Having worked as a financial analyst at several companies, I can tell you first hand that I’ve done a lot of financial modeling. In fact, when I was an investment banker back in the day, I could quite honestly say that I spent a good 60 hours a week going over and over and over the same financial models, making variation upon variation and then presenting it to a vice president, only to go back and make more changes.
What did I learn from all of this?
Good question, let me think about it. I guess what I learned is that you can get a lot of insight into a company by creating financial models about its possible outcomes. What I also learned is that you can use a financial model to analyze things in your own life too.
For example, I was debating on whether a hybrid is a good investment, so naturally, I opened up a spreadsheet and made a couple of financial models. One that modeled the cost and savings of a non-hybrid cars, and one that predicted how much a hybrid car would cost. Financially, it doesn’t make sense for me to buy a hybrid, but it does make sense for you to consider using more financial modeling in your life.
Browsing around the web, I found an article from Personal Finance Opinions that discusses financial modeling as it relates to making a household budget:
You might think that you’ve got it bad when it comes to money management, but compared to a large corporation you have relatively very little to calculate and keep track of. So how do these big conglomerates manage?
The answer is by using something called ‘financial modelling’. Here they will make a graph, chart or general projection of their finances based on their existing money to help them visualize their income and overheads, and to help them plan for the future based on their projections.
You can do something similar yourself by using a spread sheet program like Excel. Here you will input your various outgoings and income into the sheet so that it keeps a tally of everything that is coming in and out. If you include a date, then having a quick look at that can tell you how much will be coming out each day – but it can also help to make a little list and to stick it to your fridge door.
Read the rest of this article at http://www.personalfinanceopinions.com/2012/03/money-management-tips.html.
It’s true. A financial model can be used to create your personal budget. In fact, a budget is really just a type of financial model.
However, don’t stop there, consider increasing your skills with spreadsheet programs by getting lots of practice creating your own analyses. Not only can you use it to analyze your finance and create charts and graphs that visually portray your progress, but you can use it in so many other aspects of your life. Especially when making financial decisions.
For example, if you are budgeting for a home, you could create a spreadsheet with all of your savings, estimated costs to buy a house, and the expenses that go with the house. Then, you can create a simple variation for each different house you look at. Depending on the location and type of house, your cost structures will be different.
I’m sure it has something to do with the years of time I’ve spent building complex financial models and forecasting spreadsheets, but I still find it very useful to always have a spreadsheet handy and to help make most of my financial decisions by creating simple calculations that help me know exactly what I’m getting myself into.
Of course I’ve been wrong a lot, especially about the costs associated with buying a vacation home, but I’ll leave that for another post.
What do you use spreadsheets to help manage? Let us know below.