“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to.”
“I don’t much care where –”
“Then it doesn’t matter which way you go.”
― Lewis Carroll, Alice in Wonderland
Poor Alice’s lack-of-direction plight is often the way many people approach their finances. They go to work, earn money, spend the money, sometimes spend more than they earn and build up debt, forget to think about saving, and repeat the process every month. If you want to improve your financial lot in life, it is critical to be proactive and break this cycle.
Of course, just deciding to break the cycle and improve your finances isn’t the total solution. Certainly, that is the first step – to recognize you have a problem and vow to fix that problem. When it comes to your finances, get a bead on where you are right now, in order to more effectively set goals to get you where you want to be.
To determine your current financial location, you need to do some legwork and some list-making. You can do this with pencil and paper, a spreadsheet, or an app – your choice. Gather up your checkbook, credit card statements, and other financial documents to find the following information:
Assets: What do you OWN? Make a list. This might include your home, vehicles, personal property (computers, clothing, furniture, etc.), investments, savings accounts, and checking accounts. Make an estimate of the value of these assets. Don’t get mired down with your personal assets. Just take a guess at what it might cost to replace all your “stuff” and lump it into one category called “personal assets.”
Liabilities: What do you OWE? Make a list. This might include your mortgage balance, your car loan balance, your credit card balance, and student loan balances. Notice these are the balances due, not the payment you make.
Income: What money flows INTO your household? Make a list. This might include your wages or salary, rental income, and investment income. Be sure to include regular monthly items, but also irregular income sources.
Expenses: What money flows OUT of your household? Make a list. This might include your rent or mortgage payment, your car payment, what you spend on groceries, utility payments, and other spending. This one is the toughest and requires the most legwork. Be as thorough as you possibly can, using credit card statements and your checkbook register as a starting place. Don’t forget where and for what you spend your cash. Also, don’t forget what you are putting into savings. Regardless of where the money is going, if it is flowing out, consider it an expense.
After you’ve got a grasp of your financial picture, it’s time to build some financial statements. See my posts on building a net worth statement and building a cash flow statement. Don’t worry! After you figure out where you are financially, the rest of financial planning is a piece of cake.
Click <here> if you’d like a free copy of printables to help you pinpoint your current financial location!