Series: Stages of the financial planning journey – Step 1: What is your starting point?

In the previous article in this series, I outlined the four steps that I think make up your financial planning journey, namely:

Step 1: Take stock of where you are. What is your starting point?

Step 2: Establish your goals and objectives. Where are you going?

Step 3: Make plans to increase your cash flow margin. How can you get to your destination the quickest?

Step 4: Control your cash flow. Stick to your planned route.

In this article we are going to dive straight into step one and discuss how you can figure out what exactly your starting point is because sometimes it isn’t as easy as it sounds. As mentioned in the previous article, I think that this step can sometimes be the most difficult and least rewarding, but you can’t start your journey without it.

I would also like to state that your starting point is nothing to be ashamed of. Everyone starts their journey somewhere and where you start will not determine where you end. You are already making positive changes just by embarking on this journey instead of continuing on your previous path.

You need to start off by knowing that finances are made up of four basic building blocks: assets, liabilities, income and expenses.

Assets and liabilities are stated as an amount at a specific date, whereas income and expenses are measured over a period of time.

Assets are things that you own. These can be further divided into income-generating assets and non-income-generating assets. An example of an income generating asset would be a rental property and a non-income-generating asset would be your personal, paid-off car.

Your liabilities balance is made up of all the amounts that you owe i.e., your debts. This can include (but is not limited to) credit cards, store credit, personal loans, vehicle finance and mortgage debts.

Income and expenses generally don’t need to be defined but it is crucial to keep all 4 concepts in mind when you are thinking about your finances as all the building blocks relate to each other.

There are two documents that you can use to measure the above to determine your starting point and they are:

  1. Net worth calculator
  2. Expense tracker

Both these documents can be downloaded for free under our “resources” section on our website.

The net worth calculator will help you determine what your equity is. Equity is the difference between assets and liabilities. The higher your equity, the better. You will need to state all the assets that you have, from your house and car to the value of your small household items; as well as your liabilities like your mortgage, credit card debt and loans. You will then deduct your liabilities from your assets to determine your starting equity.

Doing this exercise will also make you aware of all your outstanding debt that needs to be paid off. In my opinion, debt can be seen as a truck in front of you on your financial journey. It will slow you down significantly and can cause you to get very discouraged and frustrated.

The next document is an expense tracker. This is similar to a budget except that an expense tracker looks at your expense history whereas a budget is used for future planning.

I would recommend that you track your income and expenses for about 3 months. If you earn a fixed salary then your income shouldn’t change. To track your expenses, take your bank statements for the previous 3 months and enter ALL your expenses into your expense tracker – this will give you a relatively accurate picture of your monthly expenses.

Once you have completed both of these documents you should have a very clear starting point. You know how much you own (assets); you know how much you owe (liabilities); you know how much you get in every month (income) and you know where your money is going (expenses).

I warned you that the first step isn’t fun, but once you have completed it you are in a much better place than before. I always advise that when doing this step, make it more bearable in whatever way will work best for you, for example: with a big mug of coffee or a glass of wine or reward yourself with a good book or an episode of your favourite series. You can also break it up into “bite-sized” pieces and just do one step at a time i.e., first assets then liabilities then month 1 of expenses etc.

Once you have completed step one, go read our next article in this series on step 2 (What is your destination?). I promise that step 2 is a lot more fun than step 1.

If you need any help with what has been discussed in this article, please don not hesitate to get in contact with me.

Picture of Tamlyn N

Tamlyn N

Financial Coach & Business Advisor

LE Consult Group