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You cannot comprehend your personal finances without understanding the relationship between your budget and your balance sheet. First you need to know what they are and then you need to know how they interact to help you create personal financial security. A balance sheet can help you balance your budget. If mismanaged, it can ruin your capacity to manage your budget.

Both of these financial tools need to be managed within the environment of business and economic cycles. Macroeconomics is about the performance of economies of countries, continents or the global economy. Just like you the economy has its ups and downs. Some cycles are predictable and some events such as our recent melt down are the result of human misbehavior. Your personal budget and balance sheet need to be managed to take advantage of the upswings and protect yourself in the downswings of the overall economy.

Scenario 1

One thing that should give any individual managing their personal finances worry is when the economy goes too well for too long. It becomes a sure bet that a correction will happen. And it just did. So what had to correct?

Assets on the positive side of people's balance sheet kept gaining value. Their home values increased and their investments in stocks kept going up. However, people did not say that is fine and pay off their homes to build equity along with the increase in value. They borrowed against their homes to buy consumer goods. They rang up credit card debt figuring they could refinance the house to pay it off.

But the business cycle had a big downturn. People had to pay off the mortgage and all of the credit card bills because they could not refinance. They hit the financial wall. To service their debts and pay their mortgage and live, folks could not pay all of their bills with their monthly income. And there was no hope that they could in the future.

You are bankrupt when this happens. The bankers accept no responsibility. It is your problem that you created a budget that is in a sustained negative cash flow situation and you cannot sell your assets to pay off the bills that are causing the cash draw because they are worth less than what you owe.

Scenario 2

The scenario looking forward is just as scary. Folks can now qualify to buy a house with low mortgage rates. The government wants the economy to get going again and interest rates will stay low for the near future. However, buying a house is a long term investment. In my financial lifetime the average interest rate has been 10% for a mortgage. So if things return to historical norms in the next few years, your 4 or 5 percent mortgage rate will double and so will the amount you have to pay every month. So if you are paying $1000 per month now to pay your mortgage payment, are you ready to pay $2000 out of your budget in 5 years from now. Will you be making twice as much income as you are now?

Or there is an even worse scenario where interest rates in the early 1980s reach towards 20%. That would mean that if you had to refinance your mortgage in that environment you would have to pay $4000 for servicing your mortgage.

Such a scenario would cramp anyone but the most successful individual from being able to create a budget with positive cash flow. You would have to be able to make $13,200 a month for your mortgage payment to be the proper 30% of your income.

Most folks would be looking at bankruptcy again. They would have no hope of being able to pay all of their bills out of their income and there would be not hope that they would. House prices fall in this sort of economic environment and so you would not be able to realize enough from the sale of your house to pay off the mortgage. In this scenario once again you are ruined.

Conclusion:

In scenario 1, if people had just lived within their income, they would still be living in their home. They could live on a survival budget until the economy improved and then prosperity would return. For those who did not raid their home equity, times like these are times of prosperity. They still have a positive budget and they can buy lots of the really good things for cheap compared to the prices in the high times. Even interest rates came down to the lowest they can possibly be. If you just left your mortgage alone you could renegotiate to pay even less per month to service it.

In scenario 2, be careful what you pay for your house. The one thing you cannot change is the price you paid for it. To keep it affordable looking forward, I would make sure to take steps to secure the stability of the interest rate for the long term or make sure my income making future is so bright that I have to wear shades.

In both cases be aware that you are on your own. The banks don't care about anything except making a buck and surviving themselves. Governments just do what they have to do to get re-elected. Keep your personal finances simple Keep your budget in a positive cash flow position and make sure you don't put your balance sheet in a position that will jeopardize your budget.

We are heading into hard times. I have bin there done that. That was over 15 years ago. I was bankrupt but would not declare it. I fought back and won. I retired 5 years ago at the age of 52. If your personal finances got hit by this economic downturn, I am offering to show you the path to financial healing and a way for you to salvage your financial future. I think that is more than the politicians are offering. All articles that I publish on Ezine are in support of the financial tool box that I offer on my website. Use these tools as coached and you too will return to financial viability and the attitudes and principles that you will embrace will set you on the path to financial security. It will not matter how smart a dumb person you are or how dumb of a smart person you have been. If you figure this out and use the tools that I offer, you will find a lifestyle that empowers you to do whatever you want in life.

High Times Editorial Office

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