Today I am starting operation ‘focus on money’.
‘But, Maria, you told us that now is not the time to worry about money; you told us we must focus on surviving the health pandemic instead.’
Yes, I did tell you so, friend. And I meant every word I said.
But things have changed in the last month and merely trying to survive, literally keep alive in the next several months, is no longer an appropriate life strategy.
Humanity, it looks like, is winning against Covid – vaccination started this morning in the UK, and the rest of the world is likely to follow suit. Science wins the day again, and there are effective vaccines that will reach all people everywhere and not only rich people in wealthy countries.
Having access to effective Covid vaccines is a game-changer; it may take time, but we will be able to move around again, work and earn again, do business again, and be sociable again.
That is why I will be starting operation ‘focus money’ and so should you. That inventory of my finances is not merely about money – remember that here on The Money Principle, we believe that the purpose of money is to nourish your life? Hence, today I will tell you how to conduct the ‘focus money’ exercise, which is also about the life you want to live.
Today, I will share with you how to inventory your finances and offer you the tools to do it. I’ll show you how I have done it and share what I found in my next post.
Let’s go, friend, and may the Gods of money, wisdom, and the economy are with us. It is time, to paraphrase Ludacris, to keep your mind on your money and money on your mind.
Focus on money: inventory your debt
Any other time I would have said that you should start your ‘focus on money’ adventure from money management, e.g., to begin by tracking your income, spending, cash flow, and net worth.
Today, however, I’d say each of us must start by inventorying our debt. This year has been challenging, and you will likely find that your debt has grown somewhat.
Taking stock of your debt is best done the old-fashioned way – manually. Analyse your bank and credit card statements and:
- Make a list of your creditors.
- Note the amounts that you owe to each creditor.
- Write down the monthly payments you make to each creditor.
- Work out the annual interest rate for each creditor.
Once you have a clear picture of your debt, you can start planning to pay it off. Don’t argue – life is much better when you have no debt. We lived with large consumer debt for decades and have been debt-free (apart from our mortgage) since February 2013. Life is better and more relaxed when you have no debt.
(Remember that you are making an inventory of your debt to have the information you need to pay it off, not to scare yourself half to death and head for sleepless nights,)
Focus on money: income, spending, cash flow, and net worth
Next on the list of taking stock of your money situation is working out your income. It may sound like a trivial task, but it isn’t – people tend to under-estimate how much they earn and forget to include some of their income sources. For instance, receiving a small monthly payment from a wealthy aunt may slip under the radar of your domestic accounting. Work out your income and do it with precision.
When you have money on your mind, becoming intimately acquainted with your spending is critical. It is best done by keeping your receipts over a month and downloading the statements for the accounts you use. (I’m assuming you use internet banking and hope, for your sake, that I’m not assuming too much.)
At the end of the month, analyse your spending using the Monthly Budget Planner. This tool will allow you to calculate your spending easily across categories. Analysing your spending over several months will make to possible for you to make decisions about your consumption. For instance, several years back, I was stunned to see that we spend entirely too much on ‘treats’ – we, as a family, discussed what treats we like and cut down the rest.
Using the Monthly Budget Planner also calculates your monthly and annual cash flow, or the difference between your income and your spending. Having a positive cash flow is excellent. Having negative cash flow means trouble.
Yes, you read this right – negative cash flow means a debt (see the last part of this post).
Finally, you must work out your net worth. Net worth is a bit like unveiling the picture when you do a jigsaw – it brings all strands of your money situation together, so you know where you stand. And can also decide where to go from there.
You can use The Money Principle Net Worth calculator to do that.
Focus on Money: your investments
Have you been paying attention?
If you have and have done the inventory from the last part of this post correctly, you already have a record of your investments as part of your Net Worth record.
You may, however, wish to analyse your investments in more detail. In that case, make a list of your investments (for example, Nutmeg stocks and shares ISA, Vanguard ISA, IG investment account, etc.), the amounts you have contributed, and the investment returns.
I also like knowing which investments are liquid and which are not.
What do you want to do next?
Planning is always a part of my money inventory. I ask myself:
- What expenses am I likely to have over the next several months or a year? Do we need to decorate the sitting room? Do we need to repair the roof?
- How much income do I aim to generate? (This doesn’t always work, and my general rule is ‘aim for the stars to hit the Moon’.)
- How am I to increase my income? Do I want to increase my income?
- Which charities will I support?
These are just some of the questions I ask myself – you may wish to have a different conversation with yourself. You must decide what do you want to do next, however.
Personal finance inventory: final words
These are the ‘focus on money’ steps for a deep dive into your money situation.
Once you have completed them, you will have all you need to make sound decisions about your money and life.