Assessing your Current Financial Reality

by Ron DuBois on June 7, 2011

Before you can move forward financially, you need to understand where you are starting from. No matter what your financial goals are, it is important to take a present financial snapshot. This financial information will be useful in generating your financial plan as well as for providing a gauge of your progress over time.

Over the next few days I'll write about each these four areas of finance in more detail.

Your Net Worth

One of the first places to start when establishing your current financial reality, is determining what your present net worth is. Your net worth represents everything that you own minus everything that you owe. To calculate this figure, calculate your assets and your liabilities and discover what the difference between the two figures.

Your net worth is a strong indicator of your financial strength and should increase over time. Be sure to evaluate your net worth on an annual basis to ensure that you are making positive financial progress on an ongoing basis.

Your Personal Budget

Your spending habits are important when working toward building personal wealth. To determine what your spending habits are as well as to find how much discretionary income you have on a monthly basis, begin to organize financial information.

Collect financial statements such as bank information, investment statements, ATM receipts, income statements and prior year tax returns. Use this information to determine what your monthly average income is as well as what your average monthly expenditures are. Take the difference between your income and expenses to determine what your available discretionary income is. This amount is what you have available to dedicate towards your financial goals.

If your discretionary income is negative, it may indicate that you are living on credit and increasing the amount of personal debts that you owe. If you intend to move forward financially, you need to increase your discretionary income as much as possible. There are two primary methods to accomplish this; increasing income and decreasing expenses.

Increasing Income

One method to increase your discretionary income is to increase your monthly income. Consider increasing hourly work if you are on an hourly wage. If both spouses are not employed, consider adding dual incomes to the household even it is temporary for the benefit of your financial future. Another option is to seek freelance work. And lastly, you could sell unused items in your home such as collectibles, unused books or clothing on online auction sites.

Decreasing Expenses

In addition to increasing income, you can increase your available discretionary income by decreasing expenses. Review your variable expenditures to determine which can be reduced or eliminated. Your variable expenses are those that change on a monthly basis and in many cases, are not necessary. Common variable expenses include travel, dining, entertainment, gifts and clothing.

By focusing on examining your present financial situation, you can determine where you are in relationship to achieving your financial goals. And, if you are not on track, you can make adjustments and changes in order to free up additional discretionary income. This found money can be redirected to reduce and eliminate consumer debt as well as toward investments for your financial future.

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