Far too many people are in the financial predicament where their financial position needs to be fixed but they have no clue where to begin. This article presents the basic preliminary steps which need to be taken to fix their finances.
Recently, I was having lunch with a friend. Just few doors from the restaurant’s outdoor patio was a PayDay loan store. While my attention was focused on our conversation I couldn’t help but observe out of the corner of my eye the number of people who were pulling into the parking lot and heading over to the PayDay loan store.
After observing at least 3 people enter the PayDay store within a span of 5 - 10 minutes I couldn’t help but mention to my friend my observation. Over the next hour we observed at least another 15 people entering the store.
I don’t prejudge people but I certainly didn’t expect PayDay loan clients to be driving high end late model vehicles!
I was surprised at how many people I witnessed entering this PayDay loan store since the 3 PayDay loan outlets in the town of 44,000 people in which I live always seem to be empty. I will admit, however, that I have never sat in one spot for a prolonged period of time to track the level of activity to these 3 outlets but the fact they have been in operation for several years suggests business is steady!
Quite frankly, when PayDay lenders’ websites reflect effective interest rates and fees that amount to effective interest rates of 391.07%, 443.21%, 517.08%, and 573.57%, they probably don’t need THAT many borrowers. Having said this, one PayDay loan website to which I referred when conducting research for this article indicates that it has more than $1 Billion in funded loans. Shocking!
The fact so many people resort to the use of PayDay lenders leads me to believe there is a sizable subset of the population which has no idea where they stand from a financial perspective.
I then came across a couple of lendedu articles (‘Subprime Borrowers Aren’t the Only Ones Using Payday Loans’ and ‘Best Free Credit Report Site’). After reading these articles and conducting some research on the extent to which people from various socioeconomic groups resort to the use of PayDay lenders (and paying those ‘usury’ interest rates) I thought I would share my take on how to fix your finances.
Know Where You Stand
If you’re struggling with your finances and you want to improve your circumstances you need to know where you stand. The journey upon which you are embarking is like any other journey. You’re lost before you even start if you don’t know your starting point.
Make sure you obtain a credit report….regardless of your perception of your financial circumstances.
Make a Commitment
Depending on your circumstances, your journey to improve your financial circumstances could be short or it could be an epic journey.
If you are drowning in debt and it has taken you a long time to get in this predicament, what makes you think that this will be a quick fix?
Make a commitment to fix your finances….regardless of how uncomfortable you will feel going through this process.
Gather Your Financial Records
Gather your financial records. This would include, but not be limited to, the most recent statements related to all your financial obligations. Locating your loan documents in which you agreed to the terms and conditions of your obligations is advisable.
If you are disciplined and organized, this will be relatively easy. If your financial circumstances are a mess, however, it is entirely possible the paperwork related to the financial aspects of your life is not entirely in order.
Don’t, however, get discouraged. Get started. It is better than doing nothing.
If being organized is something totally foreign to you it is entirely possible you may need to engage the services of someone who is organized. Since you’re dealing with highly personal and confidential information it is imperative you deal with someone honest and trustworthy and who will keep everything confidential.
If your financial predicament is dire, you may need to work with a credit counsellor or a Trustee in Bankruptcy.
Personal Financial Statement (Balance Sheet)
Once you have succeeded in gathering all your financial records the next step is to create a Personal Financial Statement. This document reflects your assets (what you own) and liabilities (what you owe). The difference between the two is your Net Worth.
On the left hand side of a page, itemize all your Assets.
We all think that some of the ‘stuff’ we own is worth ‘x’. In the vast majority of the cases, the true value is a fraction of ‘x’. Unless you own highly valuable or much coveted ‘stuff’, there is a very strong probability that the ‘stuff’ in your house is worth squat. Don’t, for example, assign values to household furnishings. View those items as having no value.
If you own assets that truly have a value then be realistic and conservative when assigning a value to such items. If it reaches the stage where you need to liquidate some assets to pay down your debts, you want to be confident the values are reasonable.
I might be taking this a bit to the extreme but I view a depreciable asset such as a vehicle has being of little value….even more so when leased. This is why I totally exclude vehicle(s) when calculating our family’s net worth.
When listing your assets, be sure to reflect them as either a current asset or a long-term asset. A current asset is one which is reasonably liquid. Money owed to you for which you expect receipt within one year would be a current asset.
Order the current assets by order of liquidity with cash being at the top of the list.
Long-term assets, such as land, buildings, etc., are not nearly as liquid and would be treated as long-term assets.
Total all your current assets and all your long-term assets and then add both values to arrive at your total assets.
On the right hand side of the page, list all your debts and be sure to record ALL liabilities! The value of your liabilities can be found on the most recent statements provided by your creditors. Having said this be sure you double check all values for reasonableness as lenders have been known to make errors.
Next to each obligation be sure to record the specifics (ie. amount borrowed, amount owing, interest rate, payment terms, frequency of payments, number of remaining payments, etc.).
Short-term liabilities include amounts that must be repaid within the year.
Many long-term liabilities (eg. term loans and mortgages) will have a component that is due within one year. Record one year’s worth of payments for these types of obligations as a current liability. The remaining balance would be reported as a long-term liability.
If your mortgage is up for renewal within the year then the entire amount of your mortgage should technically be reflected as a short-term liability. You might disagree with me on this but I can assure you that if the term of your mortgage ends within the next 12 months and your lender is not prepared to renew your mortgage, then you have to come up with the entire amount owing. You may very well want to debate this point with me but before you do so, talk to people who had to refinance their mortgages at the height of the Financial Crisis.
Once you have listed all your current and long-term liabilities, add up these amounts to come up with your total current liabilities and total long-term liabilities. You then add both these sub-totals to arrive at your total liabilities.
After having listed all your assets and liabilities you now have an opening balance sheet. This is all very well and good but it is not enough. You see, the Balance Sheet gives you no indication of the timing of your cash flows. This is why it is critical that you complete a Cashflow Statement.
A cashflow statement provides an outlook on the timing of your inflows and outflows.
Some people use software to help them create a cashflow statement. I, however, have resorted to the use of an Excel spreadsheet because it suits my purposes and I am familiar with Excel.
I created a couple of cashflow spreadsheets for my personal use and provide them below. They are not password protected and can be modified to suit your personal circumstances.
In the Historical Spend Analysis worksheet I record my actual spend for the month of the previous year.
My wife and I resort to the use of a credit card for a significant percentage of our expenditures. This provides us with some context as to where our money is being spent. It also simplifies my cashflow analysis process in that I can easily download information from our online banking platform which can then be sorted and analyzed. I have developed a habit of reviewing all activity through our bank accounts and credit card on a daily basis and this process takes very little time. I highly recommend you develop a similar habit.
Knowing our historical spend patterns helps me complete the projected monthly spend worksheet. I don’t want to insert random values in this worksheet so using our historical spend figures provides me with some basis upon which to forecast our monthly projected spend.
The Actual Monthly Spend and Variance worksheet is where I insert the actual inflows and outflows; these figures are inserted in the unshaded areas. The formulas within the shaded areas then populate the Variance fields.
Since these worksheets solely reflect monthly values, I make a record of the details of any cash payments. This way I can allocate cash expenditures appropriately at month end.
If the first steps to fix your finances are totally foreign to you, my suggestions might appear to be somewhat daunting. That’s okay because it is natural to feel uncomfortable when we undertake things with which we are not accustomed.
If you are not pleased with your financial circumstances and you want to fix your finances, what I present in this article is really not an option. It MUST be done. Step 1 is to know your current financial position.
If you decide not to make a commitment to fix your finances and you continue to do what you’ve been doing then keep in mind that the definition of insanity is to ‘keep doing what you’ve been doing with the expectation of achieving different results’.
I wish you much success on your journey to financial freedom.
Thanks for reading!
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I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company mentioned in this article.