So you have decided that you want to get on the right track with your finances. Maybe it’s because you want to travel to Rome and explore Vatican City, or maybe it is just because you are sick of living paycheck to paycheck. Whatever the reason, let me start by congratulating you. This decision is a huge deal (as long as you stick with it). According to The Motley Fool, 69% of Americans have less than a $1,000 in savings (Fool). This is a shocking and terrifying statistic. I compel everyone reading this to work to get out of any and all debts, and start working to get as much saved as you can while still enjoying yourself now.

69% of Americans have less than $1,000 in savings

In order to delve into what your plan needs to be going forward, you need to see where you’re at now. This means that you need to look at how much you currently have in cash and assets, and how much you owe. This document is called a personal balance sheet. First, let’s look at what you have. To do this, you need to look at your current bank account balances, any cash you have, investments (including retirement accounts), and all real assets (house, cars, etc.). Below, I have an example:

Assets

• Cash equivalents (cash, bank accts, etc.): $ 1,102.56
• Investments (non-retirement): $546.01
• Investments (retirement, 401K, etc.):  $ 842.43
• Real assets (house): $0
• Real assets (car, w/ 25% depreciation/yr, start @ $12,000): $9,000.00
• Other (real assets w/in home): $509.00

Total                           $12,000.00

The bright side here is that you have $12,000 in assets. The bad news is that the retirement investments are basically untouchable in the short-run (unless you want to be penalized), and the $12,000 car that you bought is only worth $9,000 now.

Next, we’ll look at everything that you owe: including mortgages, car loans, student loans, and any credit card balance or other loans:

Liabilities

• Mortgage: $0
• Car loan ($250 monthly payment, owed $12,000 initially): $ 9,000.00
• Student loans: $18,000.00
• Credit card debt: $ 8,000.00
• Miscellaneous debt: $0

Total                           $35,000.00

Welp, this does not look very good…

Using the fundamental equation of accounting:

Shareholders Equity + Liabilities = Assets

or in our case:

Net Worth = Assets – Liabilities

This translates to a -$23,000 net worth. In other words, you owe $23,000 more than you can currently pay for. Yes, this is not a great place to start, but once you have this information spelled out, it’s much easier to see where you need to go. We will begin looking more into this situation soon with a look at revenues and expenses.

Bibliography:

Fool, Sean Williams The Motley. “Nearly 7 in 10 Americans Have Less than $1,000 in Savings.” USA Today. Gannett Satellite Information Network, 09 Oct. 2016. Web. 19 Mar. 2017. <http://www.usatoday.com/story/money/personalfinance/2016/10/09/savings-study/91083712/>.