll be and when they will arise, but they’ll certainly happen. Your furnace breaks down during a cold snap; your car needs repairs; you cannot work because of an illness or injury. Everyone has had unexpected events and expenses that require readily available funds, and having a budget in place helps you know how much money is available for these unforeseen expenses. You can plan for unexpected costs by saving money in an emergency fund. For most people, an emergency fund should contain three to six months of expenses and should be liquid and easily accessible (such as in a bank account).

We’ve found that a  great way to start building your emergency fund is to automate the savings process, similar to the way many people invest systematically at predetermined intervals. By automating a transfer to your emergency fund account, at each pay period, for example, you are treating your emergency fund as just another bill to pay. Automation also reduces the possibility that the funds are used for other (potentially unnecessary) expenses, so, for many people it makes saving easier.

Extra credit: Creating a balance sheet

While implementing a budget is the first step in knowing if you have enough money, the second step is having a household balance sheet. A balance sheet provides an overview of what you own and what you owe at a specific point in time. Setting up a balance sheet can be done through software applications or by working with your Corient Private Wealth Advisor.

Here are three components of a balance sheet that we believe should be considered:

1. Assets

Assets are what you own. They include cash, investments and substantial possessions, such as your house, cottage or vehicle. These items are further broken down into categories based on how quickly they can be turned into cash that may be used to pay debts. For example, cash is a liquid asset that can easily be used to pay a debt, but a house is an illiquid asset that would take some time to convert to cash. If you need the funds quickly from the sale of your house, you may have to sell at a price lower than what it’s worth in order to get the funds in a timely manner. When creating your balance sheet, assets should be entered at their current market values. If current market values cannot be found, they should be included using a proxy of a similar item that was sold recently, which you can often find by performing a simple internet search.

2. Liabilities

Liabilities represent the money you owe. These include outstanding bills, loans or credit card balances. Liabilities can also be assigned to categories based on the length of time until the debt is due. Current liabilities are short-term debts that need to be paid within the next year, while long-term liabilities are those debts, such as a mortgage, that have longer repayment periods.

3. Net worth

Net worth is the difference between assets and liabilities. If you have more assets than liabilities, you have a positive net worth. More liabilities than assets, however, means a negative net worth—you owe more than you own. A negative net worth is not an ideal situation when striving to build wealth. But you can improve your net worth by increasing your assets, reducing your liabilities or some combination of the two.

Informed spending

By using a balance sheet in conjunction with a reasonable budget, you can focus on generating extra cash each month to either reduce your debt or increase your assets. Once you’re on a clearer path, you’ll be able to make a sound decision on whether you can afford to pursue that once-in-a-lifetime opportunity. We believe knowing how much money you can spend, along with what assets and liabilities you have, is an important first step toward understanding your financial situation and meeting your financial goals.