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Analyzing Your Current Situation is Essential to Achieving Financial Security

By Jane Young, CFP, EA

Whether you are just getting started or your net worth is several million dollars, you may be struggling to find time to develop a comprehensive financial plan. Although you are busy, make some time to look at your current financial situation.

You can take a huge step forward by at least knowing and analyzing where you are today.  As you go through this process, areas that need immediate attention will rise to the surface so you can focus on what is most important.

Begin by developing a personal income statement. Start by identifying your sources of income, this should be straightforward unless you have a lot of business activities.  Next, identify your annual expenses. Go through your earnings statement, checking account, and credit card statements to identify your expenses.  If you use a lot of cash, keep a log for a few months to track this spending.  Categorize your expenses by items that are non-discretionary and discretionary.  It is also helpful to identify what goes towards saving and investing.

Subtract your expenses from your income to determine how much free cash flow is available.  This should be a positive number. Analyze how you spend your money and how much you are saving.  This can provide valuable information on how you are managing your finances and what steps you can take to improve.

Be sure your discretionary dollars are being spent on what provides you the most value. Strive to save or invest at least 10% of your gross income. If you have a lot of cash remaining at the end of every month, how can you make better use of that money?  Are you maximizing your retirement contributions or at least contributing enough to receive your employer’s match?  Are you investing your money in the most tax efficient accounts for your situation? Where applicable, consider making contributions to a Roth IRA or a Health Savings Account.

Next, determine your net worth by developing a personal balance sheet. Make a list of your assets and the type of account or asset they represent. Subtract any debts such as a mortgage, car loan, credit card balances or student loans.  Your net worth is the total value of your assets less your debts.

Analyze your assets to find opportunities to improve your financial situation.  Be sure to maintain at least four months of cash reserves to cover emergencies.  Avoid leaving idle cash in investment accounts or low yielding bank accounts. Certificates of Deposit are currently paying over 4.5% for maturities as short as 6-months.  Rebalance your portfolio if you are heavily concentrated in one category.  Consider using excess cash to pay down outstanding debts or maybe create a Roth IRA account.

Make the time to understand and analyze your current situation to uncover opportunities to help you reach your financial goals.