The Homeostasis of Personal Finance
When you think of homeostasis, it is likely that personal finance doesn’t come to mind. So why am I using a term from ninth-grade biology class? To answer that question, let’s review what we learned about the body back then. In 1865, Claude Bernard defined homeostasis as “maintaining a constant internal environment.” In other words, our bodies remain in a constant and stable internal state despite changes in the external environment. The body regulates:
- Body temperature
- Blood pressure
- Water levels
- Sugar levels
You’re probably thinking, “Why are we comparing homeostasis and personal finance?” Well, just like your body is in best condition when it maintains a stable and constant state, so are your personal finances.
Homeostasis of Personal Finance
When you think of homeostasis of personal finance, the following should come to mind:
- Positive cash flow each month
- Positive cash flow toward building net worth
- Proper levels of protection – insurance coverage and savings safety net
- Proper debt usage and levels
- Long-term goals
Personal Finance: Positive Cash Flow
Positive cash flow is like keeping the proper oil levels in your car. Or your body keeping a normal blood pressure level. Positive cash flow requires you to make sure your monthly income is more than your expenses. This will help you maintain positive cash flow during good and bad times. As you can see, it is important to focus on increasing personal cash flow.
How to Calculate Positive Cash Flow
Calculating positive cash flow is simple. Use the formula below to compute your cash flow in a matter of minutes:
Income – Expenses = (Positive or Negative) Cash Flow
If you’re not a math person, you can use our FMF365 Cash Flow Worksheet to determine positive cash flow.
Personal Net Worth
Personal net worth is the most important measure of your financial well-being. Why? It is a snapshot of your financial status at a given time. Personal net worth is the dollar value of your assets minus the dollar value of your liabilities.
You must always work on increasing your net worth. You can increase your personal net worth by increasing assets and decreasing liabilities. For example:
- Increase Personal Assets
- Positive asset growth
- Contributions to investments
- Decrease Personal Liabilities
- Principal payments
- Extra principal payments
- Pay off automobiles
- Pay off credit cards and lines of credit
Net worth is the number-one way to measure your financial condition. Use our FMF365 Net Worth Tracker to start tracking your net worth right now.
Personal Finance Protection
Insurance Coverage and Savings Safety Net
When we talk about proper insurance coverage, we don’t mean sign up for a pointless insurance contract. Instead, we’re referring to protecting your family in case you get hit by the proverbial bus. Personal finance protection ensures your family will be secure without you. Term life insurance is the best way to protect your personal finances. Check out our FMF365 Term Insurance Quote.
Personal Finance: Savings Safety Net
A savings safety net is another protective measure. It will help you in case there are any short-term disruptions to your cash flow or any unexpected expenses – for example, car repairs, health issues, or loss of employment.
Proper Debt Usage and Levels
Debt can be a double-edged sword. But it is also considered capital or financial leverage. Debt helps us buy and pay for items that are above our means. How else could a young person afford to buy a $200,000 home? While debt can help us build wealth, it is dangerous if used for the wrong reasons – for example, racking up credit card debt by overspending on clothing or food.
FMF365 created lots of tools you can use to track your debt levels and usage. Check them out now!
Personal Finance: Set Long-Term Goals
Setting long-term financial goals will help you achieve stable and constant finances. Like anything in life, financial goals will change over time. Life is dynamic, not static. So be sure to keep tabs on your progress and reassess your long-term financial goals every so often.
Wealth Management for the 21st Century
It is easy to see why achieving homeostasis of personal finance is important. Doing so will rid you of financial worry and anxiety. So get a handle on your personal finances to build a foundation.
Check out all the knowledge, tools, and resources at FMF365. The goal of our financial firm is to level up the American people. So get started today!