Yes, I said SITREP. And while it might not be exactly the right use of the word, it pretty well explains what we’re trying to accomplish today. You need to have some sort of situation report so that you know where you are starting. This project can be as easy or as hard as you want to make it, but basically, you need some sort of list of your current financial situation. There should be three basic parts: Assets, Expenses, and Liabilities. There are no hard and fast rules as long as you include everything that is important.
In the assets section, you list everything that you own that might be of value. You get to decide what to include, but please be realistic. The things that are usually included on this list include bank accounts, investments, retirement accounts, cars, houses, household furnishings and jewelry. However, this is YOUR report – you include the things that you think are important. For example, I don’t include household goods and jewelry in my report because I think that they have very little value on the resale market. However, if I had some spectacular video game collection that could be sold for a significant amount of cash, I might include that on my list.
In the expenses section, include everything that you pay for on a regular basis. You can split it into monthly and yearly if that helps you to remember yearly bills like auto registration, swimming pool memberships, or whatever else you pay less than monthly. You can also split your monthly expenses into essential and non-essential. Essential things are things that absolutely, positively need to be spent each month: rent, car payments, debt payments, a minimum amount of food, etc. Non-essential would include everything that you could cut out, or cut back, if you absolutely had to: clothes, beer, haircuts, etc. Can’t remember everything? Check out the Where Did The Money Go? list to jog your memory.
The last section is your debt section. Here is the place where you write down every debt that you have: auto loans, mortgages, credit cards, personal loans, loans from family, school loans, anything! Try to find out the minimum payment due every month, the interest rate, and when the debt will be paid off.
You might not be able to find out each and every figure this week. Fill in your list the best that you can, and make a list of information you still need to locate. Make a place to keep statements, account numbers, and PINs. It can be a folder, a drawer, or a basket – whatever works for you as long as you know where to keep these pieces of information so that you can access them when you need them.
At the bottom of the sheet(s), add up all your assets and separately add up your debts, then subtract your debts from your assets. This figure is your current Net Worth. Don’t panic – it often is a negative number, and it is often scary. Whatever the number is, that is where you are starting, and it is a good tool to motivate and track your efforts. The goal is to increase your net worth a little every month, get that number into the positive if it is negative, and help it grow.
This report of your current situation is the first, and possibly most important, step in making a financial plan. If you are married, be sure to share this with your spouse. It is important that both of you know what is going on in your finances. Most of us find a few interesting surprises when we work this stuff out – learning is good. Keep it handy as we work through the next steps of the process.
This post is part of our Back to Basics Series. Don’t know where to start creating your financial future? Start with us!