If you can’t see the total amount of your assets and liabilities, it’s going to be hard to set your financial goals.
Last week we learned about LaTisha Styles who had racked up to 22,000 of credit card debt. In order for her to get serious about paying off that debt, she had to sit down and gather her financial inventory. Figuring out your financial inventory is very important, if you can’t see the total amount of your assets and liabilities, it’s going to be hard to set your financial goals. This is because you won’t really know where your money should go.
“You’ve got to be careful if you don’t know where you’re going, ‘cause you might not get there.” Yogi Berra
In order to create your financial inventory you have to make a list of current assets. This would include your savings accounts, retirement accounts, business accounts, home equity etc. Also create a list of all your liabilities such as your credit cards, student loans, and mortgage payments, car payments, etc. It’s important to write all this information down so that you can see exactly where you stand and you can figure out your net worth. Once we’ve gathered this financial inventory, it’s time to set your financial navigation or financial goals.
Setting your financial navigation.
In order to get to any destination you first have to know where you are.
We need to look at how you’ve previously been spending your money and see if there are any areas that can be fixed. My recommendation is for you to look at your past 3 months of expenses. You can do this by looking at the last 3 months of your checking account and your credit card account statements. Since we are in October you would be looking at September, August, and July’s statements.
I know it may seem like a scary task, seeing how you’ve spent your money, however it’s a very helpful exercise. Just so you don’t feel like you’re in this alone, I am going to share my own personal spending habits that occurred in the last 3 months.
I was shocked to find that I’ve spent almost $600.00 on weave, wigs, hair cuts, color and hair products in the past 3 months. I did pretty well when it came to groceries, I spent no more than $45.00 for food shopping each week. This amount was within my budget.
You can sign up with Mint.com as they do a really great job at visualizing where you spend your money. If you have a mint account that you update regularly you won’t have to log into your checking and credit card accounts to view your past statements.
Thinking you know where all your money is going and actually seeing where all your money is going are two very different things. I knew I spent a lot of money on my hair, but I had no idea I spent that much. I also thought that I spent more money on groceries, but it turns out I’ve been pretty good at staying within my budget.
Once you’ve taken inventory of your past spending we now net to create a list of our monthly discretionary and non-discretionary expenses. Investopedia defines discretionary income “a cost which is not essential for the operation of a home or a business.
In the home, discretionary expenses are most often defined as things, which are “wants” rather than “needs”. This would include items like buying coffee, eating out, vacations, movies, drinks, etc. Nondiscretionary expenses are items that you have to pay each month. This would include your rent, or mortgage, car insurance etc.
Discretionary items are usually expenses that you have more control over and areas where most people can trim some fat.
Since you have your account statements from the past 3 months, you have probably noticed some areas that you want to cut back and save more. If you’ve found 8 or more areas that need to be improved, it’s important that you only choose 2-3 areas to work on at a time.
This way you won’t get overwhelmed. For me I will work on cutting back on hair purchases. I know that if I have a ton of things that I need to work on if I keep thinking about the larger task at hand than I’m more likely to procrastinate and not get it done.
Only focus on 2-3 changes to make to your spending habits then once you’ve mastered those you can move on to the next items on your list.
Now that we know exactly where our money has been going and realize the changes that need to be made, next week we will focus on creating a new plan that will help us address debt strategically, in order to help us reach our financial goals. Are there any areas that you noticed you were spending money on that you were surprised?
If you need help creating your money goals, be sure to download your free copy of my credit card tracker workbook.