If you feel like your finances are a trainwreck then welcome to the club. For many of us, trying to get to that one clear view of our financial life can feel like a huge undertaking.
It’s not that it’s hard, its because it feels exceedingly complex, requiring a monumental effort to do it and we are busy tired and confused enough already. There is just too much to know, with no clear guide. Start talking about the alphabet soup of investing and it’s enough to make you glaze over like a donut.
The truth is, it seems more complicated than it is.
Beyond the sea of numbers and an alphabet soup of portfolios and options, there are only 7 numbers that if you have a clear understanding of each of them is a huge sign that you have financial control of your money and are instantly be in a better position than more than half Americans. Even if you don’t know everything, if you have a good, fairly aware of these number (within a couple hundred dollars) then you can be in good shape.
So here’s what you need to know and how to find it out if you don’t.
Income: How Much Money Do You Take Home?
This refers to your salary or wages that you receive from your job or investments etc.
Don’t take your gross salary as your figure, you want to know your net income (basically what you take home after taxes, insurances and other deductions).
The easiest way to find it out is to look at your pay stubs or your bank account summary to see how much money is being deposited monthly. You want to as accurate picture as possible we can plan well. So be sure to include any alimony, child support, rental income etc. that you receive.
Expenses: How Much Do You Need To Live On?
These refer to how much you spend to keep you clothed, fed and safe. Since some months are more expenses heavy than other, take a look at your bank account over the last 6 months and take the average.
If you’ve had some extreme swings, like the month you moved, bought a new car etc, then determine a average number for ‘usual/regular months’ and also write a list to pin down the large expenses that will come up in the next few months – new glasses, having a baby etc.
Don’t be shy when determining your expenses. If you know you are a smoker, then account for the cost of cigarettes each month. There is no gain in underestimating your bills so ‘it doesn’t look as bad’. You’ll only be hurting yourself in the end.
Debt: How Much Do You Owe People?
This one is a number with a little extra. You need to know how much you owe, to who and when it is due.
It doesn’t matter what it’s for, whether student loans, personal loan, mortgage, a loan from your parents or credit card debt; if you have to pay it back every month then you need to have a firm grasp on how much of your earnings are being allotted each month, how long before you are free from the repayment responsibility, and how much you are paying back in interest for the privilege of having the debt.
You might be scared to know the real gravity of your debt situation but knowing is powerful. Things might not be as bad as you thought, or they could be much worse. Either way you can make steps to improve once you are aware. It’ll either motivate you to move faster since it wasn’t as bad as you thought, or kick you in the pants to do better because you are in a far worse financial situation that realized.
Assets: What Do You Own That You Could Trade For Money If Needed?
An asset is anything of value that puts money in your pocket now or when it’s sold. If you used to watch ‘The Lifestyles of the Rich and Famous’ you might think that you don’t have any assets – only rich people do. But your car, your home, jewelry, investments, are all part of your assets.
You might have some odd balls, like mortgages being debts and liabilities, and the same with cars and all. But while you have a loan on the car, the loan is a liability, but the car is an asset because it has value and you can sell it to get that value.
Don’t be tempted to put the amount of your loan, or how much you paid for the item as it’s asset value. Kelly blue book can help you determine the value of your car, realtor.com or Redfin can give you the sale price of comparable houses to determine your house value to help you with the big ones.
Net Worth: What’s The Overall Picture?
This is the easiest. You can determine your net worth by subtracting your liabilities from you assets. It accounts for your
As time progresses, you want your net worth to continue to increase. So each purchase you look at should be weighed in light of your net worth. Does this pair of shoes increase my net worth or lower it? Does this house increase my net worth or lower it? This is a mind
It also changes how you spend. You might have debt, but if you use your cash to purchase a rental property, then you can increase your net worth with the value of the home, and add a cash flow, making it more beneficial to your net worth to stay in debt and use your funds more effectively than to pay down debt.
Credit Score: What Is The Risk Of A Creditor Lending To You?
The final step in gaining financial control is knowing your credit score. Having a good credit score is important not just because you never know when you might need credit for purchase, but also because employers and landlords also check it.
Somewhere, at some point, in your
So pull it down, take a look at the report, make any corrections or beef it up where you need to.
Your Magic Number: How Does Your Dream Life Cost
If I asked you right now, how much money you need to be able to have the life you want, what would you say?
For a while, I used to think it needed to be somewhere in the 7 or 8 figure range as well because … the more the better right?
But when I actually ran the numbers, it turned out I only needed $250,000 a year to comfortably do all the things I wanted to do which included saving for retirement, traveling, etc.
Turns out I didn’t nearly at much.
When you don’t know what you want, or how much it costs, you can get overwhelmed with anxiety about what you think you need. But working the numbers and getting actual figures next to it, gives you a clear vision.
Want an expensive flashy car? – write down how much it’ll cost.
Want to travel the world for a year? – write down the cost
Want to buy a 4 bedroom, 3 bathroom home in upstate New York? – write it down.
When you know what you want and how much it costs, it’s much easier to get there.
You are ready
Just 7 little numbers to know and you’ll have a very good picture of your financial health at any given point.
You will want to check the more complex numbers like your assets, liabilities, net worth and credit score every quarter, or at least twice a year. Your income and expenses should be checked more frequently because they fluctuate more often – parking garage raised the price of parking? you need to make adjustments. Open enrollment at work and you opted for the higher medical plan? you need to make adjustments.
Bottom line is, getting a handle on your finances does take some work, but it is totally doable. And once you do it the first time, you feel so good that you actually accomplished it, that you are excited for the next opportunity to do it so you can see how you’ve progressed.
You can do this. You know what you need to focus on and how to get it done.
So go out and do it today and take your first step to understanding your finances.