Thursday, March 6, 2008

Personal Finance Basics - Where To Start

by Aussie 1 comments

Are you trying to get your personal finances organized? This article will help get you started.

Lots of people have good intentions when it comes to personal finance - they just don't know where to start. And it's not always easy. Everyone's situation is different - there's no one-size-fits-all solution. You may be in a situation where you have trouble making ends meet from week to week. Or you may have a decent income coming in each week but never seem to have any money left at the end of the pay period. There are even those among us who have managed to save a little money but are not sure what to do next.

Take Stock Of Your Personal Finances Now!

The first step you need to take is to work out where you are now. This is essentially establishing what you financial position is now. What are your assets and liabilities? How much income do you have each month? How much do you spend?

What Are Your Assets?

This can be a tricky question. How do you work out what an asset is? The simplest asset to identify is cash in the bank. Next will be any investments you have - stock market, real estate, retirement fund and so on. Then, if you own (or have a mortgage over) your own house you might like to include this next.

Now comes the gray area. Some personal finance books will tell you that lifestyle purchases like cars, boats, televisions and stereos are not assets. They argue that these "assets" wont appreciate in value and in many cases will have very little resale value. And in the worst case scenario, they may have high maintenance costs associated with them. I'm not going to say whether or not you should include these things in your list. I tend not to include them, but it's up to you. You should be going though this exercise (establishing your financial position) on a regular basis and the most important thing is to be consistent over time in what you record.

For each of the assets you've listed, assign a dollar value. For financial asset (like cash, mutual funds and stock market investments for example) this will be easy. For other things you may like to record the purchase price. In cases where the monetary value of the asset diminishes quickly over time, you might like to allocate a value based on how long you've had it and how long you think it will last. Better (and easier) still, just don't include it as an asset. Consider it as an expense - like a night out or a weekend away.

What Are Your Debts?

This should be a little easier than the assets - as most lenders will remind you frequently of how much money you owe them. Write them all down. Include any money owing on your mortgage, personal loans, car loans, credit card debt, student debt, store cards and so on. Now write the amounts next to them.

Do You Owe More Than You Own?

The next step is to add up all the values you allocated to all of your assets and write down the total. Now add up all of your debts and write down the total. Now the moment of truth - subtract your total debt figure from your total assets figure. What do you get? Is it a positive number or a negative number.

If you got a negative number, don't panic. At least we know where we stand. You should be happy that you now have a basic idea of your personal finances and how they stack up. Knowing how much net debt you have will give you something to focus on. Each month, you will want to try to reduce the deficit of assets to debt. You may not improve every single month, but overall you want to see a steady improvement over time.

If you subtracted your debt from you assets and got a positive number, well done. Don't become complacent, but you must be doing at least something right to be in that position. Either though hard work or maybe just good fortune you are ahead of the game - but by how much? Or maybe a better measure would be to look at the total interest you are paying on any debts you may have, then compare this to your income. You may have more assets than liabilities, but are you moving in the right direction?

In my next article I will be looking at what our next step should be. How does our income stack up against our expenditure? Please come back tomorrow to read the next article in the series on personal finance basics.

Comments 1 comments
Steve said...

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