For many people, actually writing down everything to figure out what their current situation is, is very emotionally demanding. After all, sometimes you’re in more debt than you think, or your savings is anemic, and you feel like you’re much further away from the ability to retire than you thought. Your current financial situation can only be discovered through an honest reflection of the real current financial situation you’re in.
- What Is Your Net Worth? – This is simply a calculation of what you own minus your debts. It’s not unusual for some people to have a negative net worth if they are early in the payment process for their home. Assets include investments, the equity in your home, stocks, and other valuables like vehicles and even jewelry.
- What Is Your Debt Level? – Your debt level is everything you owe money on. Having said that, it’s a good idea to separate secured debt from the unsecured debt you have. The unsecured debt should be paid off as fast as possible. Secured debt often comes with low-interest rates and can be considered an investment, but you do need to know what you owe in total too.
- What Retirement Planning Do You Have So Far? – You need to know what type of retirement planning you are already doing. If you have a wage job, you may be investing in a 401K or other retirement accounts through work. If you work for yourself, you will need to set up these accounts yourself.
- What Does Your Credit Report Say? – At least yearly, pull your credit report and look at it from all three credit reporting agencies. You’ll get a real picture of what you owe and what you own by looking at this, and you also protect against mistakes or identity theft. You can use CreditKarma.com and monitor your credit all the time for free, but do ignore the ads regarding credit cards.
- What Types of Savings Do You Have? – Make a list of everything you save and where. Whether it’s short term, long term, cash, or other investments, do some future math to find out where you’ll be 5, 10, 15, and 20 years down the road if you stay on the same track.
- What Education Planning Have You Done? – If you have children, you probably need to be investing in and planning for their future education.
- What Types of Insurance Do You Have? – Almost everyone needs insurance at some point. Some of the types you need are life, health, house, renters, automobile, and (depending on your situation) liability insurance.
- What Investments Do You Have Now? – Separate your investments from your other savings to list what you have now. Calculate how your investments will be doing in the future if things stay the same.
- What Income Opportunities Exist? – One way to improve your situation is to create more streams of income. Can you pinpoint any opportunities to increase your income through smart investments or a side gig?
You’ll want to examine each aspect of your financial life to find the ways you’re on the right track, as well as the ways you’re not on the right track. The only way to do that is to be very realistic and write down every penny you have coming in and every penny you have going out, and to honestly acknowledge each situation where you have a shortfall so you can develop a plan for success.
Figure Your Assets and Liabilities
As you work on your financial plans for today and the future, you’ll want to know where you stand on the basics too. Knowing the true situation with your assets and liabilities is the first step toward knowing where you stand and where you’re going.
Adding Up Your Assets
Your assets include cash, cash equivalencies, certificates of deposits, checking accounts, savings accounts, money market accounts, physical cash, treasury bills, property, land, or anything that can be turned into cash very easily.
Adding Up Your Liabilities
Your liabilities include anything you owe to other people, including your mortgage, student loans, credit card debt, auto loans, income tax owed, interest payments, and other personal loans. If you owe it, it’s a liability. If you owe it and it has a contract, it’s a liability. If you owe it because you just want it, but you can cancel it with one phone call, you don’t have to include it in this figure.
Your net worth is figured by subtracting your liabilities from your assets. Some people who owe a lot on their home may find out that their net worth is negative, which can be disturbing; but don’t worry, you will improve over time.
The good point about figuring out your assets and liabilities is that you’ll be able to find a few liabilities that you don’t have to keep because there is no contract. For example, if you currently pay for a month-to-month gym membership, you can take that off your liability list, but it’s still a monthly expense so don’t get confused about that. The current liabilities you have should only include the must-pay items and not anything you can cancel during an emergency.