Rule 19: You Have to Know Where You Are Before You Start
Before you can go forward, you have to know where you are now. When Robinson Crusoe swam ashore from his shipwrecked boat, the first thing he did was check out what stores and guns and ammunition he had. When he knew that, he could assess the situation and move forward.
So you are going to swim ashore and begin your new life. The first thing you have to do is to take stock. Find out what you’ve already got, what can be used, what can be discarded or discounted, what you owe, what you are owed, what basically is your net worth.
You’re going to do a full financial audit on you and your life. If you don’t know where you are before you start, you can’t really work efficiently toward becoming wealthy. It’s a wise man who lays out his tools before he begins the job.
Here’s your check list. Finance nerds call this a Balance Statement. It is simple addition and subtraction. You add the value of all the things you own and all the debt you have. Once you know these numbers, you subtract them. Here is an example. It may need adapting to suit your individual circumstances. Start with the big figures to get a picture of where you are right now overall:
If your net worth is a negative number, you have more debt than assets. A negative net worth is a dangerous sign. Technically, a guy who lives under a bridge that owns nothing and has nothing has a higher net worth than you.
Now that you have an overall figure, you need to look at your typical inflow and outflow of cash on a monthly basis. Finance nerds call this a Cash Flow Statement. Most people look at it like a budget.
| Inflows | |
| INCOME | |
| Salary, Wages, Commissions | $ |
| Rental Income | $ |
| Interest and Dividends | $ |
| Social Security Benefits | $ |
| Retirement Benefits | $ |
| Child Support and Alimony | $ |
| Total Inflows (sum of everything in inflow category) | $ |
| Outflows | |
| DEBT | |
| MORTGAGE Payments | $ |
| Loan Payments (car, installment, student, etc.) | $ |
| Minimum Credit Card Payments | $ |
| OTHER LIVING EXPENSES | |
| Auto (Insurance, Fuel, Licenses, Service) | $ |
| Daily Living (Food, Clothing, Supplies, etc.) | $ |
| Education | $ |
| Entertainment & Recreation | $ |
| Health Insurance | $ |
| Homeowners Insurance (not in escrow) | $ |
| Life Insurance | $ |
| Maintenance | $ |
| Medical | $ |
| Phone and Internet | $ |
| Property Tax (not in escrow) | $ |
| Subscriptions and Dues | $ |
| Supplies | $ |
| Utilities (Electicity, Gas, Water) | $ |
| Vacation and Travel | $ |
| Miscellaneous | $ |
| Total Outflows (sum of everything in outflow category) | $ |
| Net Cash Flow (inflow – outflow) | $ |
This may not be ideal for your circumstances but I’m sure you get the idea. Don’t be tempted to skip this exercise. Even if your financial situation is shitty, it’s time to face up to reality so that you can take positive action to address the situation.
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