If you’re like most people, you’re probably not where you want to be financially.
Before you can figure out what the real problem is, you have to get organized. That’s why I’m here for.
There are 8 steps to organize your finances.
Okay, now let’s get started…
How To Organize Your Finances: An 8 Step Guide
1. Write down your assets and liabilities
Assets: List all bank accounts (checking, savings, etc.), retirement accounts, equity in your home(s), vehicles, and stocks/bonds/annuities/etc.
Liabilities: List all of your debts, including your mortgage, student loans, car loans, other loans, credit cards, and any all other debt.
You can do this on a simple piece of paper of in a spreadsheet. It doesn’t need to be complicated. Just list the name of the asset or liability and next to the name list the value.
2. Calculate your net worth
Calculate your net worth by subtracting your total debt from your total assets (Assets – Debt = Net Worth).
Again, this can be done just by taking what you wrote down in step one and doing a little math. A spreadsheet can do this for you if you use formulas, or you can use a good ‘ol calculator. Take your total debts and subtract them from your total assets.
- Related: How to track your net worth
3. Record your income and expenses
Steps 1 and 2 give you a picture of your overall financial health. They show you how you’re doing financially as a whole. This is really important to know. Equally as important (but different) is your monthly cash flow. To calculate this, use your income and expenses (like you did with your assets and liabilities above).
Income: List any income you receive, such as your salary, any additional income from stocks/bonds, and any income from side jobs or sales.
- Related: 21 Days to a Better Budget
Expenses: List your total monthly expenses. Look back at the last three months and take the average of what you spend, or you can calculate your spending for the year and divide by twelve months. This will spread out spending evenly for the months where spending is higher (eg: December for the holidays).
In this step, you’re essentially creating a budget, but for the sole purpose of knowing where you stand financially (not for the purpose of creating a plan for the future).
4. Calculate your cash flow
Calculate your monthly cash flow by subtracting your total expenses from your total income (Income – Expenses = Monthly Cash Flow). Think of cash flow as “money in and money out”.
5. Get your credit reports and credit score
After you know your overall net worth (using your assets & liabilities) and your monthly cash flow (using your income & expenses), the next part of your financial life that you need to know about is your credit. You can get your credit reports for free from each of the three reporting agencies once a year from AnnualCreditReport.com.
To get your credit score, you’ll need to pay about $20 or so.
Once you have your net worth, cash flow, credit reports, and credit score in front of you, you’re well on your way to knowing exactly where you stand financially. Now, you need to evaluate this information.
If you have more assets than liabilities, you have a positive net worth. If your net worth is lower than you want it to be, set a goal to increase it. Knowing your net worth is the first step to changing it (and your net worth is really important).
Your cash flow should be a positive number. When calculating your cash flow, be sure to include the amount of money you put into savings as an expense. Also, make sure to consider your credit card debt in your cash flow. If you have a positive cash flow but you use your credit card to make up the difference and carry a credit card balance, then you are living beyond your means. The point here is to get an idea of whether you’re overspending, underspending, or somewhere in the middle. Once you know what your cash flow looks like, you can decide for yourself how to make adjustments and create a plan to achieve your financial dreams.
When you’re looking at your cash flow, look at your cash reserves (compare yourself to the savings / debt ratios for young adults). It varies depending on your circumstances how much of an emergency fund that you should have, but no matter what you should have one. At a minimum, you should have 3 months of living expenses saved, and ideally, 8 months. Why? Because unexpected things happen all the time, and while they’re never easy to deal with, they’re a lot easier when you don’t have to worry about how to pay for it.
Read each of your credit reports so you know what’s been reported, and also look for errors. If you have incorrect information on your credit report, you need to get it corrected. To do this, contact the appropriate credit bureau. The agency must investigate the dispute within 30 days of your request. Alternatively, you can write to the creditor disputing the incorrect entry.
Negative entries remain on your report for 7 years. After 7 years, the negative entries should fall off. If you have negative entries on your credit report that are over 7 years old, you should request to have that information removed by contacting the agency reporting the information or by contacting the creditor.
Evaluate your credit score by using the following guidelines:
a) Less than 500: Very bad credit
b) 500-549: Bad credit
c) 550-599: Poor credit
d) 600-649: Fair/Average credit
e) 650-699: Good credit
e) 700-749: Very good credit
f) 750 and up: Excellent credit
7. Create monthly and yearly budgets
After you have evaluated where you are right now, you can make a plan to take you where you want to go.
The first step to change your finances is to create a budget (use my 6-step guide to creating a budget). You can also download my budget spreadsheets to help you with this step. A budget is the framework for finances; it’s the boundaries you set for yourself.
8. Review, Revise, and Repeat
Once you have completed steps 1-7, you can create a schedule for yourself where you “check in” and review your finances, revise anything that needs changed, and stay up to date with your numbers and reports.
It’s important to stay on top of your finances and know where you stand financially all of the time. An easy way to do that is to follow these steps every year. By using a yearly budget, you’ll be able to compare your yearly spending and watch your net worth and cash flow increase (hopefully)!
I don’t know where I’d be if my money wasn’t organized! You can use the steps above to track your finances manually, and you can track them digitally by using a free online account from Personal Capital, which is what I use (and love).
Whatever you do, make sure you stay organized! No one will care as much about your money as you do.