When we’re just starting out with little or nothing in terms of a personal finance plan, the task can seem daunting, even ominous. We struggle with where to begin, finding all of the information, condensing it, and determining a course of action. There are other important things demanding our time and as long as there’s more money coming in than there is going out, things are ok…right? Well, without carefully examining our financial position, we don’t really know the answer. We find out quickly when there’s a shift in pay, layoff, cut back in overtime or regular hours, or a major expense hits our accounts. But at that point, we’re reacting and trying to absorb the financial impact. We’re not managing our finances, they’re managing us. As long as things are going along “normally”, we seem to have better things to do with our time…and that’s a choice we can make, but it’s a very dangerous choice.
Many people that I talk to about personal finance management wish they had a better handle on things, more control, less debt, and increased saving. These are all good goals, but they aren’t specific enough to use as the basis for an achievable plan. Instead of simply planning to lower our debt, we need a specific plan such as eliminating all credit card debt in six months. Of course if we don’t know where we stand financially, we can’t know where we’re going or the steps we need to take to improve our situation. It’s like driving on a long trip with a broken gas gauge. We’re taking a guess.
After making a commitment to getting control of our finances, the first step is finding out exactly where we currently stand financially. All of our asset and debt information has to be gathered together, condensed, and then reviewed. This can take some effort, and often keeps people from even getting started. But taking the first step is always the hardest, and after the first exercise of gathering everything together, updating the information takes a lot less effort.
We generally have a handful of accounts and credit cards, and then there are loans, and expenses including rent or a mortgage. Statements aren’t as available as they used to be since many accounts are now paperless, so we have to log in to our accounts to get the information. The automation associated with many of our financial transactions has reduced our visibility into the monthly activity…it just kind of happens each month. Most banks have created expense tracking pages on their web sites to help, but they can only capture the transactions handled through that account. To form a comprehensive picture, we need to be sure that every expense is noted.
When we see all of our expenses, debts, and savings together, and where our money is going, we get a clear picture of our financial health. This is an illuminating experience for many people, and for some it can be a strong dose of reality. But the alternative is just hoping that things are alright.
Once we have our current information, we can begin to form a plan toward where we want to be financially. If debt elimination is part of our plan, having all of our debt information in one place allows us to consider different approaches and to form an achievable strategy. To control, reduce, and eliminate debt requires knowing the balances, spending rate, interest rate, and regular payment amounts, and comparing these to our income and saving information. This allows us to evaluate different debt reduction approaches to determine the best plan for our circumstances. There are a variety of approaches to debt reduction which I compared in another blog and at length in my book Personal Finance Simply Understood, but regardless of the method we need to track and review our progress. Seeing the balances go down every month gives us the incentive to stick to our plan, and comparing the amounts from month to month shows how much progress we’re making and if an adjustment to the plan is needed. If I set financial goals and don’t review my progress, then I can’t know if I’m on track to achieve them.
Saving is handled the same way. We review our current income and expenses, our current saving rate, and form a plan based on where we want to be balanced with our available cash. Without considering our other finances, saving tends to be a start-and-stop activity, or a save-and-withdrawal activity that never achieves the desired goal. Since personal finance encompasses everything in our lives pertaining to money, all of the information has to be reviewed collectively as we establish our financial plans. Otherwise, an area that we haven’t taken into account could interrupt our plans and jeopardize our success.
If you haven’t done this yet, or you haven’t done it recently, do it! Commit to getting a handle on your finances and to knowing exactly where you are and where you’re headed. Use a system that will ensure that you capture every debt, asset, and form of income. Include balances and interest rates, group expenses together, and compare the total amounts coming in and going out. It’s also a good idea to segregate liquid assets (regular savings) from long-term savings, and short and long-term debt as well. This helps when we want to focus on a specific debt or savings area. It also shows where our focus should be, and the things that we need to keep an eye on. Seeing the balances and interest rates side-by-side will often shed a whole new light on our situation. I designed Jazer 100 personal finance software specifically for this purpose.
The point is to make the commitment, get started, get a handle on the whole picture, face reality, and then form and work with a comprehensive plan….and the sooner the better.