Balance sheet? Profit and loss account? Isn't that for businessmen and corporates? Well, every individual can be seen as a small business entity with incomes and expenses, assets and liabilities.
Each household runs like a small business enterprise, so it is essential that individuals need to draw up their own financial statements or at least keep track of their assets, liabilities, income streams and expenses.
According to Atul Kumar, director of Practical Financial Services Pvt Ltd, who advises individuals on their personal investment strategies, it is necessary for individuals and households to "make a quarterly review of their finances," which could take the form of a rudimentary balance sheet and profit and loss account.
"A quarterly review is sufficient if you do not anticipate any major changes in your financials," said Kumar, adding that an individual who is much more dynamic in terms of his or her money management could probably undertake a month-to-month review.
First of all, the balance sheet. As in the case of a business enterprise, this would be a statement of the individuals assets and liabilities as at a certain point of time.
So if the review has been taken on a quarterly basis the balance sheet would be as at the end of three months.
The assets side would obviously contain the cash balance left over with the individual - the disposable income. This would be done after taking into account all the expenses which have been incurred during the course of the three-month period.
Any real estate holdings such as ownership of a house would also go into the assets side including rentals. The actual cost of the house can be taken. Investments would also be part of the assets side of the balance sheet.
"Allocation of assets can be between various instruments depending on the risk profile," said Kumar. So there are mutual funds, equities, fixed deposits, debt investments among others.
Allocation of assets would depend upon the risk profile of the individual concerned, his or her liabilities, the age group he or she belongs to, the interest rates prevailing and so on.
The liabilities side present an interesting picture - outstanding loans (including housing loans) will be part of this.
In fact for most households housing loans usually form a large chunk of their liabilities with personal and other loans contributing a little bit.
Insurance premiums will also come under the liabilities side of the balance sheet as will all expenses of a personal nature.
Since the assets must equal liabilities anything other than personal expenditure will go into the capital account of the individual or household.
Atul Kumar said, "this is a very tricky part, since the individual has to decided what has to be capitalised and what cannot."
Obviously, spending for a movie or dinner cannot be capitalised but spending on anything else which increases or has the potential to increase your wealth can be capitalised.
The review will also typically have a profit and loss account which can give the individual a good idea of the inflows and outflows during the period concerned as well as what is actually remaining at the end.
Income will include income from all sources including salaries, dividends, interests, rentals which are the main categories.
Expenses will be, of course everything such as that spent on living, food, travel, education, mandatory expenses such as water, electricity, telephone and so on.
Anything remaining at the end of all this will be the net disposable income. This is the disposable income out of which the individual has to allocate funds for investments and other purposes.
According to Kumar a structured financial planning is essential since it gives the individual a good idea of his or her financial health and also provides a long term perspective on how to maximise returns from the current income flow.