Whether you are in despair or happy with your current financial situation, if you have any desire to create change you will need a starting point from which to measure success.  Sitting down and putting to paper your financial life is not fun for anyone.  Though required of most small business owners, I don’t know anyone, including myself, who looks forward to this process.  However, if you want to improve anything then you must first determine how to measure it, otherwise how would you know if you have improved it or not?

For most of us, this is not an overly complicated project in terms of collecting the information we need.  One easy place to gather a lot of the information you will need is to get your credit report.  Most states require the reporting agencies provide you with at least one free annual credit report.    An updated credit report should show your home loan and car loan balances and payments as well as any other debt due, but if you are carrying credit card balances then you will need to look at each card statement to get the interest rate information.  In addition, you will need a couple of months of bank statements for all of your bank accounts and any retirement or investment accounts. 

We all have an implicit bias to try to make our financial life look its best, but as we go through this process it is best to be more conservative.  For example, if you cousin owes you $500 that you lent him last year, we are not going to include that amount in the “what we have” bucket because you don’t have it and its probably not likely that you will receive it back any time soon, otherwise you would have received it already.  Sometimes we try to think of all the things that make the current situation look better, while ignoring the items that could make it look worse.  The point of this exercise is to get an honest assessment so we can use this information in planning our goals.

According to the research, the average American family is in a lot of debt, so know that you are not alone regardless of your situation, and we reiterate that getting to zero is a great initial goal. 

So lets’ begin, without judgement, to define where we are today. You can either start your own, or you can use the worksheet linked at the bottom of this post, just delete the data examples in the cells.

1.      List all the cash you currently have – all bank accounts, checking and savings and cash under the mattress or in your wallet, etc.

2.     List all of the debts you owe, to whom you owe them, and the interest rate you are paying on each.

3.     List the things that you are in the process of buying – the loan amount, interest rate and monthly payment.

4.     List any other assets you have, such as a retirement account, investments, etc.

This information gives us a base to work from.  We will use the examples of the “average American household” as our starting point and for our discussion.  The average household in America is spending about $5,000 per month and has about $4,800 in checking and saving accounts.  Each household is carrying about $7,000 in credit card debt as well as mortgage, car and student loan debt.  We have added those into our worksheet to give us an initial assessment of our situation.

The next worksheet we need to do is our monthly income and expenses.  Try to use the averages over the past three months when entering income and expenses.  Income should be “Take Home Pay”, assuming you did not owe a large tax bill on April 15th.  We use take home pay so we don’t have to deduct taxes, but the second tab on the Excel document shows the impact of taxes from Gross pay to take home pay.  You may also have other items that affect your take home pay such as retirement contributions and health insurance.

Once you’ve completed your income and expenses sheet, it will be pretty clear where you stand financially, versus where you want to be. This is crucial information, so don’t despair if the ideal doesn’t match the reality. Just know that now creating wealth begins with a real assessment of your current situation, and adjusting your lifestyle accordingly. You might need to consider picking up a second job for a short period of time, or find ways to reduce your expenses. Which option fits better will be a personal choice.

Homework:

• Allow yourself a budget for your entertainment or the “extras” that you indulge in every month, and take out enough cash to cover those. Once that cash budget is depleted, you’re not allowed to spend more on those things for the month. Paying in cash helps to keep the transaction “real” and may give you pause: is that really what you want to spend your hard earned money on?

• For one month, keep a journal of every transaction you make. List the retailer, amount, and what you purchased. This will likely be very eye opening at the end of the month, and you will probably be able to see some areas where you can cut back.

Remember, the longest journey starts with the first step. You can do it!

Resources:

Current Assessment Worksheet