Horse Economics. Catherine E O'Brien

liabilities + equity^♦. (“Equity” is often referred to as “net worth.”) The left side of the balance sheet represents your assets and the right side your liabilities and net worth. The total assets should equal liabilities plus net worth.

      Determining what your personal balance sheet looks like can help you put your goals into perspective. If you have a negative net worth, start taking steps to improve your balance sheet. Common solutions include reducing debt load or increasing assets.

      You can determine where your money comes from, and where it goes over a period of time by using a budget, an important tool for controlling expenses and realizing what areas of spending need to be curbed or increased, depending on your goals.

      Your ability to manage cash (called cash flow) goes hand-in-hand with a good budget. Liquidity (the conversion of assets to cash through sale or exchange—a liquid asset is one that is easily converted) is extremely important to solvency; you need to gauge and time your cash flow so your debt obligations are met. You can have plenty of assets on your balance sheet, but if they are not liquid, they are not available at that time and you can end up falling behind on your payments, in foreclosure, or filing bankruptcy.

FINANCIAL RISK MANAGEMENT TOOLS

      Brett Alexander Zwerdling, a partner in the firm of Zwerdling and Oppleman in Richmond, Virginia, specializes in bankruptcy. When asked how people end up in bankruptcy, he replies, “It is not so much because of what people do or don’t do, it is a matter of circumstance.”

      You can’t always control the circumstances that can leave you vulnerable: these may include becoming unemployed, suffering a disability, or losing a spouse and corresponding income. Other factors, such as inflation and economic problems—both within the United States and globally—can have a profound impact on your financial situation. There are tools you can use to guard against financial upset, however. The most common are:

      Safety nets

      Budgeting and cash flow management

      Debt management

      Credit management

      Organizing your information

      Insurance

      In the pages that follow, I will illustrate how you can learn to use all of these.

Safety Nets

      Often, a corporation obtains lines of credit to use in the event of a cash flow shortage and only borrows under them if absolutely necessary. You can have similar “safety nets” in place to help cover your household finances: for example, cash to cover three months worth (or more) of your average monthly expenses in interest-bearing savings accounts; certificates of deposit; or other easily liquefiable assets. If having large sums in savings is not feasible, maintain a credit card with a zero balance to use in the event of an emergency. A home equity line of credit (see p. 34) can be used for the same purpose, but again, it is very important not to utilize the credit line until the need arises.

Budgeting and Cash Flow Management

       Develop a Budget

      Creating an annual realistic budget is hard, especially if you have horses. A budget is easily done on paper or with spreadsheet software (though I find that software budget calculators, or those found online, don’t offer enough categories, nor include horse-related items). First, use the following five steps to find your average total monthly expenditures—the figure upon which you will base your budget (fig. 2.2).

      1 Sit down with your checkbook and credit card statements.

      2 List your expenditures from the previous twelve months by category. Some categories that may apply to you:Automobile maintenance (service, new tires, oil changes)Automobile insuranceAutomobile loansFederal, state, and local taxes not withheldMortgage paymentsHome equity loansGroceries/household itemsGasElectricityFuel/wood for heatWater and utilitiesTelephoneCell phoneClothing/dry cleaningPersonal care (haircuts, etc.)Recreation and entertainmentVacationSpending money and lunchesSchool and sports activities for childrenFarrierVeterinarian expenses for all animalsMedications for domestic animals (flea and tick control, heartworm preventive, etc.)Wormer, fly spray, ointmentsBoarding feesHayGrain and suppliesBeddingHorse shows and related attireRiding instructionTraining clinicsPasture management (lime, fertilizer, seed)Credit card paymentsUninsured medical and dental expenses, co-pays and prescriptionsHealth insuranceLife insuranceDisability insuranceHorse owner’s liability insuranceRetirement fundsInvestment fundsChristmas gifts, birthday gifts

      3 Then, go through your checkbook and credit card statements and list the relevant monthly expenditures made over the last year in each category. (Items that do not need to be paid for within the next year should not be included. However, if there are purchases that you know you will be making later in the year, such as new tires, include the appropriate amount in your yearly automobile maintenance figure, or list it as a separate item.) When you are done, each category should have 12 numbers, an amount for each month.

      4 In the first category, add the 12 numbers, and then divide by 12. The resulting figure is your average monthly expenditure for that category. Repeat this step for the remaining categories.

      5 Finally, add all the average monthly expenditures together. The resulting figure is your total average monthly expenditure.

       TOTAL AVERAGE MONTHLY EXPENDITURE WORKSHEET FOR TWO CATEGORIES

Grain & Supplies
Jan	$155
Feb	140
Mar	120
Apr	105
May	95
June	90
July	90
Aug	110
Sept	130
Oct	135
Nov	135
Dec	140
Total	$1,445
Avg. monthly expenditure:	$120

Groceries & Household Items
Jan	$400
Feb	600
Mar	350
Apr	375
May	450
June	400
July	500
Aug	600
Sept	500
Oct	550
Nov	450
Dec	400
Total	$5,575
Avg. monthly expenditure:	$465

       Total avg. monthly expenditure (for these two categories): $120 + $465 = $585

      2.2

      Next, determine your average monthly income, which may include take-home pay, dividends, and interest. Don’t include bonuses or overtime in this figure unless they are guaranteed.

      The household depicted here owns a farm and two horses. This month, it is about $350 over budget. It needs to increase the amount budgeted toward utilities, and decrease household and grocery expenditures.

      Compare the expenditure and monthly income figures. If expenditures are greater than income, either reduce expenses or increase income. If income is greater than expenditures, then increase savings, retirement plans, and investments.

      One way to track expenses in a specific category is to print or copy twelve monthly