I am probably going to date myself here, but oh well! When I was growing up, I used to watch G.I Joe (if you were in grade school in the 80s I think it was a requirement, and yes I was a Tomboy!).
At the end of every episode, a kid-themed public service announcement always drove the point home about a lesson that was echoed throughout the show that was being taught, which was “Knowing is half the battle”.
I understood the lesson majority of the time, but the quote didn’t make one ounce of sense to me back then! Well, thank God for experiences and wisdom! That quote is something I find myself saying with so many things in life, especially when it comes to knowing the real situation about your money.
Knowing is half the battle when it comes to money
In the previous blog, we talked about knowing what you want for your vision. There are two parts to this equation; one is helping you to define what you need to do with your money. The second part is knowing where you currently stand with your money…aka the real 411 on your money.
When you are not clear with what position you are currently in with your finances, you will not be able to get from where you are, to where you want to be. I get it, knowing your numbers can be very scary at times, but I assure you that it is better to face the bad, ugly and scary about your money, than to stay in the stupor of denial…and I say that with lots of love and no shade!
Determining the truth about your finances
To get to the bottom of what is going on with your money, you will need to complete the following calculations:
- Your Average Monthly Income
- Your Average Monthly Expenses
- Your Average Monthly Savings
- The Current Value of your Assets
- Your Current Debt
- Your Financial Net Worth
These steps are applicable whether you are a full-time Solopreneur or a Side Hustler! You can access this information via your online banking, paper bill or statements, or if you subscribe to apps such as Mint, Personal Capital, etc. To help you with performing these calculations I have created a checklist for you to help you gather the information that you will need, you can grab it below:
Step 1: Calculating your Average Monthly income
If you’re an Employee:
This is the amount of money that you bring home every month after expenses, taxes, and any other amounts that are deducted from your paycheque. The amount that you will use is the “Net Pay”, and it is found on the paystub that you get from your employer each time you are paid. It will outline in detail all of the amounts that were deducted from your income for the applicable pay period.
You would need at the last 3 months of pay stubs, and you would calculate the average. If your earn a salary and are paid the same amount each pay period, then you can use the last two paystubs for your calculations.
If you are a Full-Time Entrepreneur or Freelancer:
This is the amount of income that you actually take home from your business. From an accounting perspective, this is known as “Owners Pay”. The amount that you pay yourself will be either a delegated amount in dollars or percentage of income revenue from the business on a monthly, bi-weekly or weekly basis. This amount doesn’t include your profit, taxes or expenses, which should be accounted for and put aside separately.
Since most businesses experience seasonality, it is most likely that your monthly income will not be the same every month. This is why I advise using the average of the past 3 months to have a better insight into how much your monthly income is.
If you are a Side-Hustler:
When you are a side-hustler, you have the privilege of being paid by your employer and your business! To calculate your monthly income, you would take both approaches as indicated above, and then add the monthly incomes from your business and employer for the past 3 months to determine your average monthly income.
You can easily determine your monthly income if you are currently using personal finance apps like Mint, You Need a Budget, Personal Wealth, etc., in conjunction with your bookkeeping software (Quicken, Fresh Books, Xero, etc.). You can find out what your monthly net income is by gathering the information from all of the apps that you use. Depending on the app, it should provide you with your average monthly income, which helps if you are someone that is paid irregularly.
Step 2: Calculating your Average Monthly Personal Expenses
This is where you will calculate the amount financial obligations that you have every single month for your personal finances. For the purpose of this blog post, we will not be going into expenses for your business (will be covered in a separate blog post), as these amounts would have been factored and accounted for when determining the amount of Owners Pay.
Your expenses will cover things such as:
- Housing
- Food
- Utilities
- Transportation
- Etc.
It will cover all the things under the sun that you have an obligation to pay for every week, month, quarter or year. All money that’s going out of your pocket needs to be captured in your expenses.
Don’t be surprised if you find out that you are spending more money than you thought! It is a common reaction when my clients have performed this exercise. The reason for performing this exercise is to get a strong understanding of where your money is going. It’s great to have the money come in but we all know the devil is in the details. It’s really about knowing where are you spending your money on a day-to-day basis, so you can make the necessary adjustments to get you closer to achieving your vision.
To gauge what your monthly expenses are you should base it off of an average of the past 3 months. If your expenses are the exact same every single month…One, I’m envious of you! Two, it is normal to have some expenses that fluctuate from month-month, i.e. electricity and gas bills!
Step 3: Calculating Your Average Monthly Savings
You will be looking at all the amounts that you are currently allocating on a monthly basis to various personal related savings goals. These can include savings for:
- Emergency Fund
- Vacation Fund
- Retirement
- Baby
- Children’s Education
- Etc.
You will take the average of the past three months to determine what the average amount is that you are currently allocating for savings.
Step 4: Calculating the Current Value of Your Personal Assets
In this calculation, you will be looking at obtaining the current value of all the things that you own. To be more specific, you are looking at this such as:
- Cash in bank accounts (or under your mattress!)
- Current value of your house
- The current value of any investments:
- Stocks
- Mutual funds or other
- Private investments
- etc.
Once you have all of these amounts, you would add all of the totals to determine the total value of your assets. Again, if you use the personal finance apps such as previously mentioned, it will automatically have a lot of these amounts calculated for you when you have the necessary accounts linked so they can be tracked. If you don’t have these items linked, then you will need to calculate this amount manually be obtaining the statement/evaluation amounts separately.
Step 5: Calculating Your Current Debt
You will be taking the most current information on the debts that you owe from recent statements to determine the what the total amount is that you are owing. These amounts can include:
- Credit Cards
- Back Taxes
- Mortgage
- Car Loans/Leases
- etc.
Step 6: Calculating Your Current Net Worth
This is where you take the amounts that you calculated in step 4 (current value of assets) and step 5 (your current debt) to subtract the amounts from each other to determine what is your current financial net worth. Determining your financial net worth is going to reveal a big overall picture of what’s going on with your finances.
The goal is to have your financial net worth be in the positive, as opposed to the negative. Simply put, when you are in the positive, you have more money than you currently owe, and vice versa for when you are in the red – you owe more than you own.
I would like to stress that if you do this calculation and you determine that you are in the red or in the negative, please don’t beat yourself up over this! It is just a snapshot to show you what is currently going on. I want you to remember the vision that you established for yourself. This is simply showing you that at this time, something needs to get done so you can change the current situation and not go through this again.
Numbers always tell a story
Remember, numbers always tell a story! Your money may reveal a story that you don’t like, but like a choose your own adventure story, you have the control to determine how you want the story to go next time you perform this exercise.
Now that you know how to determine what is really going on with your finances, it’s time to actually go find out what is going with your personal finances. You can download the checklist here to help you determine your numbers.
Once you find out the 411 on your finances, you will be in a stronger position to understand the next steps needed for you to get aligned to accomplish your goals. Stay tuned for the next post, where you will learn to create a plan, set goals to address the issues that you may have uncovered and to actually achieve your vision.
Till next post!
