It’s New Year’s Resolution time and what better way to start your budget than to figure out where you are? Every good resolution requires knowing where your starting point is. So in the in the next few posts, we are going to analyze your finances, determine a good budget and make a plan to deal with the debt you have now. So get out your piece of paper right now and let’s get started. It will only take a few minutes.
Step 1 – Make a list of your assets.
On the first page of your pad, make a list of everything you own. Use one line for each item and leave a blank line between each one. Leave room in the left hand margin to put values – we’ll get to that later. Start with the largest or most valuable items first; your house, other real estate like income houses and time shares. Then list your car(s) and other motor vehicles like motorcycles, campers, trailers, boats, snowmobiles, ATVs, boats, etc (all the toys). The list your financial accounts; checking, savings, retirement, stocks, bonds, and so on. Finally personal property which is everything else. As far as household goods and furniture, you cam lump that all together unless you have a particular pieces that is valuable like a Michelangelo sculpture or Picasso painting (as if!). Household goods are rarely worth what you think they are and we’ll get to valuation in a minute. Don’t forget to list your clothing and jewelry.
Step 2 – Make a list of your debts.
This is something most people get wrong. Your debts are not your living expenses. They are not the light bill or the phone bill or the car insurance. Debts are accounts that you owe like credit cards, personal loans, mortgages, car loans, etc. If you are behind on things like utilities, these can be ‘debts’, but it is important not to mix your living expenses; the monthly bills. with your other obligations. Right now, we are not worried about the balances on those debts, there will be time for that later. Just get everything written down. Again, one line for each account and leave room to the left for the numbers and a blank line under each one.
Done? Good, let’s move on.
Step 3 – Value Your Assets
In that empty space to the left of each item we are going to put in a number. Some of these wil be easy to obtain. Bank balances and retirement accounts come in regular statements – maybe not monthly, but regular. Cars, motorcycles and boats are easy to value online. You can go to Kelly Blue Book, NADA, Buck Book (for boats) or Yachtworld. Jewelry can always be appraised in a jewelry store. Household goods and furniture and clothing? Well, plan on valuing those as what you could get for them at a yard or tag sale. (Not much.) And if you have that Michelangelo or Picasso, well, you probably know where to go to get those appraised. As far as real estate, the best way to got that valued is to talk to a Real Estate Broker. It is perfectly OK to ask how much you could get for your peropty if you were to list it and sell quick. Once you have all those values, write them down. While you are waiting for any missing values, let’s go on to step four.
Step 4 – Determine Your Debt
Remember all those blank spaces on your debt sheet? Go back and fill in the balances of your mortgage, car loan(s), credit cards, etc. That should be very easy to get since most send you statements each month And for those that don’t, you should be able to get them online for each account or by looking at your Credit Report. Just don;t count on the numbers in your credit report being very accurate. (That;s a topic for another day.)
Step 5 – The Hard Part
Once you have all your numbers, you know what to do next, don’t you? Yep, that’s right, add up the columns on each sheet of paper. Total the value of all of your assets and total the amount of all of your debts. Now, first take a deep breath and maybe down a shot ot two and then subtract the debt total from the asset total. What you are looking at is your net worth. If it is a negative number, we’e got a problem Houston and it’s time to go speak to a bankruptcy attorney. If it is a positive number, you’re not out of the woods yet, there’s more work to do.
If you are so inclined and have the time, repeat this exercise as if it was five years ago. And then do it again as if it was ten years ago. Is the net worth number getting bigger as time goes on? The same? Smaller? Don’t feel bad if the number from five years ago was bigger than it is today. That’s pretty common these days given the real estate market and employment picture. Remember that it’s only a number and numbers can be made to do whatever your want. Check out my podcast on Money Go Roundtable where Jay Fleischman and and I discuss how to do this.