So, I’m confessing off the bat that I’ve ripped off this post idea from Rockstar Finance. The short, but thought-provoking post needed an expansion – at least in my mind.
The fact of the matter is that too many people don’t have as much of a clue about their money as they should. They have no idea how much debt they have, when they’ll be able to retire or what they’d do if the financial SHTF in their house.
This post today is designed to help you answer those questions. Knowing exactly where you’re at financially is a rock star start to changing your financial situation. For us, sitting down in October of 2012 and assessing the answers to the questions below was what started us on the path to debt freedom. After nearly three years of dealing with the deep, dark forest of a journey out of debt, we’re closer to the finish line than we are to the starting line.
But I firmly believe that wouldn’t be the case if we hadn’t taken the time that October day to learn the answers to these questions. Today, I’m sharing with you why I think it’s important to know the answers, and in the process getting a better handle on your finances.
What You Need to Know About Your Money
What is Your Net Worth?
It’s important to know your net worth amount because it can give you an overall sense of how you’re doing financially. Figuring out net worth is easy: simply add up your assets (retirement savings, non-retirement savings and investments and values on large items such as your house, cars, recreational vehicles), add up your liabilities (any money you owe to anyone) and calculate the difference.
Many people like to calculate net worth without including retirement savings too, just to get a picture for “today”, since retirement assets are untouchable without taking huge penalties.
Your net worth is how much money you’d have in your pocket if you sold everything big that you owned and paid off all debts. Is it enough to live on for a good while? Or are you in the red? It’s important to know the answer to that question, as it can help you get a big-picture overview of your finances so that you can work on change to make things better if need be.
How Much Debt do You Have?
In a recent report released by the Consumer Credit Panel, American households underestimated how much credit card debt they had by a whopping 37 percent. That hurts.
It’s that lack of knowledge of just how much debt one has accumulated that leads to an increasing debt load in many cases, and destroys any chance of becoming debt free. Since we began dumping our debt in January of 2013, we’ve kept a running spreadsheet of how much debt we have – down to the penny – each month. Not only does this running spreadsheet (we also track all monthly expenses) help us to keep our spending in check, it helps us to know exactly how far we are away from our financial goals.
I highly recommend you keep regular track of your debt – it helps you stay out of denial about your spending habits, which we’re going to talk about next.
How Much Money do You Spend Each Month?
I always tell people that tracking our spending was the number one best thing we’ve done for our financial health. Why? Because before we started tracking our spending, we “supposed” that we were spending about $600 a month on groceries. A traumatizing backtrack of our 2012 financial showed we were actually spending about $900 a month on groceries.
We also “supposed” we were spending very little on eating out. We were actually spending about $275 a month on eating out and entertainment.
So we learned that not keeping track of what you spend each month can very easily lead to hundreds or thousands of dollars of wasted money each and every month. Now that we track all money spent, we can look at monthly totals of outgoing cash and reign in any financial waste very quickly.
If you’re really serious about getting your financial crap together, I highly recommend facing the music that is your spending and tracking it each month. It takes guts to be honest with yourself in this way, the benefits far outweigh the work.
How Much Have You Saved/Are You Saving for Retirement?
Without a plan for your retirement savings, you simply can’t be sure that you’re saving enough. It’s important to remember, too, to not be saving simply to cover living expenses during retirement, but medical expenses as well. Even a trip to the ER for something minor can result in a bill for thousands of dollars.
Find out now how much you have saved for retirement, and use an online retirement calculator to see if you’re on track to save enough (be sure to use a modest investment return rate) and then increase retirement savings if need be so that you’ll have enough to cover both basic living expenses and other unexpected expenses as well.
What Are Your 1, 5, 10 and 20 Year Financial Goals?
If you have no goals to give you a purpose for your money, you’ll likely waste thousands of dollars per year on things that don’t truly matter to you. Take a few hours to sit down and determine what is truly important to you from a financial standpoint. Write your short, medium and long-term goals down and post them where you can see them every day.
Where is Your Written Plan for Achieving Those Goals?
A goal without a plan is simply a wish. Let’s say your one-year financial goal is to pay off your car loan early. Without a concrete, written plan you have very little chance of achieving your goal. However, by modifying your budget to include the extra payments on the loan that will get it paid off in that year’s time, you have a written plan that will help you to spend your money in a way that assures you’ll achieve your goal.
Will/How Will You Help Your Children Pay for College, Weddings, etc?
This is a discussion that should be had sooner rather than later with your spouse. It’s important to be on the same page with your spouse regarding financial goals, and since many kid expenses are major expenses, you’ll want to make a plan together with your spouse for if/how you’ll help your children with those expenses. Then work a monthly savings amount for those expenses into your budget and start saving today.
When Will You be Debt Free?
Even if you have zero interest in paying off your debt early, it’s important to know when you’ll be debt free. Why? Because your debt load plays into all other financial plans and goals. For instance, the amount of debt you have affects how much money you’ll need to save each month for retirement. If you plan to retire at 65 but won’t be free of your mortgage until age 85, you need to be sure you’re setting aside enough money into your retirement accounts so that you’ll be able to pay your mortgage payment as well as your other expenses.
Make a list of every loan you owe on, how much you owe, what the monthly payments are and when the last payment is so that you can determine a debt free date. If you decide that you don’t ever want to be debt free, be sure to budget in monthly allowances for car payments, etc. even after your current loans are paid off.
How Much Are You Putting In Non-Retirement Savings Each Month?
Yes, you do need non-retirement savings. Why? Many reasons: emergencies, upcoming expected expenses such as replacement of appliances and automobiles, vacation expenses, etc. Even if it’s only $20 a month, put something into a non-retirement savings account.
How Much Money is in Your Emergency Fund?
Yes, you do need an emergency fund. No, an available credit card balance does not count as an emergency fund. Also, the following items do NOT qualify as “emergencies”:
- Christmas, birthdays and other gifts ( you should have a separate budgeted amount for what you spend annually on gifts)
- Home repairs (all homes need repairs on ocassion – you should have a separate budgeted amount for this)
- Vacations (plan a budgeted amount in advance for this)
- New and Shiny stuff (not a need – a want. This is why you need a separate non-retirement savings account, as we talked about earlier)
Emergencies are things that are completely unexpected, such as a job layoff, a medical emergency, etc. Experts recommend keeping 3 to 6 months’ worth of expenses in an easy-to-access, non time bound savings account and not a CD or investment account. Set aside an amount of money you can comfortably save each paycheck to go into your emergency fund until you’ve reached the desired amount.
Determine not to spend out of that account unless you have a true emergency, and if you do need to take money out of your emergency fund, ramp up your savings until that money is replaced.
What is Your SHTF Money Plan?
Yes, you need to have a SHTF Money Plan. “SHTF” means different things to different people. It might mean that you get laid off from your job. Or that you suddenly have to support aging parents. Building up a solid emergency fund is part of a SHTF money plan. So is stockpiling your basic food and personal necessities. So is having a cash stash at home in case you need to get out of Dodge quickly.
See our Prepping and Survival page for more info on preparing for a SHTF situation.
What is the Monthly Total of Your Bare Bones Budget?
What is a “Bare Bones Budget”? A Bare Bones Budget is how much money you’d need each month if you had to survive on necessities only. In other words, how much money would you need each month if you had to:
- Keep grocery and other spending to a minimum
- Cut cable
- Stop entertainment spending
- Keep clothing expenses to “none” or thrift store shopping
- Sell the car and get a reliable used car that you could pay cash for
In other words, how much money would you absolutely need to survive if you went through a long-term period of having a drastically reduced income, such as a long-term job layoff, medical issue that kept you from working, etc.?
I believe all individuals and families should have a written bare bones budget set aside for “just in case” situations. Creating a bare bones budget is not something you want to do when trouble has already come; instead, do it when everything is fine and you can think clearly without being influenced by the emergency situation at hand. Simply sit down, make a list of all monthly expenses, and then divide them into “can reduce, can eliminate, can’t reduce.”
It’s important to think drastically when creating your bare bones budget. No half-hearted attempts here. Imagine that the S has just HTF in your house, and that your income has been cut by 50 percent or more.
It’s no longer about living comfortably, but about surviving and making sure you have enough food to eat. Eliminate all possible expenses and determine what the minimal amount of money you would need is in order to pay for living expenses and feed your family.
Armed with this information, you have what you need to prepare for nearly any financial disaster that can come your way.
There are likely many more things I could add to this list, such as “Are you Properly Insured” etc. But the above twelve items are a solid starting point that will get you on the fast track to organized finances and will help you to begin reaching your financial goals and dreams.
Don’t put off till tomorrow what you can do today. Begin the process of organizing your finances today and check this big thing off of your to-do list. You’ll be glad you did.
Are you financially organized? What things do you not see on this list that you think are important in terms of personal money knowledge?
*Image courtesy of 401(k) 2012