Understanding Your Financial Picture

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Have you ever tried to solve a problem without first knowing what was wrong and the tools at your disposal to fix it?  That may sound illogical, but it’s 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 the amount they actually owed wasn’t nearly as bad as their imagination had led them to believe.

As a professional problem-solver, I can assure you that trying to lay out a roadmap 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?  On the other hand, 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

The document that contains our financial snapshot can go by several different names.  I like to refer to it as a Personal Financial Statement.  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 we go through this process and start to map out a plan, we will come back to this list to see if there is anything we should sell to help us improve our situation.

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.  Prioritize the goals that are most important to you 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 resources 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 in interest.  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 get it paid off quickly.  If you pay off other debts first, you will have more to apply to the larger debt later, helping you to make progress more quickly.  It doesn’t matter how much interest you’re saving if you ultimately get discouraged and give up the plan.

· High monthly payment – Most people with debt are struggling with a tight budget.  Paying off a debt with a higher monthly payment will give you more breathing room in your budget when it’s gone and relieve some stress from daily life.  It also gives you more money to use to build an emergency fund or apply to the next debt on the list.  The nice part is it’s your choice as to how you use it.

As you can tell, there’s no simple formula for prioritizing debt that I can give you.  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 in 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 have a good summary to help get them started.  You can consider leaving off any detailed information you wouldn’t be comfortable having on that sheet and it would still be helpful to point them in the right direction.

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 part of my Financial Boot Camp class, I have participants update it quarterly to help them develop the habit, but also so they can see the progress they’re making.  At a minimum, I would recommend you update the statement annually.  I’ve been doing that for more than a decade now and it’s a great way to see how God has provided through the years as our lives have changed.  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 a nest full of kids.

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.

This article was originally posted February 21, 2017.

Brad Graber, CFP® has been working with clients on personal financial planning and investment issues since 1996.  He invests his time mentoring and educating individuals on ways to be better stewards of the resources God has entrusted to them.

Brad is a specialist in personal financial planning issues including retirement planning, investment management and charitable giving optimization.

3 Comments

  1. […] We discussed how to start your financial journey by assessing your situation and understanding your financial picture on this broadcast.  The following recording is from “Mornings with Kelli and Linda” on Moody Radio Indiana (97.9 FM).  You can read the corresponding article here. […]

  2. Russel Lopez on February 5, 2018 at 9:19 pm

    It has been said that the longest journey begins with the first step. It seems that the most difficult part of getting my financial house ‘in order’ has been to actually start the process. That, and to have specific goals.

    There is a lot of inaccurate and even conflicting information available about the best way to handle money. Many years ago, conventional wisdom said I needed to have a large mortgage debt to take best advantage of tax credits. I didn’t follow that advice and was rewarded when taxes, my job, personal health and the housing market changed.

  3. Lin Lopez on February 24, 2018 at 8:35 pm

    We have a tiny, dormant business, for which I need to prepare financial statements annually. It provides a reminder of where we are. It also shows clearly what we sank into it when it was not dormant…a kind of clear record of the cost of learning some lessons. Our personal financial statement practically shows the same thing. It explains a lot not only about where we are, but some about how we got here. Keeping that in front of ourselves, it is a little easier to formulate the next steps. I can see the merits of doing a personal financial statement annually and having the household “business meeting” to go over lessons learned and strategies to try next.

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