In order to move forward with any kind of direction you MUST know your starting point. You have to know where you are.
This is a necessary step in becoming financially stable and ultimately…hopefully, financially independent. This is a step many will attempt to skip…but it MUST be done. You CANNOT reach your destination without first knowing from where you are leaving.
Yes…you will have to put forth a little effort.
Yes…this will probably feel like work.
Suck it up. You have to do it.
Way back on my 25th birthday (almost 9 years ago….yikes!) I started assessing my own personal financial situation. I was looking around and realized that I had been working like a crazy person since the day I graduated from high school. Most of the time I was working two jobs, I was jumping in and out of going to college full-time and really just doing A TON of work and getting nowhere. On my 25th birthday I decided that I didn’t want to do that anymore and established a goal: a net worth of $500,000 by the time I turned 35. No rhyme or reason to the number….I just picked it.
At this point I set about the business of learning how to use my money to make myself more money.
I studied and learned lots of new terms and a lot of exciting information. Mutual funds, ETF’s, stocks and real estate investment were the stars and I felt I was beginning to grasp how to create wealth. We began making investments and watching those accounts grow was exciting! There really wasn’t a lot of additional money to invest but, we were doing it and we were determined to change our future.
Fast forward a year and a half later and we found ourselves pregnant with our first child and we had no health insurance…well, we had catastrophic plans from our restaurant jobs that covered ER visits….so we had no health insurance. A few months into pregnancy I found myself jobless and we were terrified. The medical bills kept piling up and we didn’t qualify for Medicaid for Pregnant Women. We were making payments but barely making a dent. In our area the hospital applied no uninsured discount unless you were able to pay-in-full…we couldn’t so we were bearing the brunt of the full cost of health care.
We found ourselves in a position of truly NEEDING the money we had been investing. The investment accounts were drained and used to pay bills. Those investment accounts were not large; we didn’t even have $3,000 so it didn’t go very far. If you have ever had mounting medical debt you know that $3000 is absolutely nothing.
So there we were. Nothing in savings. No investment accounts. Pregnant. Down a job and having difficulty replacing it…employers didn’t seem eager to take on a pregnant woman and eventually we accepted that fact. We decided to ride it out and survive on my husband’s income alone.
I realized that we had went wrong somewhere and I began waddling my very pregnant self around our public library looking for the answer. I checked out three books one written by Suze Orman, one by Farnoosh Torabi and one by Dave Ramsey. After reading these three books I came to the conclusion that we were not completely wrong in trying to begin investing and growing our money. The problem was that we had not started out basic enough. We were completely ill-prepared…like flying into Las Vegas in July having only packed sweaters and jeans, which would be stupid right? At this point in time we had no idea how much money we actually brought home, we had no idea where we were spending our money…we just knew we didn’t have enough and we had no idea what we had in debt.
During this time we didn’t know where we stood, no starting point and certainly no foundation. We were just meandering along with a destination in mind while having no map and no clue where we were. Our mission at this time was to find our starting point.
There are few key pieces of information you need to gather in order to learn your starting point.
- Take home pay This should be easily obtainable from your pay stubs. If you have a variable income you need to figure out your average. If your income is variable and extremely seasonal you will need to figure out your average for each season. This way you can predict the highs and lows you will experience throughout the year.
- Look at your savings account. It is really that easy…just take a look at your savings account and note the number. Not retirement accounts…savings accounts only.
- How much you spend and what you spend it on. This one could take some leg work. You will need to go through bank and credit card statements categorizing each expense. If the thought of this makes you want to stab out your eyes or you pay for things using cash, you can always track every dollar you spend for an entire month. Remember, this is EXTREMELY IMPORTANT, you absolutely HAVE to know where your hard earned money is going, otherwise it will just keep going while you stand there clueless looking shocked that you have no money until your next pay check.
- Debt Load. If step number three is dreadful because of the work then step four is dreadful because…….well, because it is dreadful. Debt can cause or be a contributing factor in: stress, anxiety, depression, suicidal thoughts, hypertension, marriage and relationship problems…the list could keep going. If you don’t believe me just look here, here, here or here. Or just perform a simple google search and you will get a plethora of information regarding the impact of debt. Anyhow, no matter how dreadful it is you need to know your debt number and who owns the debt. If you have items in collection accounts head to annualcreditreport.com to check those reports.
After completing just four tasks you now know: the amount of money you are working with, the cushion you have, you know what you’re spending and where you’re spending it and you know how much you owe in debt.
These four simple pieces of information give you your starting point. After seeing your situation you may be smiling or you may be crying while pouring straight tequila…either way, now you have a basis on which to make decisions.