Getting Financially Organized – Part 2 (Gather Information)
In my previous blog I began to explain the financial planning process by describing the first stage – deciding that getting your finances organized is a “must” instead of a “should”. The following step is where you’ll need to roll up your sleeves... it’s time to work!
In any plan, whether financial, professional or personal, you need to assess where you are before you can move forward. As simple as that sounds, not many people actually know what their monthly expenses are or even their net worth. To that point, the second step to getting financially organized is to gather as much pertinent information together as possible in order to assess your current financial situation.
A perfect example arose recently in my personal circle: one of my best friends is going through the process of getting a better handle on her finances and asked for my input. Having decided that this was a priority (a “must”), we started working on getting a good grasp of her current financial situation. The basic requirements for this are to have enough information to produce a personal balance sheet (assets and debits), a cash flow statement (income and expenses), as well as any insurance coverage. Business owners will also want this information for their business. Luckily, in today’s world there are many financial websites and apps (like www.mint.com, myFinance Tracker, and others) that can do everything such as creating personal balance sheets, letting you know if you’ve exceeded any of your monthly budgets, and reminding you when your bills are due. She started by signing up for one of these websites and was up and running in 15 minutes!
If you are a disciplined spender and find that having your cash flow tracked on a transaction basis is overkill, this assumption is perfectly reasonable. However, I have many clients that make well into six figures, and clients who are retirees and whose net worth are in the millions, that are tracking their expenditures. I myself use one of the websites mentioned and feel more in control of my finances than ever before. These tools give a clearer idea of how money is spent on a month-to-month basis and are great for keeping you accountable to your plan.
After the client has gathered their monthly income and expenses, we ask that they provide us a list of their assets and liabilities through a fact finding document. This gives us a strong sense of their net worth as well as any opportunities for tax or interest savings.
Now that the hard work has been done, we are ready to start the next phase of the process … that of setting the financial goals that are important to you and your family. Keep posted for my following blog post which talks about this next step.