Every 3,000 miles you take your vehicle into the shop to get an oil change and a general check out. We visit the dentist at least annually to ensure we have healthy teeth and gums. We visit the doctor annually for check ups, or if we get a small cold to ensure we pull through it. How often do we perform financial check ups? This article addresses your initial steps in determining your financial health. Print it out at the office and take it home as a guide.
Gather Documents
Your first step towards a financial check up is to gather all your information into a central, organized place. For my family finances I use a 12 section accordion folder. This way I can organize items into categories such as; “Bills”, “Income Statements”, “Stocks”, “Credit Cards”, “401k/IRA”. The information you need is largely dependant on what you have. Some general, but critical items you need to gather are:
Open Documents and Organize
Many people I know will have to open envelopes in this phase. Most of the individuals in our age group don’t keep spectacular records. I’m not saying everyone is guilty of this but, if you have a pile of envelopes that have never been opened before sitting in front of you then its time to open them, categorize them, and file them with the most current on the top (or in the front) of the folder.
Calculate Net Worth
This step entails some math, you will need a calculator, a pencil (if doing your balance sheets, and financial statements by hand), your excel spreadsheet, or financial tracking software such as Quicken, or MS Money. This is the part where you will place your assets into proper categories on paper (or in excel), write down your liabilities and calculate the difference. This calculation will tell you where you currently stand. If you have a positive net worth, very good but check the numbers again because not many people in their 20s have a positive net worth, unless of course you listen to CNN and their “Where do you stand” calculator which claims most people in their 20s has a network of $400.00.
In order to calculate your net worth you will add your assets on the top. This includes things such as savings, stocks, 401k balance, money in your checking account that is not accounted for, cash in your pocket or under your mattress even equity in your house and vehicles. This can actually be exciting and a happy moment when you value your vehicles, realize how much equity you have in your house and see the final number. Then you will experience the depressing aspect of calculating your liabilities. The Liability category on your net worth spreadsheet includes mortgage, credit cards, car loans, personal loans, money you owe your sister from last Christmas. This is a big turn off to people and probably one reason most people don’t do this often. Seeing how much you owe written down on paper each month can be a depressing experience. Don’t fret, stick around Twenties Money Magazine and we will lead you to a brighter future, help you get that debt monkey off your back and have a more relaxed night sleep!
Now that you have the sum of your assets and the sum of your liabilities you will subtract the sum of your liabilities from your assets. In my case my network becomes negative because I count my mortgage as a liability. As time increases that mortgage amount will decrease the liability portion and increase my asset portion.
Analyze Monthly Cash Flow
Your fourth step is to analyze where all of your money is going. Personally I don’t like using items such as Microsoft Money, or Quicken. From my perspective there are far too many buttons and items in the menu that it consumes more of my time on data entry. I use a simple excel sheet that I’ve created for all my bills, categories and general monthly money flow planning. Your budget measures your monthly cash flow, you want to account for all of your monthly income and your monthly out go. Your monthly out go consists of bills, consumer credit payments, gifts, and your tithing. Your monthly income will consist of your pay checks, dividends from stock investments, retirement income (some 20s have been medically retired from the armed services).
Generally your aim is to determine where your finances are going and ensure you don’t have a monthly deficit. Dave Ramsey has an excellent monthly budget calculator/ sheet called the gazelle budget. Unfortunately you can not save the budget as an excel sheet, which would make it all that much better. The thing I like most about Dave Ramsey’s gazelle budget is the recommended percentages it shows.
Next Up
After analyzing your monthly finances, calculated your net worth and have created a budget you may find yourself in a state of depression. If that is the case, you can probably chase your negative monthly cash flow back to over spending. The key is to discover where your monthly deficits are, and correct you’re over spending. Tomorrow we will address over spending, and how to correct it.
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[...] Financial Health - Initial Check Up. This is another great reference to use with the above article. [...]
Great post and just a quick note to let you know it was included in the 28th edition of the money hacks carnival, which I hosted this week.
[...] presents Financial Health - Initial Check Up posted at Twenties [...]