Assessing Your Situation

Your net-worth statement and income-and-expense plan are two very important tools to help establish your current situation and your progress toward your goals. Each should be a one-page report that you can review once a month.

Net-Worth Statement

Your net-worth statement establishes what you own and what you owe. Think of it as a personal balance sheet. It lists the balances of all your asset accounts and your debt accounts — the current asset value or the total owed. The net-worth statement helps organize the list and makes easier the job of managing and tracking.

To start, gather copies of all your account statements: checking, saving, mutual fund, brokerage, life insurance, credit cards, mortgage, equity loan, car loan, school loan, and anything else with a balance. Organize the statements into two piles — one for assets that you can liquidate for value and one for liability balances that you owe. Organize the asset pile in order of safety or ease of withdrawal. This would put cash accounts such as bank and money market accounts and life insurance cash value on top. Then list the riskier, but still easy to withdraw, investment accounts next.

Don't Stop Now

List the restricted accounts next — the retirement accounts. These might include individual retirement accounts (IRAs or Roth IRAs), employer accounts (401(k), 403(b), or deferred-compensation accounts), or self-employment accounts (SEP IRA or SIMPLE accounts). Finally, list your assets that are not liquid — the things that would be difficult or expensive to sell. These are so-called use assets such as your home, car, boat, business interests, and personal property.

Use assets are difficult to value because you don't get a statement every month listing their value. Home values can be estimated by using tools available online and through real estate brokers. A quick Internet search using “what is my home worth” will bring up the most common home value estimators. Don't be tempted to overvalue personal assets unless they are special collections or antiques that can be appraised. Online resources to value your car, boat, or airplane can be found with a quick web search.

Set up direct deposit to savings to build your emergency fund. You should eventually have three to six months' expenses in an account, depending on your job security and the waiting periods on your disability insurance coverage. Start today by directing 1 percent of your pay to an account. Increase the amount when you get pay raises.

Check Your Results

Once you've finished your net-worth statement, step back and examine the breakdown of your assets and liabilities. Do you have enough cash available in case of emergency? Do you have high-interest debt that should be paid down with cash or targeted with extra monthly payments? Do you have old retirement accounts that could be combined or rolled into new accounts to make them easier to manage? Do you have both liquid investment accounts as well as retirement accounts?

Income-and-Expense Plan

Your income-and-expense report lists all your payments broken down by month or by paycheck, depending on how you prefer to think about them. These are not the account balances, but the amount you regularly pay toward each expense or receive from each income source. Tracking where your money is coming from and where it is going is very important from an everyday budgeting standpoint, but also in planning for retirement. It's hard to know how much you need to save for retirement when you don't know what your current lifestyle costs or how much you can allocate in your budget toward investing.

Start your income-and-expense list by gathering your bills and your pay stubs. Not all bills come monthly; be careful not to miss the quarterly or annual bills. Not every expense results in a bill; pull together credit card and bank statements so you can calculate the amount you spend on variable expenses such as groceries, clothing, entertainment, and holiday spending.

Getting It Right

The trick to a good income-and-expense plan is to boil everything down to its monthly or per-paycheck equivalent. The regular bills are easy because you probably have a recent statement to refer to. List the cost of each next to the appropriate category. Annual or quarterly bills need to be divided down into their monthly or per-paycheck equivalent. Remember that there are four and one-third weeks in each month, so if you're adjusting a monthly expense, such as the electric bill, into a weekly per-paycheck equivalent, you'll need to divide by 4.33.

Credit Purchases

List the expenses that you pay with your credit card separately in their correct category. For instance, if you went out to eat and paid with your card, put that expense under entertainment or dining. Payments toward paying down an old credit card balance are listed under credit card payments. So the $500 you sent to your credit card company last month might contain both current expenses — such as dining — and debt reduction through payment on the previous balance.

Both the net-worth statement and income-and-expense plan should be updated monthly.

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  4. Assessing Your Situation
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