Knowing where to start is difficult, especially when it comes to changing your relationship with money. Alright, maybe you intuitively understand your spending is a little out of control, perhaps you are only just starting to pay attention to your savings, or maybe a friend disclosed how much they have stashed away for retirement (and it is a lot higher than yours). Any of these scenarios might lead you to dig a little deeper into this whole personal finance thing. So now that your interest is peaked, where do you begin?
For anyone new to the world of personal finance, I always suggest coming up with a vision of where you want to be. Naturally, that starts with an assessment of where you are today. The first step in understanding where you are is to list out all of your checking, savings, investment, and retirement accounts.
Below is a list of accounts that you can print out. Fill out all of the relevant accounts with their individual balances. If you only have one account, do not panic, this is only the beginning.
Now that you have all of your accounts and balances listed out it is time to assess where you stand. Let’s take a look at your Total Balance. How are you doing? Well, that depends on how much you earn throughout the year (your total taxable income). If you earn more then you should have more saved and if you earn less then you need to have less saved. This is because the metric for savings is a ratio of income to savings, or what I like to call your Flash Savings Number (Flash Savings Number = Total Savings/Total Taxable Income). This ratio gives you a quick view into your financial savings health. And a great rule of thumb is to have 2-3X your salary saved by the time you are 30 years old, or a Flash Savings Number of 2-3.
Below is a list if salaries with a recommended corresponding savings number ranging from two to three.
There are two types of readers at this point. One is breathing a sign of relief and the other 99% are screaming Holy Shit! If you are in the group with the anxiety attack setting in, do not worry. You can now leverage the fact that you know you are behind on your savings to insert positive habit changes into your financial life. With persistence, you will be able to turn your finances around in a matter of months.
Whether you are hitting your total recommended savings or not, now is a perfect time to come up with some short-term and long-term goals. By creating this list of goals, you will give yourself a metric to judge performance and, from time to time, you can look at back at your progress. Fill out your goals in the chart below (seriously, get out a pen and write them down – don’t just think about them).
Now that you have completed your financial self-assessment, evaluated your savings, and set short-term and long-term goals it is time to get to work. But what are the next steps? Over the next couple of articles, we will investigate how to create a budget, which will allow you to pinpoint areas of financial strengths and weaknesses. After evaluating your budget, we will create an automatic money flow system that will allow you so save money while you sleep.
For now, you are at the starting line. Knowing where you currently stand will give you the visibility to determine exactly where you want to go.