How to Evaluate Your Current Financial Status and Set Goals
Do you know what your current financial status really is? By that I mean can you easily answer the questions:
- What is my net worth?
- What is my FICO score?
- What are all the assets I own and their value?
- What are all my liabilities and their current payoff amount?
- How much do I earn?
- How much do I spend?
- Am I adequately protected from an insurance and legal standpoint?
Can you rattle off the answers or at least go to one central record keeping place in your files (electronic or paper) and find the answers? If you are in a relationship are you clear on your financial status individually and as a couple?
If you can't answer the questions, find these questions creating more questions in your mind, or are simply overwhelmed by it all and would prefer to stick your head in the sand, now is the time to stop and take stock. If you don't know where you are today financially, how can you ever determine where you want to go tomorrow (and why) and how to get there?
Here's the good news - you can (and must) start right where you are. Let's walk through each of these questions, get clear on the importance of answering them, and create an action step so you can start moving forward starting today.
What is my net worth?
This is actually a question you will be able to answer after you answer all the subsequent questions. What your personal net worth represents is the total value of all your assets less the total value of all your liabilities. If you've got a positive net worth -- that is great! The higher it is, the better off you are in terms of financial independence. If you have a negative net worth, don't fret. Many people do and it is not an insurmountable obstacle. By the end of the Healthy Wallet series of posts, you will have a better idea and plan to get you out of the red and into the black.
What is my FICO score?
Your FICO score is what lending institutions use in order to determine your credit worthiness. I wrote about FICO in detail in the past, but here are the basics you need to know.
What makes up your FICO score? I items such as:
- punctuality of payment
- ratio of total revolving credit debt to total revolving credit available
- length of credit history
- types of credit currently used
- recent searches on your credit history
What does the score mean? Basically a FICO score can range from 300 to 850 and the higher your score, the better.
Find your current FICO Score:
You can now request your credit report once every 12 months for free from Annual Credit Report.com. This free report includes information from all three major credit reporting agencies (Equifax, Experian and TransUnion) but it does not include your FICO score. It is a nominal fee to obtain your FICO credit score as part of your report.
What are all the assets I own and their value?
For those not familiar with the term assets - what it means is anything you own that has value. Things that fall into this category include:
- Bank Accounts (savings, CDs, money markets, etc.)
- Investment Accounts (mutual funds, stocks, bonds, etc.)
- Tangible personal property (houses, cars, boats)
Now basically in this day and age of eBay almost anything can have value, but for the purposes of your financial snapshot you want to focus on big ticket items and use their current market value in your calculation. What that means is while your new car you bought in 2004 may have cost you $25,000 in today's dollars it might only fetch $10,000 so you use the $10,000 in your calculation.
Assets can also include your investment in a business that you own, especially if it is the type of business that can be sold. Factor this into your calculation as well, but remember in all things, be conservative (as in, better to underestimate something's value than overestimate it).
What are all my liabilities and their current payoff amount?
This is much like the assets exercise except this time you are looking at liabilities - those are things that you owe money on. This is traditionally all forms of debt - credit cards, loans, mortgages, home equity lines of credit, and similar. In this case you are tracking what your current payoff amount is. That is, if you were to pay off all your debts today, what would it cost you to do so?
How much do I earn?
Do you know what your current salary or hourly rate is? Do you know what its fully loaded value is to you (that is, salary plus any benefits offered by your employer)? If you own your own business, do you know what your current revenues are both gross and net (after expenses)?
Get clear on exactly how much you are earning both before and after taxes so you know what your regular cash inflow looks like.
How much do I spend?
I will be talking about this in more depth when I write about creating a realistic budget. For now, take a look at the last 12 months of expenses and see where your money is going. If you don't have any way to go back historically and track all your expenses, take a ballpark figure of the last 12 months using your checkbook register, credit cards, and bank statements. Then, going forward, start tracking every dime you spend. There are some good online tools for doing this as well as ones you can download.
Am I adequately protected from an insurance and legal standpoint?
This could be many articles. The bottom line is - you need to assess your insurance needs and them make sure you are adequately protected. This includes things like: car insurance, business liability insurance, life insurance, home insurance, disability insurance, renters insurance. The goal is to be adequately protected without making yourself insurance poor.
Legally speaking you want to make sure you have the proper documents in place to protect you while you are alive as well as when you die. From wills to powers of attorney to how you own your assets are all things a lawyer can help you with. For gays and lesbians out there this step is even more important because of the lack of adequate protection for couples under existing laws because we cannot marry.
What Are Your Goals?
All this work in taking stock of your current situation is not just for kicks and giggles and something to do on a rainy day. The truth is that you can't achieve your goals unless you are clear on what your current financial life looks like. You do have some goals, right? Just as everyone has unique life goals, so it goes with the finances. Not everyone wants to earn a million dollars and buy a fancy house. There is nothing better or worse about having more or less money as long as you are clear on what you want your life to look like and why. Be clear on whether you want to create a life or a lifestyle and here's a hint -- a life is the path to real happiness and lasting fulfillment.
As you go about creating your financial goals, you need to ask yourself the most important question you could ever ask about money. That is, what is important about money to you? Bottom line -- what does money mean to you? What will achieving your goals bring you? What will you have then that you don't have now? And here's the catch - it has little to do with actual greenbacks and more to do with what emotions you'll feel and what you will do with your time.
Write down 3-5 goals you would like to achieve from a financial perspective. Break goals down into 1, 3, 5, 10 year goals. Then, next to each goal answer the question "When I achieve this goal what will that mean to me and how will I feel? What will I have then that I do not have now?"
Make note of all your answers as they will be important information to use as inspiration and milestones along the way.
Paula Gregorowicz, owner of The Paula G. Company, works with women who are ready to create their lives and businesses the way the want rather than how they were told they "should". She is the author of the 12 part eCourse "How to Be Comfortable in Your Own Skin" which you can download for free at her blog http://www.coaching4lesbians.com.
To get the latest word on personal finances from an LGBT perspective and Paula's practical coach approach to the topic check out Queercents http://www.queercents.com.
Are you a small or solo business owner who wants to be comfortable in their own skin online via a website that is a true reflection of who you are and what your business is about? Paula's signature down to earth and "plain English" approach to website design and consulting can help. Visit http://www.paulagwebdesign.com to download the free successful website planner.