Where Are You Financially?
Before you start any financial journey, you need to know four things:
- Where are you now,
- Where do you wish to end up,
- What is your current cash flow, and
- What is your plan to achieve your goal.
Few trips are completed without challenges. Your financial journey is exactly the same. If you don’t have a plan to get from where you are to where you want to end up financially, you are unlikely to ever get there.
Side Note: On a recently road trip that Joan and I took, a transport in front of us dropped a piece of sheet metal. Fortunately we were not injured, but it did take out a tire. We have always belonged to the auto club, so help was only a phone call away. We lost half a day of travel time, but that was not a problem. You can read the full story at Drama on I35 Takeaway: Expect a problem now and again and plan for it.
How Much am I Worth?
Calculating your net worth is fairly straight forward. First calculate the value of everything you own. Include savings accounts, vehicles, investments and real estate (how much is your home worth?) Then calculate everything that you owe. Include mortgage, vehicle and other loans, credit card debt, student loans and anything else you are expected to pay.
Deduct what you owe from what own, and you have your net worth. Don’t worry if it is negative! You just need to know where you are starting out from.
What Are My Financial Goals?
Now set your financial goals. This is not where you wish to win the lottery or get a big payout from Aunt Harriet’s will. These are goals that you believe you are capable of achieving. Your goals do not need to contain specific numbers. Examples of goals: I want to provide my family a decent home to live in. I want to retire in 20 years with a reasonable income. I want to be able to take my family on a nice vacation every year. And so on.
What Is My Current Cash Flow?
Cash flow as a concept is fairly simple. How much money do I bring in every month from all sources minus all the money I spend every month.
In reality, cash flow is a little more complicated for most people. Although most of us have a fairly stable income every month, we have periodic expenses that are no every month. Examples would be items such as quarterly tax payments (home or income), annual insurance premiums (although most of us pay monthly), vehicle licencing fees, course tuition, weddings, birthdays, anniversaries, Christmas, vacations and more. Go back through your cheque register for a year and pull all of these out.
Free Habit Tracker
Find out where your money actually goes with this free spreadsheet.
I like to tally these periodic expenses for the year, divide that by the number of paydays per year and include that amount in my monthly budget. I set up a separate savings account and transfer the amount from each pay. An example might be: The total for my periodic payments for the year is $3,600 and I get paid every second week (so 26 times per year). I divide the $2,600 by 26 and get $100 per pay that must be transferred to the account. When a payment comes up, I can then draw the necessary funds from the savings account.
In this case, I calculate my cash flow by subtracting my regular expenses plus $100 from my income for the month. Some folks I know who get paid every two weeks use two paycheques a month to pay bills, and twice a year put the third cheque straight into their savings account for periodic payments.
Once you calculate your cash flow, you are in a position to plan for your financial goals.
How Do I Get to My Financial Goals?
Now you are ready to plan your journey.
As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences.