Dec 30, 2009

Get a Grip on Your Debt: How to Obtain a Clear, Concise Financial Snapshot

Financial Snapshot

This is part three of my Getting Out of Debt: The Essentials series.

In the first two parts of the series we laid the ‘mental foundation’ to start our surge against debt. For most, this groundwork is essential to succeeding, however there comes a time for action. That time is now.

Before we can know where we are going, it helps to know where we currently are. Studying the past does little good right now. We want to examine our current situation, stop the bleeding, and keep our focus on moving forward and on the new habits we will be installing (not the old ones that led to our problems).

A key step in the process is obtaining a clear, concise financial snapshot.

Debt can be sneaky…

Unfortunately, when dealing with finances (and certainly debt) one of the biggest issues is that we don’t realize how bad our situation really is.

The ‘monthly payment’ mentality adds fuel to this fire. Instead of considering what an items full purchase price is, we just ask ourselves, "Can I afford the monthly payment?" A $20,000 new car is much easier to swallow if we only look at the $325/month car payment. This is obviously a dangerous mentality, but one that is rampant in our consumerist society.

This will be one of the first hurdles we need to overcome. We need to ditch the ‘monthly’ mentality and start looking at our overall financial situation.

I’m not an accountant!…

Yeah, neither am I. But getting a clear and concise financial snapshot doesn’t have to be rocket science. It doesn’t take a degree or a fancy license.

We tend to excuse ourselves from having to deal with the dire nature of our financial problems because we are convinced the process is too difficult or complex.

But that’s not the case at all. It’s another justification. Just another hurdle to jump.

Ignore Income and Spending

No, I’m not crazy. These are essential parts of the problem (probably the two largest), however we do not need them to get our financial snapshot. Don’t worry, we’ll be attacking these two categories aggressively very soon.

For now, we will just be piecing together the rough draft of our net worth. How to calculate your net worth is of a little debate in the community. What do you consider a positive asset? What do you consider a liability? ‘Experts’ have all sorts of unique definitions, but we will be keeping it super simple. Once again, we aren’t accountants.

For assets, be very general and focus on the big ticket items. Don’t include personal possessions this first time around. Remember, go big. You can always come back and add later.

Assets may include:

A conservative value of any real estate.
Current retirement accounts
Savings accounts (and other liquid accounts)
A very conservative value for each vehicle (and recreational vehicle)

There are many more types of assets and each of the above categories are extremely broad.

Treat liabilities in the same way. While your cell phone contract is technically a liability, we aren’t worrying about accounting for every tiny detail at this point. Shoot big.

Liabilities may include:

Mortgage(s)
Credit Cards
Student Loans
Business Debt
Car loans/leases

Basically, you are going to want to list every person or entity to which you owe money. Once you’ve covered the ‘big ticket items’ yourself, I strongly suggest you pull a free copy of your credit report to check for any liabilities/debts you may not remember or know of.

When checking you credit report you should use www.AnnualCreditReport.com. This is the only site you need in 99% of situations. I’ve previously written a step-by-step guide to this process with full screenshots for those of you that are doing this for the first time.

Organize the Lists!

Already now we should have a rough list of our general assets, a rough list of our major debts, and a copy of our credit report. Now it’s time to organize it into an easy-to-view snapshot.

When organizing, I will once again suggest to make the process incredibly simple. It’s easy for complexity to creep in, but I try to stick with 5 categories for each asset/liability.

Name of asset/liability
Account Number
A rounded number of the total amount owed (or value).
Interest Rate
A general ‘Notes’ Section

I suggest creating on simple table for your assets and one for your liabilities. I generally order assets with the highest value item on top, and I order liabilities with the lowest value on top. It doesn’t matter what you do this first time around. Just getting the first snapshot together is the key.

As you are adding the items on your credit report to this list, put a star next to (or write in the notes section) for each debt you believe may have an error. Later, you can call these debts and verify the information. Mistakes do happen frequently with credit reporting and correcting this simple mix ups can have a drastic effort on a lackluster credit score.

That’s it! There’s your first snapshot. Keep the list handy and over the next few days and weeks you’ll probably remember things to add to it. The more you revisit and examine the snapshot, the more clear it will become.

Take you new list of liabilities and tape it to the refrigerator (cover up the account numbers for guest)!

Getting Out of Debt: The Essentials

Over each of the next couple of weeks, an additional segment of the series will be released. The links below will be updated as each new articles goes live: