All of you reading this have used a GPS, or an APP for directions. And when you enter the information about where you want to go, the GPS asks you to enter your starting point, either your address or your current location.
Makes sense, doesn’t it? The GPS needs to know where you are in order to send you the directions to get where you are going. Every journey starts with a beginning. And at the beginning of any journey, it is important to pray to God for safe travel. “They said to him, ‘Consult God, that we may know whether the journey we are making will lead to success.’” ~Judges 18:5 (NABRE)
Knowing your starting point also applies to making changes in your financial life and including God in the start of that financial journey is imperative.
In today’s Money Musing we will talk about the first three steps you need to complete in order to figure out where you are. Next week, we’ll talk about the next three steps to figure where you are. Then we’ll cover how to get where you are going.
Figuring out where we were was a problem for us years ago. We were struggling financially and all of our financial issues were swept under the rug. Neither of us was bold enough to admit that we had a problem, so it went unacknowledged and unsolved. It took years for us to hit bottom, realize we had an issue, and figure out exactly where we were.
Hitting bottom may sound like an awful place to be, but simply stated it is the place where you decide that you have moved far enough in one direction (where you really don’t want to be) and have decided it is time to move in another direction (where you really do want to be.)
The first step in making any type of change is to realize the change is necessary. This is true no matter what kind of change(s) you want to make or how much money you make, save and spend. We’ve counseled people who could not save any money even though they had a mid six-figure income. We’ve also counseled people who did not know how they were going to pay the next month’s rent. We’ve also counseled people who realized their consumer driven mindset was the opposite of how God intended them to live and they wanted to learn to be more generous. The ‘bottom’ is the point at which you decide change is necessary.
Whether you want to save more, pay off debt, manage your money better or give more, it all starts with acknowledging that something needs to change and figuring our exactly where you are so you can change directions. The items below will be valuable tools in assessing the starting point of your financial journey.
1. Where are you on the Compass Money Map?
The Money Map is a tool to gauge financial well being as it gives you a snapshot of the different steps it takes to reach true financial freedom. There are seven destinations on the map. Using the Money Map, you begin with Destination 1 (start using a budget, save $1,000 for emergencies and begin giving) and finish at Destination 7 (True Financial Freedom).
Ideally you should complete the destinations in order. In reality most people are scattered and have some steps complete on several different destinations, thus financial chaos. How can you save for your children’s education or fund your retirement if you don’t use a budget and know where your money is actually being spent? How can you pay off credit cards if you do not have an emergency fund and you have to keep using credit to take care of those little emergencies that continue to pop up? How can you be generous if giving is not a priority?
Using the Money Map, check off all the steps you have completed in each destination. Then complete, in order, each incomplete step starting with Destination 1. (More on this in the “Get Where you are Going” Blog in two weeks.)
2. How Much Debt Do You Have?
Use the debt list to itemize all your debts. Be sure to include everything–credit cards, car payments, mortgage, student loans, past due bills, medical bills and the money Uncle Fred loaned you a year ago that you never paid back. The debt list should also include any loans for which you have co-signed. If the borrower defaults, as the co-signer 100% of the outstanding balance is your responsibility to pay back. Thus it should be listed on your debts just in case you end up paying the outstanding balance.
This step is an eye opener for most people. It is usually the first time they have put together the whole list of outstanding debts and it can be a tad overwhelming when that total is tallied. Sure, we all know the amount of the car loan or the mortgage payment or the minimum payment on the credit cards, but once you see it all added up in one place it can be a frighteningly large number.
3. What’s Your Net Worth?
If you want a fairly clear picture of your financial health, take some time to complete a financial statement or net worth calculation. A financial statement basically has 3 pieces–assets, liabilities and the difference between the two.
Assets are anything you have that is of value, such as house, cars, bank accounts, investment accounts, and retirement accounts. Assets are also material goods such as jewelry, furniture, electronics or clothing.
Liabilities are any debts you have, including the mortgage, car loans, credit card debt, consumer loans, home equity loans, student loans or loans from relatives, and any past due bills. Monthly bills that come due and are paid on time are not considered debt (example: electric or phone bills paid in full each month are not debt.) But if these monthly bills are past due, then they are considered debts.
Net Worth is the difference between your assets and liabilities. Subtract the liabilities from the assets and the difference is your net worth. Hopefully it is a positive number … if it’s a negative number, then you really need to buckle down and concentrate on saving and paying off debt.
These first steps will give you a good overview of various aspects of your current financial picture. Next week we’ll talk about the next three steps. It’s going to take some time and will test your patience but remember: “A journey of a thousand miles begins with a single step.” (Chinese Philosopher, Laozil)
When you are getting your finances under control, start giving. I know this sounds counter-intuitive, but it is important for you to consciously recognize that God owns everything and you are his steward. This concept is the foundation of all your financial planning and will serve you well as you move forward to define your financial location and move toward your ultimate financial destination.