The first step is to determine your “net worth.” Net worth is simply the value of your assets less liabilities. The information you gathered on your “Asset Inventory with Values Worksheet” in Chapter Two is your starting point. You should also gather the most recent statements for each asset and liability. Look for bank, brokerage, IRA, 401(k), credit union, as well as mortgage and credit card statements. This information is part of the mosaic of your current financial position. Keep these statements handy, since either you or your financial advisor may need them to contact the financial institutions for more information.

DETERMINE MONTHLY INCOME AND EXPENSES

Determining your monthly income and expenses is more difficult than determining your net worth. If you’re like most people, you don’t know where the money goes each month. No, you probably don’t have a hole in your wallet! You probably use the “pay as you go” budget method, hoping that you don’t run out of money during the month. Record your cash inflows (income) and outflows (expenses), including non-monthly items.

For example: if you pay $2,400 in annual property taxes, divide the cost by 12 to arrive at a monthly property tax expense of $200.

If you are computer literate, programs such as Quicken and Microsoft Money are excellent for helping you keep track of your income and expenses. You can even pay your bills online. For the first few months, keep a detailed journal of your daily expenses to get a clearer picture of where you are spending your money. If your total income exceeds expenses, you have a surplus that can be earmarked for savings.

If your expenses exceed your income, you are practicing “deficit spending,” and immediate corrective action is required.

DEFINE YOUR GOALS

What are your personal and financial goals? Although it may sound like a simple question, very few of us ever take the time to plan our future, let alone commit our thoughts to writing. Once you know where you’re going, finding the right path is rather straightforward. On the other hand, as the old saying goes, “if you don’t know where you’re going, any road will get you there.”

If your future seems cloudy, and you are having difficulty identifying your personal and financial goals, here’s an exercise: Start by dreaming. Put your dreams in writing. Be specific. What do you want? How much will the goal cost? Set a time frame to reach the goal. Organize your dreams by category (personal life, career, health, financial standing) and prioritize them. Create a written action plan. Implement your plan.

Review the plan regularly and monitor your progress. Adjust the specifics of your plan if necessary. And finally, celebrate your accomplishments!

In order to set financial goals, think about the following:

1. When do you want to retire?
2. How much money per month do you need?
3. What large purchases do you wish to make (college, second home, car, vacations)?

The following example illustrates the power of a written plan:

The senior class at Harvard University was surveyed about their life goals. The results showed that only 3% of the class actually had clear, established goals and had them in writing. The other 97% may have had goals, but they were not clear and were not in writing. Twenty years later, the same group was resurveyed. The results showed that the 3% who had clear, written goals had lived happier, healthier, and more fulfilling lives. In addition, the survey also showed that this 3% had a cumulative net worth that exceeded that of the other 97%—combined. (Source: Body For Life: 12 Weeks to Mental and Physical Strength by Bill Phillips and Michael D’Orso).