Evaluate Your Current

Financial Situation

The first step to moving toward wealth is evaluating where you are right now; that is, measuring your current financial health.  In a later step we'll evaluate where you want to go, but in order to map a route to your future destination you first have to know where you are right now.

A lot of people avoid putting down on paper exactly what their present financial situation looks like because they're afraid of what they'll find.  However, keep in mind that however dire your financial situation may look right now, people have been in worse situations and have managed to turn things around and gone on to become wealthy.  If your intent is to become rich, you need to have a sound financial plan that you're working toward each day that allows you to measure, track and control your finances, and that empowers you to live your best life.

It's impossible to reach a future ideal goal if your present is not set up to support it; you have to set up the foundation for the ideal.  Take a look at your present financial situation and get started on the immediate work it requires. The analysis of your current financial health will include the following areas:

• Your Spending Plan or Budget
• Paying Off Debt
• Having an Emergency Fund
• Creating Passive Income
• Creating Multiple Streams of Income
• Insurance Needs
• Tax Planning
• Financial Education
• Investments
• Retirement Plan
• Financing Your Goals
• Your Net Worth 
• Estate Planning

Start off by answering the following questions: 

-  How many credit cards and/or store cards do you have for personal use?  Do you pay the entire balance on your credit card each month?  Do you have credit card debt?  Do you have other personal/consumer loans?  If so, do you have a plan to pay off your debt?

-  Do you pay your bills on time?

-  Are you saving a minimum of 10% of your net income for investing?  That is, do you pay yourself first?  If it's not 10%, what percentage of your income have you saved during the last six months?

-  Do you have three to six months of expenditures saved up in case of an emergency?

-  What is your current income?  How can you increase your income?

-  How is your income earned?

- Do you rely mostly on earned income, or do you also have a stream of residual income (passive income and portfolio income)? 

- Do you have a strategy in place for developing multiple streams of income?   

-  Do you have insurance to protect your assets against major catastrophes?

-  Do you know how to legally minimize the amount of taxes that you pay?

-  Do you have a retirement plan?

-  Do you work at improving your financial literacy?

-  What do you want to leave your heirs?  Are your estate plans in order?

-  Do you have a financial plan?  Do you know what your short, medium, and long terms goals are and do you have a plan on how to finance them?  How much would you like to spend on travel and adventure?  How much do you need for your child's education?  How will you pay for that house by the lake you've always dreamed of? 

-   How is your overall financial situation compared with last year at this same time?  Is it improving or declining?

In addition to answering the questions above, you will need to prepare certain personal financial statements.  The preparation of these financial statements will help you clarify the current status of your financial situation and provide a "starting point" for any future action.  We've already mentioned having a spending plan or a budget to track your spending.  In addition, you need to prepare a balance sheet and an income statement. 

Do you remember receiving a report card each semester in school?  Of course you do.  Well, as a grown up your report card is your balance sheet.  A balance sheet is a snapshot of your assets and liabilities at a specific moment in time.  If you subtract your liabilities from your assets you get your net worth.  Hopefully, your net worth is positive and you can get to work at increasing it even more over time.  However, even if you're in the red, you can start moving toward a positive net worth right now.   

In addition to a balance sheet you'll also be preparing a personal income statement.  An income statement is a financial document showing your income and expenses over a period of time.

There' s a great workbook by the Motley Fools that you can use to assess your current financial situation, The Motley Fool Personal Finance Workbook : A Foolproof Guide to Organizing Your Cash and Building Wealth. 

Remember, assessing your current financial situation is the first step toward building wealth and being able to finance your life goals.  If you put your financial affairs in order this will help you create a life of your own design.