If you’re like most people, you’re probably not where you want to be financially.
And that is totally okay.
You can actually do something about it. And it start by getting organized.
There are 8 steps to organize your finances.
1. Write down your assets and liabilities
First, you need to get organized. Start by getting together a list of all your assets and liabilities.
List all your assets and liabilities on a template or in a Word document.
Here’s a look at what I mean by “assets” and “liabilities”.
- Assets: Bank accounts (checking, savings, etc.), retirement accounts, equity in your home(s), vehicles, and stocks/bonds/annuities/etc.
- Liabilities: Debts, including your mortgage, student loans, car loans, other loans, credit cards, and any all other debt.
Once you have your assets and your liabilities written down in some way (excel or on paper), move on to the next step.
2. Calculate your net worth
The second step requires you to calculate your net worth.
To calculate your net worth, subtract your total debt from your total assets (Assets – Debt = Net Worth).
I created a net worth worksheet you can use to track your net worth.
- For a more detailed look at net worth, read my post on How to Track Your Net Worth.
3. Record your income and expenses
Next, make a list of your income and expenses.
Steps 1 and 2 give you a picture of your overall financial health (aka your net worth). This is really important to know. Equally as important, but different, is your monthly “cash flow”. Cash flow is a finance word for budget.
You can do this in a Word document, excel spreadsheet, my budget templates, or wherever!
Here is what you should include in your income and expenses:
- Income: List any income you receive, such as your salary, any additional income from stocks/bonds, and any income from side jobs or sales.
- 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).
Once you have a list of all your expenses and income, move on to Step 4.
4. Calculate your cash flow
Once you have your income and expenses listed, you need to calculate your monthly cash flow.
Subtract your total expenses from your total income (Income – Expenses = Monthly Cash Flow).
Think of cash flow as “money in and money out”.
This is basically your budget.
Knowing your cash flow situation is super important because it’s the tool that you’ll use to change your situation (more on that in Step 6, below)!
Here is a list of my best budgeting resources:
5. Get your credit reports and credit score
Next, you need to get your credit reports and score.
You can get your credit reports for free from each of the three reporting agencies once a year from AnnualCreditReport.com.
You should definitely take the time to go do this! It’s super important so you know whether your identity has been compromised and what the credit agencies are looking at on your credit reports.
To get your credit score, you’ll need to pay about $20 or so.
Steps 1-5 are all about data collecting. Once you’re done getting all your facts down, you’re ready to actually evaluate what everything means. The purpose of this step is to get you prepared for creating a budget in the next step (but you can only do that if you’ve evaluated where you are now).
Let’s take a look at each section….
- Net worth
To evaluate your net worth, look at whether the number is positive or negative. 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).
- Cash flow
To evaluate your cash flow, look at the money left over (or not!) after you subtract your expenses from your income.
This will give you 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 (you’ll do this in Step 7 below).
- Savings (liquid)
Take a look at your savings (specifically your liquid savings — i.e. the cash you have sitting in the bank that you can access in case of an emergency).
Compare yourself to the recommended savings / debt ratios . 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.
- Credit report
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.
- Credit score
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
f) 700-749: Very good credit
g) 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.
Enter the B-word. Aka budget.
Create a budget in this step. Every person’s budget will be different. The key is to take the time to actually create one that works for you.
I have several resources that can help you with this.
8. Review, Revise, and Repeat
Once you have completed steps 1-7, create a schedule where you “check in” and review your finances, revise anything that needs changed, and stay up to date with your numbers and reports.
I recommend doing this at least monthly.
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.
A Final Note!
These steps are a great way to get started organizing your financial life.
Even though you might not love budgeting, it will help you achieve the financial freedom you want, so it’s worth it to put in the time now.
No one will care as much about your money as you do, so there’s no better time to start than now.