Get a Grip on Your Debt: How to Obtain a Clear, Concise Financial Snapshot

By Adam Baker on 28 December 2009 (Updated 7 January 2011) 7 comments
Photo: joebeone

This is part three of my Getting Out of Debt: The Essentials series.

In the first two parts of the series we laid the 'mental foundation' to start our surge against debt.  For most, this groundwork is essential to succeeding, however there comes a time for action.  That time is now.

Before we can know where we are going, it helps to know where we currently are.  Studying the past does little good right now.  We want to examine our current situation, stop the bleeding, and keep our focus on moving forward and on the new habits we will be installing (not the old ones that led to our problems).

A key step in the process is obtaining a clear, concise financial snapshot.

Debt can be sneaky...

Unfortunately, when dealing with finances (and certainly debt) one of the biggest issues is that we don't realize how bad our situation really is.

The 'monthly payment' mentality adds fuel to this fire.  Instead of considering what an items full purchase price is, we just ask ourselves, "Can I afford the monthly payment?"  A $20,000 new car is much easier to swallow if we only look at the $325/month car payment.  This is obviously a dangerous mentality, but one that is rampant in our consumerist society.

This will be one of the first hurdles we need to overcome.  We need to ditch the 'monthly' mentality and start looking at our overall financial situation.

I'm not an accountant!...

Yeah, neither am I.  But getting a clear and concise financial snapshot doesn't have to be rocket science.  It doesn't take a degree or a fancy license.

We tend to excuse ourselves from having to deal with the dire nature of our financial problems because we are convinced the process is too difficult or complex.

But that's not the case at all.  It's another justification.  Just another hurdle to jump.

Ignore Income and Spending

No, I'm not crazy.  These are essential parts of the problem (probably the two largest), however we do not need them to get our financial snapshot.  Don't worry, we'll be attacking these two categories aggressively very soon.

For now, we will just be piecing together the rough draft of our net worth.  How to calculate your net worth is of a little debate in the community.  What do you consider a positive asset?  What do you consider a liability?  'Experts' have all sorts of unique definitions, but we will be keeping it super simple.  Once again, we aren't accountants.

For assets, be very general and focus on the big ticket items.  Don't include personal possessions this first time around.  Remember, go big.  You can always come back and add later.

Assets may include:

  • A conservative value of any real estate.
  • Current retirement accounts
  • Savings accounts (and other liquid accounts)
  • A very conservative value for each vehicle (and recreational vehicle)

There are many more types of assets and each of the above categories are extremely broad.

Treat liabilities in the same way.  While your cell phone contract is technically a liability, we aren't worrying about accounting for every tiny detail at this point.  Shoot big.

Liabilities may include:

  • Mortgage(s)
  • Credit Cards
  • Student Loans
  • Business Debt
  • Car loans/leases

Basically, you are going to want to list every person or entity to which you owe money.  Once you've covered the 'big ticket items' yourself, I strongly suggest you pull a free copy of your credit report to check for any liabilities/debts you may not remember or know of.

ARTICLE CONTINUES BELOW

When checking you credit report you should use www.AnnualCreditReport.com.  This is the only site you need in 99% of situations.  I've previously written a step-by-step guide to this process with full screenshots for those of you that are doing this for the first time.

Organize the Lists!

Already now we should have a rough list of our general assets, a rough list of our major debts, and a copy of our credit report.  Now it's time to organize it into an easy-to-view snapshot.

When organizing, I will once again suggest to make the process incredibly simple.  It's easy for complexity to creep in, but I try to stick with 5 categories for each asset/liability.

  • Name of asset/liability
  • Account Number
  • A rounded number of the total amount owed (or value).
  • Interest Rate
  • A general 'Notes' Section

I suggest creating on simple table for your assets and one for your liabilities.  I generally order assets with the highest value item on top, and I order liabilities with the lowest value on top.  It doesn't matter what you do this first time around.  Just getting the first snapshot together is the key.

As you are adding the items on your credit report to this list, put a star next to (or write in the notes section) for each debt you believe may have an error.  Later, you can call these debts and verify the information.  Mistakes do happen frequently with credit reporting and correcting this simple mix ups can have a drastic effort on a lackluster credit score.

That's it!  There's your first snapshot.  Keep the list handy and over the next few days and weeks you'll probably remember things to add to it.  The more you revisit and examine the snapshot, the more clear it will become.

Take you new list of liabilities and tape it to the refrigerator (cover up the account numbers for guest)!  ;-)

Getting Out of Debt: The Essentials

Over each of the next couple of weeks, an additional segment of the series will be released. The links below will be updated as each new articles goes live:

  1. Acknowledge You Have a Problem with Debt
  2. Debt-Free Living IS Attainable. If You Want It, You Can Have It.
  3. Get a Grip on Your Debt: Obtain a Clear, Concise Financial Snapshot
  4. Dissect the Source: Understanding Your Income and Spending Habits
  5. Plan to Win: Debt Reduction Methods and Emergency Funds
  6. Aggressively Attack Your Debt
  7. The Art of Maintaining Motivation while Overcoming Debt
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Guest's picture
KateMTP

What a great way to get a snapshot of your finances. I am going to start on this tonight. At first I was depressed about my financial worth until I realized that my savings and retirement accounts counted!

Guest's picture
Ken

Knowing what you owe and own is central to knowing how debt is affecting your life. This exercise can create the "aha" that I have to chenge my ways to get ahead. On the flip side, it may tell someone what a great position they have created. Good post!

Guest's picture
Guest

Seems more complex than it needs to be - using something like mint.com or quickenonline.com would probably help to simplify this process

Guest's picture
KC

I also did this summary and posted it on my fridge. I added this step too...

Review all debt accounts from credit cards, mortgage, student loans, car loans etc. Write down the interest amount charged or the portion of your payment that goes to interest from the most recent monthly statement for each account. Also find out if any account charges an annual fee to hold cards or other misc fees like late or over limit charges and divide by 12 to figure out your monthly average "fee" for each account. Now tally up all fees and interest for a total monthly amount from all accounts.

I did this earlier this year and was surprised to see the monthly total amount going toward interest and fees(NOT principal) even though my rates weren't very high! I only did this once when I was "getting my grip" on debt. The posting on the fridge was a huge motivator for me and I'm glad to say I'm now paid off on everything except for a student loan. And that one's gonna be gone by August 2010.

Guest's picture
KC

I do still have a mortgage, that's gonna take awhile...

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Debbie M

The per-month mentality is emphasized by salespeople, too. I once went to a used car dealer thinking they wouldn't have anything for me, but checking, just in case. The guy asked how much I could afford (trying to get my maximum number right away!). I said $3000 (this was a decade ago). He asked how much I could afford per month. I explained that I could afford a $3000 down payment and $0 per month.

**

By the time I finally calculated my first net worth, I was very excited to learn that it was positive.

**

@KC, it was definitely depressing to see how little of my mortgage payment was going toward principal ($30 out of a $610 payment, 13 years ago). At first. But then I realized by just adding $30 to my payment, I would be cutting a month from the time I had to pay my mortgage. So I started paying $100 extra, which sounds kind of small compared to a $610 payment, but which, for a while, was cutting off three months, which sounds huge!

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Brian

Thanks www.AnnualCreditReport.com - this was the first time I checked my credit report, and it was pretty easy using your step-by-step process mentioned above.