This post was origionally published on June 19, 2012.
For those who have no clue on where to start managing their money and getting back on their feet, this should shed some light as to where you should start. Though it might sound boring and no one likes doing it, the reality is that the very first step to take is finding out where you stand. I will discuss with you the five steps needed to finding the roots so that you can take control of your money.
To do this one will need to follow a few simple steps:
1. How much do I have?
This should be a given as we need to know what we have to work with. Compile a list of all your money in saving accounts, checking accounts, cash in wallets and purses, and any other solid cash that can be currently spent without any hassle. Add this number up and write it at the top of a piece of paper. We will use this number later.
2. How much do I owe?
This can be overwhelming at first for some people but it will not go away on its own. Add up all money owed on any current loans, credit cards, past due bills and any money borrowed. Write this number down under the first number. This does not include current month to month utilities such as cable or electric.
3. How much money comes in each month?
This one should be easy. This is not your base pay on your LES but rather the actual money after all taxes, life insurance, and any allotments that are being taken out each month. This should be the amount that is actually deposited into your bank account on a bi-weekly basis. Make sure this is the monthly amount so you may have to double it.
4. How much money goes out each month?
This number represents all of your monthly bills, gas, groceries and any other regular spending. This may be the hardest part because it is very important to be as accurate as possible.
Start with your normal bills such as car insurance, cell phone, cable, heat and electric.
Then figure out how much you spend on gas a month by looking back at previous months. Also, decide on a budget for food and any other regular spending you may do such as going to dinner every Friday. It is important to be accurate rather than frugal at this point. If you spend about $400 a month on food but write down you spend only $250 because you want to be frugal then it will be unrealistic.
Lastly, add up all your minimum payments due to your current lines of credit. Once again do not add in more than the minimum payments at this point because you want to get ahead. We want to see the whole picture of what you absolutely have to pay each month and what is left to avoid going to collections and filing for bankruptcy.
5. What’s left and what to do with it?
Now that you have all the numbers figured out, subtract what you owe from what you have. This number is your current net worth. Don’t worry if it’s negative, we will change that over time. Then subtract what goes out of what comes in. This is what we have to work with. If this number is negative then you should really consider getting rid of something such as cable or cell phone for the moment until you pay off some debt.
We have our baseline!
Our baseline will help us develop a strategy to get ahead with our money by knowing what we have to work with and where we currently stand. I like to think that each credit card paid off is like getting a pay raise. If I had a monthly payment of $200 on a credit card now I have an extra $200 a month to do what I please.