Financial clarity in under 10 minutes
“Some problems are itchy and uncomfortable.”
Seven years ago, my wife and I bought our first home. In his report, our home inspector mentioned the level of insulation in the attic is lower than today’s standards and that “adding insulation would be wise and could save you money over the years.”
Seven years later, I have not added any insulation to the attic.
I think about the problem often, especially when the electric bill hits triple digits for a few months every summer. But whenever I think about it, my mind floods with images of crawling into a sweaty attic and getting covered with the uncomfortable itchiness of fiberglass insulation. Do I have to rent a machine to blow the insulation into the attic? How much money will I save, really? These questions make me feel very uncomfortable and I quickly purge the thought from my head.
Many people I talk to feel the same way about personal finance as I feel about the insulation in my attic; it’s so uncomfortable, and there are so many questions, the instinct is to shut down and stop thinking about the problem. But the problem will remain until you act on it.
The first step
You do not need to read this entire book to understand your finances.
Personal finance is complicated, in part, because of byzantine rules, jargon, and TLAs (three-letter-acronyms). To go from zero to comprehensive understanding of your financial situation would take hours of education and research.
But here’s the secret: you don’t need a full picture and detailed plan, at least not yet.
The first step to understanding your financial situation can be completed in 10 minutes. It’s called the “personal financial statement”, and it is simply a list of all the accounts and debts in your life along with the dollars associated with each.
The best way I’ve found to complete this exercise is using the Elements software. Elements is an app we use to quickly orient you to your financial situation. It’s completely free for you to use and there is no obligation to work with us. Click this link to begin the 10-minute onboarding.
However, you don’t need software to complete this exercise.
A simple personal financial statement can be made in less than 10 minutes.
Take out a blank piece of paper or open a blank Note in your phone. Write down all the things you own, including your house, cars, checking & savings accounts, 401ks and IRAs. Next, write down all the things you owe, including your mortgage, car loan, credit cards and student loans.
Next, write the dollar value of each account. Estimates are okay; don’t let perfect be the enemy of good.
Finally, add up the balance of the things you own, and subtract the things you owe. The difference is known as your net worth.
You just created a personal financial statement; how did it feel? Maybe you feel guilt and shame for the credit card debt that’s been lingering for years. Maybe this is the first time you’ve added up all your accounts and you are surprised by how much you have.
If this is the first time you’ve seen all your accounts in one place, you probably felt a sense of relief. We often don’t realize how our brain is taxed by undefined problems, and “how much do I have and where is it?” is the most common money problem I hear.
What do you do with this information?
That is up to you. If money has been on your mind, hopefully this exercise has created some clarity on what you want to do next. Maybe you want to commit to paying off the credit card debt; maybe you resolve to doing more research on investing for retirement.
This is the Elements scorecard.
Maybe you need to go deeper to get clarity on your situation. If that’s the case, I highly recommend using the Elements app I mentioned above. The Elements methodology accounts for your income and expenses and will tell you if you’re saving enough and if you have enough flexibility in your financial situation. Click here to get started on Elements.
If you’ve completed this exercise and would like to discuss your results, click here to schedule a phone call. In 20 minutes, we can review your personal financial statement and help to determine what is an appropriate next step for your situation. We are looking for new clients, but there is no obligation to work with us after the free phone call.
