Financial Freedom: How Much Will You Pay?

You’ve heard the saying, “Nothing in life is free.” Getting out of debt has its price too.  First, it requires that you “get real” about your current financial condition.  In order to get the reality of your finances you’ll need to know four things: Assets, Liabilities, Income and Expenses for the household.  Denial over the situation ends and the work begins.

ASSETS

Everything you own, is an asset.  Add it all up.  Take inventory of your “stuff,” including jewelry, guns, dishes, art, books, retirement accounts, cars, clothing, and the like.  All of it.  Keep in mind though that what you paid for your “stuff,” may not be what you could sell it for.  Think “Yard Sale prices.” If you own your home, look up the value and include that too.  This is the good news.

LIABILITIES

Now, list everyone you owe money to.  Include old cell phone bills, payday loans, credit cards, friends and family, bank overdraft fees, home loans, car loans, etc. All of it.  If you haven’t pulled your credit reports in a year, the grab a copy because this will help you see your debts and help make this more accurate.  Include student loans, taxes, child support payments that have fallen behind, and anything else you can think of.

INCOME

Monthly Income is the number we’re after here.  Since there are so many varying ways to get paid, I’ll try to keep the math simple here.  Take your last year’s Gross Annual Income (BEFORE TAXES) and divide by 12, to get your Gross Monthly Income.

EXPENSES

Now let’s create the budget.  Find some budget sheets online and be sure to mash them all together to include expense items you find inconsistent among them that you spend your money on. For example, transportation costs should include gasoline, maintenance, and registration costs.  Some costs are annual costs, which must be divided by twelve to obtain the monthly cost.

The reason why most people have financial difficulties is that they don’t pay attention to the yearly costs.  When we plan for the yearly costs, and spread that out over time by including it in our monthly budgets, we’re not surprised and have the funds readily available to pay cash.  For example, many families have Christmas funds, where they set aside money each month and that funds becomes their holiday budget. Setting the budget is one thing, it’s sticking to it over time that also creates a challenge in our instant gratification world.

WHAT’S IN THE NUMBERS?

Now that you have the numbers, let’s analyze the situation you’re in.  To find out your Financial Net Worth, take your Assets (Stuff) and subtract your Liabilities (Debts).

     NET WORTH = ASSETS – LIABILITIES

How much you’re worth is important in guiding you as to the direction that is best suited for you to get out of debt.  The reason being is that some people just need to “downsize” and sell a car, boat or home to get out of debt.  Others might be saddled with loans attached to cars, homes and boats, of which the payments are no longer affordable.  If you have none of the above, or just the shirt on your back, then you have nothing to lose in getting out of debt.  Your net worth also tells you that you may just have to repay those debts in full.

After we know our net worth, we need to look at the Income and Expenses for the house.  What I find interesting among my married couple clients is the lack of communication that goes on between spouses about money, budgets, finances and the cost of women’s hair.  Many keep finances separate. Who can we talk to about money, if we can’t talk to our spouse?  What are we teaching our children about money when we stay silent and don’t share? Okay, back to work.

The I.R.S. puts out national standards for average costs for household expenses.  Using these standards, you can compare it to your own expenses and see where there might be excessive spending.  Entertainment and dining out seem to be out of control for many folks.  Also, tracking spending, like you track exercise with the FitBit, brings awareness to where your money actually goes and we all know awareness is the first step to budgeting.

Next, take a look at every other required expense and see where you stack up on the national standards. Electricity on many of my client’s expenses seems super high to me.  It’s because my average monthly electric bill is $35.00.  My husband and I would lose money going solar.  So, when I see clients’ bills at $300.00 a month, I think about whether or not they’re even aware that they’re wasting money every month by leaving stuff plugged in and on.  We live in California, it’s not that cold, or hot.

Take a deep review and understanding of your insurance needs and then look at your insurance policies.  When was the last time you actually shopped around for insurance?  Especially since car insurance is required, it’s important to be sure you’re getting enough of the right coverage at a fair price.  Review your cable bill, cell phone bill, and other obligations to see where you can cut those bills.  Maybe you’re paying for a warranty you no longer need, or another monthly service you just don’t use.  Start cancelling subscriptions, especially where you can find most content online nowadays anyway; and free.

Taxes are important to review too.  If you end up owing taxes, it means you’re not paying, or holding enough back from that paycheck, or paying self-employment quarterly estimates if you’re self-employed. Any business that is not regularly paying taxes in all required forms is headed into a financial disaster waiting to happen.

You might imagine that if your life were a business, you would need to review the financial statements regularly.  Your personal finances should be treated as if it were a small business, where you take a look at your monthly income and then set your expenses on paper first, to see what, if any will be left over funds.  Any money left over at the end of the month is “disposable income.”

The idea here is to use all of this information that is available to you by writing down your numbers and then using them to review the Five Steps to Freedom From Debt that includes:  Do Nothing, Borrow Money, Debt Settlement/Negotiations, Chapter 7 or Chapter 13 of the Bankruptcy Code.  Depending upon how your finances stack up, will help you determine which of the Five Steps is right for you.

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