By Miata Edoga
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. In your financial life there exists the same challenge. Sun dials and prayer aren’t the solution. You simply cannot meet your goals or gauge your progress until you have a clearly defined financial starting point to anchor your direction.
There are two layers to creating that clear picture of your starting point. The first is the determination of 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 and cash accounts, jewelry, etc.), and subtract your Liabilities (“what you owe,” such as the car loan or mortgage remainder, students loans, credit card debt, etc.).
The next layer, factoring your Average Monthly Profit & Loss (also referred to as monthly Cashflow, or P&L), will require more time and effort, but is a critical element in understanding your financial baseline. In basic terms, your P&L equals your Income minus Expenses, or the precise amount you earn each month — from acting/creative work, residuals, “job” jobs and/or side businesses — minus what you spend. As an artist, how do you pinpoint your P&L when income arrives from a variety of sources at random intervals and one month may differ wildly from another? The solution is to average our earnings and spending habits over a six month period. This will capture such variations and reflect all those “special, unforeseen” costs, like union dues, headshot reprints, or car maintenance, that don’t surface every month. Your Average P&L, then, most accurately predicts your money lifestyle in all months.
Begin by gathering your receipts and bank, credit card and income statements for the past 6 months. Rather than totaling all of your expenses without discrimination, arrange expenses first by Personal vs. Business and then by unique categories. (Email email@example.com for a sample Chart of Expenses to serve as a model – including over 100 expense 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 your income over a six month period and then divide by 6 to determine your average monthly income. Next, total each individual expense category one month at a time and divide by 6. (If you spent 100, 150, 125, 150, 175 and 125 respectively on Groceries, your average monthly cost for Groceries would be 137.50.) 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.”
Your success depends on the clarity of your P&L and Net Worth numbers. These answers will prove very insightful as a representation of 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 determine how you’ll acquire this income consistently.
The path to prosperity 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.
Miata Edoga is the President and Founder of Abundance Bound, the premiere financial education company for actors, artists and creative entrepreneurs. She created The Artist’s Prosperity SystemTM, which over the years has provided thousands of clients with a specific, step-by-step process to significantly improve their financial situation giving them more time, energy and freedom to focus on their creative careers and artistic pursuits. Miata’s guidance empowers individuals of all backgrounds to establish a more compassionate, conscious (and prosperous) financial life on their own terms. Visit www.AbundanceBound.com for more information. You can also e-mail firstname.lastname@example.org.