Picture for a moment, you’re walking in a forest or a park and you don’t know where you are, what do you do? The first thing most people do is stop to get their bearings; to see if there is anything around them that might give them the necessary perspective. They stop going forward and try to get as much information that they can and based on that they then plot a course of action.
This doesn’t only apply when you’re lost or not sure where you are, but it’s useful in many situations. If you can stop for even a moment to take stock of the situation you’re in and collect as much relevant information you become that much better equipped to move forward. Take a moment to think about your finances, even if everything is going ok in your financial world it’s good to stop and take a look at the whole picture before moving forward again.
Stop and assess
We’re incredibly busy in our lives and something like our finances keeps going month after month, even if we’d love it to stop (this is for most people). We can easily assume things are ok when in reality they might not be
Stopping and assessing the lay of the land will give us the perspective to choose the best path. Once we have this perspective we can choose a direction, even if that choice is not changing anything at all.
By stopping you can gather all the information in your financial life and the best part is this activity should only take a short time, even if your financial life is in tatters and scattered. Here’s a starting list to get you the base information you’ll need.
- Assess your debts
- Assess your spending
- Assess your income
- Assess your assets
If you’ve got those you can start formulating actions that you might need to take
Assess your debts
Your debts are what you owe people for borrowing money from then; be they credit cards, mortgages or loans, they’re all things you have to pay back and they also cost you interest. If you’re really organized and out of debt you might not have anything.
The whole idea here is to know who you owe how much to, AND how often you need to pay them back.
Assess your spending
Do you know where your money goes? How much you spend on gas on average? How much your monthly groceries cost?
If you’re thinking – I’ve got an idea then the answer is no. But its roughly X$ the answer is still no.
This is extremely valuable info; it shows you exactly what your money is spent on. This info becomes as starting point for a budget. If you have one then it becomes the info you use to see if you need to reassess and adjust your budget. Either way it lets you know where your money is actually going instead of a rough idea.
You might be surprised by this info if you’ve never done an exercise like this; I know I was the first time I did it.
Assess your income
For most people, this one is pretty easy since they only have one source of income. But regardless it’s good to do. If you have many sources of income (say you’re a freelancer) then knowing which sources pay how much can be good (but that’s a different story).
Assess your Assets
Like debts you also want to know what your assets are doing, many of them like your house don’t do much from year to year and others like a car decrease in value. It paints a picture of what you have and what you own and more importantly it gives you options.
On top of this comes your investments (retirement and otherwise); if you don’t have any then you might want to start thinking and planning in this area. The stock market does weird and wonderful things all the time, and while watching it like a hawk would give many a person an ulcer, it does make sense to take stock from time to time (pardon the pun).
Now with all of this info you really get a picture of your financial situation and can start planning a direction. Here are some questions to get you started and from there you can tailor it to yourself.
Do you have a budget? Do you need a budget?
How does your spending measure up against said budget?
Are you spending money on things you don’t want to?
Are you saving enough?
Does your spending outstrip your income?
Are your assets making you money?
Do you have assets?
I know that for many people questions like the ones above cause them to panic mildly. But I think they’re important.
If you’ve gone through this exercise then actions start to appear and a direction shows up very quickly. It paints a realistic picture of your finances and gives you a snapshot of the reality as it is now. You’ll know if something needs to be done, and warnings and watch outs will appear. With that info, you can adjust course or completely change direction.
Without it you’re just taking a wild guess on where you’re going and why. The best part is if you’re feeling really lost a financial advisor will be aiming to get the exact same info and build up from there.
I started this blog many years ago with some grand idea; possibly even a delusional idea but I need to stop and reassess and instead of just writing about it, I’m going to show you in the next post.