Tuesday, February 24, 1998
Foolish Domestic Financial
Management
by Wendy B G
(Wendy B G)
My sister (a homemaker who works part-time in a day care center), her husband (a recently-graduated physical therapist), and their three kids bought their first suburban home last fall. After years in apartments, this split-level abode gave my sister such an incredible feeling of liberation that she immediately bought a swimming pool, dining room set, multi-sectional reclining sofa, and master bedroom set. I hesitantly asked my brother-in-law if they had ever written a formal budget. His answer was that he was hesitant to do this, since knowing where the money went might cause him and my sister anxiety.
<Gasp!>
One tremendous benefit of The Motley Fool is that it teaches us to evaluate companies by studying the soundness of their income statements and balance sheets. The essence of Foolishness is to invest in well-managed companies with positive cash flows, controlled expenses, manageable debt, farsighted investments in new product and/or market development, and excellent long-term prospects. The perspective of The Motley Fools is long-term growth, not speculation.
We can be Foolish at home, too. We can plan and act to achieve long-term goals, such as a home, education fund, or retirement. To achieve these goals, we can evaluate our domestic finances, just as we would a business.
The home budget is the equivalent of a corporate income statement. Just like a corporation, a family will only succeed financially if cash flow is positive, and the family retains earnings to invest for the long term (including investments in the health and education of the family, as well as financial investments).
In addition, each family should have a balance sheet, showing assets and liabilities. The objective of the balance sheet, over a lifetime, is to move from the negative (where the family owes money) to an increasingly positive balance. When I formally calculate my balance sheet at the beginning of every year, any owed money is shown as a liability. I only count cash, securities, and the principal in my home as assets. "Stuff" doesn’t count, since I couldn’t sell it for more than a fraction of what I paid for it, if I could sell it at all.
How Foolish is your home financial management? If your home was a business, would you invest in yourself? Do you have the same long-term growth outlook that you value when you invest in a stock?
Have
a similar tale?
Talk about it in the Fribble Message Folder!
[Did you know that you can pen a Fribble, yourself? We welcome submissions from readers. Just click here and read "What's a Fribble?".]