It honestly can feel a bit scary and intimidating when it comes to stepping into a space where you feel empowered to make intentional and strategic moves around your personal finances and money goals. Trust me, I get it.
Before we jump into this convo, I want to clarify that I’m not a financial advisor. I’m simply presenting financial concepts, insightful information, and my personal experiences around money so you can make informed decisions about managing your personal finances.
If you prefer this kind of info audibly, please check out Episode 3 of my podcast here: https://anchor.fm/faithfulmomboss. I love writing, but I definitely learn better through hearing.
There are TWO major pillars for becoming an effective manager of your finances: education and your money mindset.
As you read this blog post, I want you to start thinking about what money mindsets you have you based on how you grew up? We all come from a variety of backgrounds, experiences, and careers that collectively shapes our view of money which then impacts our behaviors and decisions around money. Shifting your mindset around money into alignment with how you want to live presently, your financial goals and ideal lifestyle for the future is an ongoing journey.
So where do you even start? Well you’re in luck, because we are going to cover that on this blog post! with where you should start when you are trying set the foundation and direction for your finances.
You definitely need a starting point so that you can measure your progress and monitor your goals overtime. You need an easy way to capture all of the important pieces of your financial story.
So Where do you even start? It can be intimidating and it can also feel overwhelming. But if we can break this up into small bite size pieces and tackle them one at a time, before you know it you’ll be on your way to reaching your money goals.
I also want to point out that you can make some huge strides in a short period of time.
The first mindset shift you need to make if you haven’t already is to treat yourself like a business when it comes to your money. You are a business entity. Why are you business entity? Because you own assets (see explanation below), you have liabilities, and you have cash flow coming in and out just like a business does. You generate income (cash inflow) and you certainly have expenses (cash outflow). So let’s break down all these terms as it relates to you and walk through how to build a starting point.
The first step is to calculate your net worth and then your cash flow position. Your net worth = your total assets minus your total liabilities. It’s a measurement or number that will give you a good idea of your current financial health.
You can use something like excel or even pencil and paper if that’s all you have. I personally use excel because it helps to prevent errors in my math.
Your balance captures your assets and your liabilities and the difference between the two is your net worth position. So let’s get started! Yay!
So let’s calculate your net worth. You can do this by putting together a personal balance sheet. So column one on your paper or spreadsheet will be titled assets and then column two will be titled liabilities.
Start with your assets. An asset is simply something that has value and that value can be measured monetarily. It’s either cash or it can be converted into cash. For example my current assets consists of cash on hand. This is cash held at banks, financial institutions or financial tech companies. So think about the money that’s held at your checking accounts, savings accounts, money market accounts and now accounts.
I also have a brokerage account and this is an account that holds all of my investments in stocks I chose to invest in. So just like my checking account at a bank holds my cash, a brokerage account holds my stock investments.
My other major asset that goes on my balance sheet is my retirement accounts. I have a 401k and thrift savings plan through my job, and also a regular IRA which stands for individual retirement account. This is an option for those of you that don’t have 401k or other retirement account options through your employer and we will cover that on another podcast episode and blog post.
The only other asset I would include on your balance sheet is any real estate you own. You’ll list the the current market value or appraised value of your home on the asset side of the balance sheet. If you need an estimate you can go on something like zillow.com by typing in the real estate address and getting a “zestimate” or estimated market value of your real estate.
And then you’ll list the corresponding outstanding loan balance also known as your mortgage on your home as a liability. Note: The difference between your real estate value and the amount you owe on any loans against the property is your equity in the home which simply means it’s the portion of value within the home that you actually own because there are no outstanding loans or liens/demands against that portion of the home’s value. This will be captured in your balance sheet since we are listing the homes value and the loan against your home.
Your Home Equity = Market Value of your home minus any outstanding loan balances on your home.
For example if your home is valued at 300,000 and your mortgage balance is 250,000. You have or actually own 50,000 in equity on your home. When you hear the term equity think ownership.
Note: I don’t really include unique items under assets but if you decide to do so I would stick to items with actual appraised values like jewelry or art.
Ok so to recap the main items that will go under assets are cash, stocks, bonds, retirement accounts, and real estate. Once you have all these listed out, add them up and this is your total assets number.
So let’s move on to liabilities. A liability is simply anything you are contractually and legally obligated or required to pay back. So the common ones are car loans, home or real estate loans, home equity lines of credit, personal loans, and credit cards, or sometimes a tax liability you owe to the IRS. Get the totals of all these and add them up. This is your total liabilities number.
So now that we have total assets and total liabilities we can calculate our net worth. So start with total assets and subtract your total liabilities. This is your net worth. So for example if your total assets amounted to 200,000 and your total liabilities totaled 100,000, your financial net worth is 100,000. Ideally you want to be in a positive net worth position which means you own more financial assets than what you owe.
Now that you know where you’re at you can start tracking this number over time and then establish net worth goals and processes and behavior changes to meet those goals.
So next let’s move on to your income statement so we can figure out what your cash flow position is.
The first step is to figure out how much cash you have coming in within a defined time frame. I do mine monthly. So I take my 2 take home paychecks after taxes, medical deductions, retirement contributions and so forth since that’s what is coming in to my bank account. And I also take my husbands 2 paychecks for the month. After adding his paychecks for the month and mine that gives me the total cash in for the month.
Next, we need to figure out your expenses (cash going out). So you will need to do an assessment or review of your spending in a 30 day period. Some banks will do this for you through your online account, but when starting out I prefer to go through each line item on my account statement within a month and place that item in a category: rent, utilities, cell phone bills, internet, car payments, insurance medical copays, gym memberships, eating out, groceries etc. I also prefer this method if you use multiple accounts, debit cards, credit cards, so you can make sure you capture and identify every single purchase. So you can place and group all the different categories on paper or excel. After you go through every item on your account statement add up everything within each category to see what the total is for each category. And then add all of these spending items together and that’s your total cash out number. Make sure you include every single purchase, bill, or expense so that you have accurate and reliable information.
This will show you exactly where your money is going and will allow you to visualize it all. And it will help you establish a budget once you get to that step.
Some things you’ll want to notice Is if you are spending more than what you bring in, so that means you need to figure out ways to reduce your expenses or increase your income. Another thing to pick up on is if you are spending a lot more money in any of the categories so that you can be more mindful about spending in that area. When I first did this review about 10 years ago, I realized as a single person I was spending over $1,000 a month on just eating out. I was baffled. But had I not done an assessment of my spending I would have continued with a spending habit that was not beneficial to my financial position and goals.
So lets to an overall calculation. Our starting number is our cash coming in that we bring in each month. Then we are gonna add up all of the spending items from our bank statement and subtract that from our cash in.
So if my total cash in is $5,000 and my total expenses, purchases, etc. (cash out) totals to $4,500, the math would be $5,000 – $4,500 = $500. So I’m in a $500 net cash position. After I consider all my money coming in and then consider all my money coming out, I’m left with $500. If you had $5,000 of cash coming in and $6,000 coming out, you are spending $1,000 more than what you are bringing in, which interferes with your ability to build wealth and meet your financial goals.
Some other finance topics that will be coming up will be strategies for reducing your expenses, setting financial goals, and the concept of financial independence which is one of my personal finance goals and How to achieve it, and my finance journey along the way.
If you have any follow up questions or anything specific you want me to address in the future send me a DM on Instagram and let me know! www.instagram.com/stacymichellemccray