Congratulations on admitting you have a problem. That’s step one. The journey to financial health may now begin.
1. Admit you have a problem-you don’t yet have a grip on your finances.
2. Take a financial assessment of yourself just like you would a business. Begin with the good old fashioned “Assets – Liabilities = Owner’s Equity”. In layman’s terms, take inventory of all of the things you own: market values of house, car, boat, motorcycle, all bank accounts, savings accounts, other investments, and list them in a column with their corresponding value next to it. Add up your Assets. Now, do the same with your Liabilities, or your debts: house mortgage, car/boat/motorcycle loans, HELOC’s, student loans, timeshares (yes, it goes in the Liability column- you probably don’t really own anything…sorry), and, of course, credit card debt. Now, add up your Liabilities. Subtract Liabilities from Assets to get your “Owner’s Equity”. If the number is positive, that’s a good thing; there may be some tweaking to make it even better. If the number is negative, we have some work to do. Intuitively, you probably knew the answer to this exercise before you began it, but it helps to see it on paper in front of you.
3. Continue the financial assessment by looking at your Cash Flows. For the time period of a month, how much money do you bring in (earn), and where does it come from? How much money is spent, and where does it go? Is there money left over each money, or are you spending more than you’re making?
4. Before we get to the organizational steps, take a moment and look at the work you completed in steps 3 and 4. Are you pleased with how things are going? If not, make a list of things you’d like to change. More often than not, there is excess in the Liabilities column. However, before you start cutting there, realize the liabilities are there in the first place because of the decisions you made over in the Assets column. For your current season of life, do you have too much house, too many cars, or too many toys? Or, simply, are they too expensive to meet your needs/wants? After you’ve taken a hard look at the Assets column, now take a magnifying glass to the Liabilities column. Go over each liability. Call each and every note holder, (mortgage company all the way to credit card company), and try to negotiate lower rates. Yes, this is work, but you’re working for yourself. Get after it.
5. After you’ve completed the renegotiation efforts, list the liabilities again on another sheet of paper with the balance and the annual interest rate. Sort them from highest interest rate to lowest. This is the list you want to use to aggressively pay down your debts. Your credit cards are probably at the top of the list. You may wish to frame your handiwork.
6. Take a good look in the mirror. Admit the other part of the problem: you need accountability and structure to maintain your financial health. It’s okay. Many people do, but, many people don’t do what you’re doing now to fix the problem.
7. Now comes the first part of organization. Simplify your personal bills. Read through your credit card and bank statements for any services or subscriptions you don’t use any more. Don’t let them try to trap you with a cancellation fee- cancel it anyway. You’re better off in the long run. As soon as you receive bills, pay them or place a payment entry on your online banking system.
8. Have one account for paying bills, and a separate “sweep” account for storing excess cash to be used in the short term. This could help minimize your damage if you ever fall victim to debit card fraud. Another part of this structure is to set up email reminders if you like to get paper bills. Late payment fees add up.
9. Next part of the organization. Now that you’ve simplified your bills, gotten rid of the extra stuff you were paying for but weren’t using and didn’t need, reconstruct your new cash flow statement from Step 3. This will become the first draft of your monthly budget.
10. Go over this draft with your spouse/significant other, or, where it applies, your roommate. They need to be on board and supportive of these changes you’re making.
11. Before you finalize the draft, ask for their input for other expenses that could be reduced or eliminated. When you finalize the draft, sacrifice a tree and print out and post it where you can see it often.
12. Register with a personal online budget keeper. This is different from traditional financial software. There are many out there in mobile app form. Utilize reminder features that help you stay on track with discretionary spending.
If you have any questions that go beyond this article, please give us a call 713-621-1155. We’re happy to help.