What is the State of your Finances Now?

The old adage is that what gets measured gets managed; how could you possibly become financially independent if you don’t know what the state of your finances is, now and also have plan to track your income and expenses. Businesses that don’t manage their money go bust and you are no different. So here are my steps how to get a real handle on your money situation.

Establish what state your finances are in now

Where are you now financially? Do you know what your net-worth is? Could you say how much you have in the bank? Do you know exactly how much you owe on your credit card? If not, don’t worry, as this will change for good. From this moment on you will never again be in the dark. So before you start, allocate a couple of hours, when it is quiet, for this job.

1. Your Quick Net-Worth

First, we will calculate your Quick net-worth. This is all of the money you have, that you can get hold of quickly, minus any debts that are due within a month. So go and get your bank savings and current account statements (if you bank on-line login).

Record all of your current balances whether in its a positive number or in arrears.

Next, get your latest credit card(s) statement(s). Again record the current balance owed. Then get your purse, wallet, loose change and add up how much change you have.

Do you have any investments, like shares, that could be sold quickly? Add these to the list. Is there money in your pay-pal account or any other online account? These should go on as well.

Now calculate your total quick net-worth. This is how much money you have now, minus any debts.

Example:

Quick Assets
Bank & savings accounts – £1,261
Cash – £51
Paypal account – £63
Skybet account – £60
Premium Bonds – £100
BT Shares – £1,000
ISA (Equities) – £2,152
Total – £4,687

Quick Liabilities
Credit Card – £3,082
Store Card – £555
Total – £3,637

TOTAL QUICK NET WORTH – £1,050

Why should you bother with the quick net worth calculation. After all it is not your total net worth. Well, its important because this the amount of money you have to survive on if all your income stopped. We will also use this figure later to work out how long you could survive without any further income.

2. Total Net Worth

This is exactly the same process as with the quick net worth exercise, but this time we record everything.

Firstly go and get your Pension statements, or if you can go on-line, record the value of you pension funds.

Next record all of the values of any long term investments, like notice accounts, insurance policies or mutual funds.

Do you own your own home? Then record the price of your house. This would be the fire-sale price, if you had to sell it right now. You can go to rightmove.co.uk and find out what houses in your area have sold for. Remember to go on the Sold Properties tab to get the true value.

Next is a laborious, but if you are serious you will do it. Go around you house and list every single thing that you own. If it’s clothes, just put down clothes on your list, unless you have a particularly expensive item. Same with books, dvds and cds. Just list them as a single item ie 200 books. Include everything from furniture, electrical items ornaments, jewelry – everything. Now go down the list and put a number for the value next to each item. Again use the fire-sale price. By the way, this is a useful exercise, anyway, to see if you are properly covered for contents insurance.

Now for the liabilities. List any loans, or other longer term debts, like deferred payment plans. Put down what you owe on these. If your house is mortgaged, then add the remaining balance to the list.
Now add it all together, as with the quick net worth example.

Example:

Assets
Bank & savings accounts – £1,261
Cash – £51
Paypal account – £63
Skybet account – £60
Premium Bonds – £100
BT Shares – £1,000
ISA (Equities) – £2,152
Pension 1 – £55,625
Pension 2 – £31,968
Home – £220,000
Total Possessions – £5,500
Total – £317,780

Liabilities
Credit Card – £3,082
Store Card – £555
Loan – £11,000
Mortgage – £98,000
Total – £112,637

TOTAL NET WORTH – £205,143

So how are your finances? Are they positive? If yes great, if not, we will start to look at ways to change this around immediately. Look out for the posts in the next coming days, or sign up for regular updates above.

Next though we will learn the next critical step, which is to create an income and expenses tracker.