3 Steps You Need to Take to Evaluate your Financial Situation
In order to make sound decisions about your financial future, you need to first take a holistic and honest look at your current financial situation. This involves evaluating your income and expenses, assets and liabilities, and yes, your money mindset. Here are three steps you can take to better understand your financial situation:
1. Calculate Your Net Worth
TOTAL ASSETS – TOTAL LIABILITIES = NET WORTH
Calculating your net worth is an important and necessary step in understanding and managing your overall financial health. It provides vital insight into your current situation, helps you make sound decisions and enables you to seek out additional financing if needed.
Net worth is a sum total of all of your assets (cash, investments, real estate, etc.) minus any liabilities (credit card debt, student loan debt, mortgage payments, etc.). It is an important calculation for understanding an individual’s financial health and position relative to their long-term goals.
Knowing your net worth allows you to identify areas where you may need to make adjustments in order to improve your financial health. For example, if your net worth is negative, it can be an indication that you may need to reduce expenses and increase income, as well as reduce debt.
2. Compare Your Income vs. Your Debts (Your Debt-to-Income Ratio)
TOTAL DEBT/ANNUAL INCOME
To calculate your debt-to-income ratio, divide your total debt by your annual income. This will give you a percentage that shows how much of your income goes towards debt payments. If your debt-to-income ratio is high, it may be difficult to make progress on getting out of debt.
Reducing your debt and increasing your income are essential steps to improving your financial health and reducing your debt-to-income ratio. One of the best strategies for decreasing debt and increasing income is to create a spend plan. A spend plan helps you track spending, identify areas where you can cut back, and plan for how you will use any additional funds.
3. Understand Your Spending
When you’re creating your spend plan, take the time to itemize your spending. Take a look at your bank account and credit card statements and organize your expenditures into categories (many credit card and banking apps already do this for you). What categories are you spending WAY too much on?
In order for your money mindset to change, you need to take a hard look at the WHY behind your spending. If you’re overspending on things like clothes, is there an emotional reason behind your spending habits that’s causing you to go overboard? Understanding what we’re spending far too much money on – and why – is an important step to cutting down our spending.
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