When I talk to people about their finances, most of them have concerns, and many have questions. The single most common question is, “I don’t know where to start.” Okay, it isn’t technically a question, but it is still a question. Thankfully, it is an easy one. So, where should you start?
Whether you are young, single, and living paycheck-to-paycheck, or older with a family and some debt, the best place to start is always with a clear accounting of your current situation. This includes listing all your income and expenses, plus all your debts and assets. I love this kind of stuff, but I know that not everyone feels that way. It doesn’t have to be fancy or sophisticated unless you want to make it that way. Just a sheet of paper with a few lists.
You can list income in a couple of different ways. You can list your entire income and take out the deductions later, or you can list your take-home pay. For most people just starting out, it’s easier to work with take-home pay.
What if your take-home pay changes all the time? That can happen in some military jobs, especially if you’re moving in and out of combat zones or you have a cost-of-living-allowance that changes each month. I have a strategy for that.How To Budget If My Paycheck Always Changes.
There are two main categories of expenses: fixed and variable. Fixed expenses are things that you must spend each and every month: rent, car payment, insurance, some utilities, some food. Variable expenses are things that are not required for survival: internet, hair cuts, books, beer. Lots of things fall into both categories, like food. You must spend a certain amount on food to live. However, most of us spend more than absolutely necessary. That isn’t a bad thing, but it does give you more information if you know how much of your spending is fixed and how much is variable.
Debts (sometimes called Liabilities)
This list is VERY important. Make a list of every debt you have: car payments, mortgages, student loans, personal loans, family loans, credit cards, everything. List the total balance, the interest rate, the monthly payment amount or minimum monthly payment, and the end date if it has one.
If you own anything of value, list it here. Houses and cars, for sure. There is some debate over how much you should list personal possessions. Some people choose to list how much money they guess they could make if they had a gigantic yard sale this Saturday. I just leave them out because we own very little that has much resale value. Get a decent estimate of the value of your real property and if you want to put down $5,000 or $15,000 or $25,000 for personal property, go ahead. Just don’t think of it as a cash asset unless you’re planning to do some selling here soon. Be sure to use the prices you could get if you needed to sell these items today.
Having an accurate list of these four categories is always the first step in deciding what to do next. Once you’ve made a list, try to keep it somewhat up-to-date in the future. (I try to update it as things change, but I make sure it is right at the beginning of each year. If you get off track financially, come back to this step and start over. It’s OK! It happens. This is a super tool and just keeping this list current will improve your finances. With it, you are ready to start making progress.
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