This weekend we are going to take an honest look at where we are. This can be quite painful, but it is a necessary step. We cannot fix a problem until we know how bad it is. It is not a time to cover up or deny any financial mistakes that we have made in the past. This weekend it is simply about figuring out where you are and what you need to do to help your situation match your goals. The goals that you wrote last week will help you to get through this challenge and further help you prepare for next week’s challenge.
1. Total Your Debt
First we need to look at your debts. Save this list because it will help you in a few weeks. You should begin by listing your debts. Make a column for the amount you owe, a column for the interest you are paying on the debt, and a column for the monthly payment. Then total the amount that you owe. Additionally you should total the amount you pay on debt payments each month. It is up to you whether or not you include your house payment, but if you have a second mortgage or a home equity loan it should be included on this debt list.Learn More: Does It Matter How Much Debt I Have?
2. List Your Assets
Next we need to look at your assets. Your assets are things that you currently have that are worth something. Do not include your retirement savings in this list, because we will cover it later. A car is a depreciating asset and you can only include it if you have paid it off completely. Other assets may be stocks that you own, money in savings, your home (if you have any equity) and any other valuables that you are willing to sell if you need to.Learn More: Understanding Assets
3. Figure Out Your Net Worth
Compare the two numbers. This is the opportunity for you to see what your net worth is. Your net worth is the total of your debts subtracted from your assets. It is possible to have a negative net worth. This means that you owe more money that you have. It is important to check in on this number occasionally. When you retirement you want your net worth to be a positive number with a lot of money in savings and investments.Learn More: Understanding your Networth
4. Learn Your Debt to Income Ratio
Next you should figure out your debt to income ratio. This lets you know the percentage of your income goes to debt payments each month. If you have a debt income ratio higher than thirty percent you need to start making changes now. If it is higher than forty percent you may have trouble paying your bills soon. You should include your mortgage payment in this calculation. Simply divide the total amount you pay in debt each month by your monthly salary. The resulting number is your debt to income ratio.Learn More: Why Should I Worry About My Debt to Income Ratio?
5. Asses Your Retirement
Your retirement is another important aspect of your finances. Many people in their twenties put off paying for retirement because it is so far away. However the sooner you begin seriously saving for retirement the better off you will be. In fact you can really use the power of interest if you begin saving now. List how much you contribute each month to retirement savings, the amount that your employer is willing to match and how much you currently have in retirement savings. If you still have debt, you should cut your retirement contributions back to your employer’s match and then focus on getting out of debt. If you are debt free work on getting your retirement contributions up to fifteen percent.Learn More: Retirement Basics
6. Plan for Next Week
This week you should have figured out the total amount of debt you have, your total amount of assets, your net worth, your debt to income ratio, and where you are with your retirement savings. It can be eye opening to have these numbers in front of you. Next week we will use the numbers to create a financial plan that will help you get ahead and reach the goals you set last week, so keep these pages handy for next week.