The 7-Day Turnaround, Day 1: Take an Inventory of Your Finances

This is the first in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

Before beginning a plan to overhaul any aspect of your life the first step is to develop a baseline from which you can measure future success. Dieters may visit the doctor or a gym to get the latest measurements and internal health samplings such as blood pressure readings or a calculation of body fat percentage. Consider this first step of your [tag]financial turnaround[/tag] a financial checkup. Many people go through the day-to-day motions of earning money, paying bills and spending the remainder without ever knowing where they stand. Though painful, without facing reality and establishing these baselines, you will not be able to measure future successes.

Step 1 – Get the tough part out of the way first; take an inventory of all your liabilities. This could be as simple as grabbing a legal pad and pen, or as technical as designing your own spreadsheet on a computer. The means by which you list this inventory isn’t nearly as important as the activity itself. Like any good hiker would tell you, when lost you must first try to determine where you stand before deciding on which direction to set out.

Armed with your simply-designed legal pad, or ornate spreadsheet, dump all credit cards, bills and financial statements out on the table and begin to get organized. Get current balances on all your debts by calling the companies individually, pulling a copy of your credit report, or accessing your information online. Add up the balances and record your total outstanding liabilities, the negative side of your personal balance sheet. Don’t forget medical bills, family loans and any other non-recurring bill outstanding.

Step 2 – Now list the value of all your assets. Beginning with the most liquid [tag]assets[/tag], cash outside of retirement accounts, list the current value of all the things you own. Even if the bank technically owns it (your home or your car or your home entertainment system from Best Buy), you need to list the current value to offset some of the liability recorded in Step 1. Visit sites such as Kelley Blue Book to obtain a current valuation on your vehicle, using the private-sale amount quoted. At this point, it is not necessary to pay for an appraisal on your home. Record your best estimate on the value of your home by comparing it to similar homes that have sold in your neighborhood, or peruse real estate listings and compare listing prices. Be sure to record all savings, investments, and retirement accounts on this positive side of your personal balance sheet.

Step 3 – Subtract your liabilities from your assets and you have just calculated your personal net worth. For most people this is a sobering point in their financial turnaround. The realization that you owe more than you own is depressing. The fact that you don’t own enough toward retirement, or another major financial milestone (kid’s college, new home, etc.) is also enough to bring you down. However, no matter how bad the situation looks it can only improve with the implementation of the six remaining steps. Turn the televisions off at night and work on just one step each day. Who gets the most votes on American Idol, or who gets voted off the island, means nothing for your bottom line. You simply cannot afford to go longer without a game plan.

Comments

  1. Wow, what a great post. Good Job!

    You’re absolutely right. In order to get where you want to be, you have to know where you are right now.

    I heard a speaker illustrate it this way. If you received a phone call from someone asking how to get to Chicago, could you tell them? The audience said YES, but the speaker then asked someone to go ahead and tell the phone caller how to get there. The next statement summed it up nicely, “Well, where are they right now?”

    One thing I would add, and you’ll probably cover this in a future post, is to update “where you are” every month or so. This would help keep you on track.

    Ron

  2. Great post. I am stating the obvious here but the neat thing about doing this honestly is the fact that you will be better able to track your progress and set financial goals. Otherwise you just kinda float along without a game plan. Looking forward to the rest of this series.

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