Understanding Your Financial Picture
Have you ever tried to solve a puzzle only to find out you didn’t have all the pieces? Talk about frustrating. Unfortunately, that is exactly how many people approach their financial problems. It’s not uncommon to have conversations with people overwhelmed by financial worry only to find out they don’t even have a good understanding of their situation. This reminds me of a meeting I had years ago with a couple that was clearly stressed out by their debts. After a brief discussion, they unveiled a grocery bag of unopened bills. At some point, they hit a wall and could no longer bring themselves to even open their bills. After a few hours of sorting and organizing invoices, we finally had a clear picture of what they owed. It was a huge relief to the couple because their situation wasn’t nearly as bad as their imaginations had led them to believe.
I can assure you that trying to lay out a plan for your future without first knowing where you’re located is an effort in futility. How can we possibly expect to make wise decisions based on partial information? However, once we’re armed with a clear picture of our current financial position, we can start plotting out ways to improve it.
Personal Financial Statement
We’re going to refer to our financial snapshot as a Personal Financial Statement (PFS). It can come in different formats, but it doesn’t really matter whether you use a complex form you find online or simply create a list on a piece of paper. I’ve posted my Excel spreadsheet template here if you would like to use it. All you need to concentrate on is listing all your assets (the things you own) at the top of the page and your liabilities (debts) below that. Here are a few notes to help you through that process.
Assets
Create a list of everything you own, including bank accounts, investment accounts, cars and homes. If it’s an account at a financial institution, I like to list the name and account number to go with it for purposes I’ll get to later. Always list the full value of the asset (the price you would ask if you were selling it) even if there is debt owed against it. Personal property refers to all the miscellaneous things we own from furniture to clothing. When it comes to putting a price on these things that are harder to value, it’s okay to estimate.
We can view assets as the tools that we have at our disposal. As you go through this course, you can revisit this list to see if there is anything you should sell to speed up your progress.
Liabilities
Create a list of all the debts you owe, complete with the amount, minimum monthly payment and interest rate. Make sure you list out every single debt separately because you’ll want to see all the details, especially as you start to consider which ones you want to pay off first.
What to Do with This Information
Educate – The PFS is a great tool for helping husbands and wives get on the same page. It’s not uncommon for one spouse to handle financial matters more than the other, which can lead to a lack of knowledge for the inactive spouse. I recommend that any time you complete a PFS, you sit down and go over it together. It serves as an easy conversation starter.
Build a Plan – As you discuss the list, spend time talking about the things you hope to accomplish in the near and distant future. List out the goals that are most important to you, prioritize them in order of importance, and then review your financial picture to see if you are on track for accomplishing those items. If not, attempt to identify the obstacles standing in your way and what can be done to improve your planning. As part of the review process, you may also find that your efforts are being directed to something less important and should be reallocated to your priority items.
Pay Off Debt – The PFS will give you an easy-to-understand list of all your debts, complete with amounts, interest rates and payments. Review your debts, identify the one you want to get rid of first and focus any additional funds you have for paying off debt to that account only. I sometimes see situations where people are applying a little extra to all their debts, but we want to be more focused and concentrate on paying a single debt off as quickly as possible.
As with any general financial advice, there are always rules of thumb for which one you should pay off first. General advice can be helpful, but personal advice would be better since it will consider your unique situation and goals. In the absence of personal advice, there are three things to consider when prioritizing your debt: Size of debt, interest rate and monthly payment amount. Here are some reasons why you would focus on one over the others:
- Small debts– These are faster to pay off and will give you a quick victory to celebrate and keep you motivated to continue with the plan. It’s a good place to start, but not the only criteria to consider.
- High interest debts– These debts cost you the most to maintain. Paying them off will save you more in interest over the long run. While the math is true, if the amount is really large, it can be discouraging to not quick results. If you pay off smaller debts first, you will eliminate monthly payments that can be applied to the larger debt later, helping you make progress on the larger debts more quickly. It doesn’t matter how much interest you’re saving if you end up discouraged and abandon the plan.
- High monthly payment– Most people with debt are struggling with a tight budget. Every debt you pay off will give you a little more breathing room in your budget. By paying off a debt with a higher monthly payment, you will realize the maximum amount of stress relief in your daily life. It also frees up the largest amount of money that can then be used for other purposes, whether that be building an emergency fund or applying it to the next debt on the list. The fun part is that you get to choose where that money goes next.
As you can tell, there’s no simple formula for prioritizing debt. The bottom line is to seek wise counsel if you need advice, pick a debt and get to work.
Keep With Estate Documents – The Personal Financial Statement is a great tool for developing your current financial plan, but it’s also a very helpful document for anyone else that needs to step in and help. That could be in times of incapacity or even when you’re no longer living. For that reason, I like to keep a copy of my PFS with my estate planning documents so if someone ever needs to take over my financial affairs, they will have a good summary to help get them started. You can consider excluding any detailed information you wouldn’t be comfortable sharing and it will still be a very helpful guide.
Repeat the Process – It’s important to update the information on the PFS periodically. This process allows you to reassess your situation and update your financial plan as needed. Early in the planning process, I recommend people update it quarterly in order to develop the habit, but also so they are encouraged by the progress being made. Eventually, updating it once a year is probably sufficient. I’ve been doing this personally for more than 20 years and it’s a great way to see how God has provided through the various seasons of life. Ours date all the way back to when we were in debt, had two incomes and no kids to now having no debt, one income and kids entering adulthood. I find that faith is strengthened through reflection on God’s goodness in our lives.
Conclusion
Some people have questioned whether creating a list of assets and liabilities is an act of pride, but I guess that all depends on your heart. It could be a prideful thing if your goal is to accumulate as much as possible for your own satisfaction. However, when your focus is on giving God the glory in all circumstances, I see it as an essential part of good stewardship.