What You Need to Know About Your Personal Finances

One of the most challenging problems about working with people when you are dealing with money issues is that most people have strong opinions which are not founded on facts.

Some years ago I used to watch The Firing Line regularly. Often I heard Michael Kinsley say, “Everyone is entitled to their own opinion, but not to their own facts.” To be successful with money you need to get your facts together up front.

In addition to the basics you acquire from reading the kind of information you find on this site and in our newsletter, it is essential for each individual to know the facts about their own finances.

At the outset it is useful to identify three kinds of personal data. If you haven’t done it already, take time to gather your information about these now. All of your financial decisions need to reflect the realities revealed by this knowledge.

First, you need an income statement. List all sources of your income along with the amount coming from each. If some of these are annual, quarterly or weekly, do the calculations required to determine the average amount of money coming in per month.

Second, prepare a net worth statement. Simply add up all bank accounts, retirement funds, and any other financial assets plus all real estate values and any other valuables.

Then make a list of all liabilities. Include every financial obligation you have such as mortgage(s), personal loans, auto loans, and credit card balances. Don’t forget less conscious ones like loans against insurance policies or to family members.

Finally subtract liabilities from assets. Many people would assert that this is the most important financial number in your life, reflecting in one cold number the current measure of your success with money.

Third, begin work on a spending plan. This is not a budget in the sense of a controlling or limiting tool. It needs to be a description of how your money is actually being spent month to month.

Using this tool is a skill I discuss elsewhere at some length. For now expect to use two or three months to gather an accurate description of where your money is currently being used.

Just group your expenditures by categories like utilities, house payment, insurance, car expenses, etc. You may be in for some real surprises when you see how much you really spend in some areas.

The information in these three documents (income statement, net worth, and spending plan) is really the basis for all your personal financial decisions. It is important that you know the information you will gather to prepare them and it is important to keep them up to date, preferably monthly.

Keep your financial papers handy for review. Establish a definite place to keep them, one that works for you, perhaps a file drawer, notebook or desk drawer. And keep it well organized, using whatever system works best for you.