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Is your financial
health report terminal?
By Christy
Heady • Bankrate.com
Checking in with a financial doctor rates right up
there with having your teeth cleaned. Painful -- and the taste of
rubber gloves is not comforting -- but if you want pearly whites,
you know you must go through the torture.
In the world of managing your money, your goal is
to get out of debt, right? Once you've met that goal, what do you
want to accomplish financially? Do you want to:
Buy a car? Buy a house? Send the kids to college?
Retire comfortably?
Before you reach those goals, you must figure out
how bad the problem is. To do that, you must do three things to
measure your financial health. First, compare your assets to your
liabilities by completing the worksheets in this chapter; second,
determine what your expenses are; third, create a budget and trim
the financial fat. The best way to begin is to ...
Add up the pluses and minuses
There's no greater mess to clean up than unorganized,
mismanaged financial affairs -- which is why so many people stick
to organizing their financial records about as long as they do a
New Year's diet. Determining what your assets (what you own) and
liabilities (what you owe) gives you a clear picture what you're
worth.
Begin with organized records. These may include, but
are not limited to, checkbook registers, recent bank and brokerage
statements, copies of your income tax returns (keep these for at
least three years), and paycheck stubs. Forget the shoebox theory
-- keep these and all of your financial records in a well-organized
file cabinet for your personal finances.
Once you have all of your information intact, you
can start filling in the first of three worksheets which is a financial
property assets worksheet and includes all the money in your bank
accounts, brokerage accounts, and other investments.
Next, by completing your personal property worksheet
-- which is also an asset -- you'll assess how much your physical
property is worth. For example, your home is probably the largest
(in physical size and financial size) asset you own. Write in when
you bought your home, what the price was, and how much it's worth
today. If you're not sure -- and want to make more than an educated
guess -- contact an appraiser to be certain.
Finally, calculate your liabilities -- all the things
you owe. The main thrust of this worksheet deals with loans, such
as auto loans, student loans, and your mortgage, but do remember
to put down ALL of your outstanding credit card balances (yes, ALL
of them). Your liabilities show how much debt you carry.
Two kinds of debt traditionally exist, although we're
going to add a third: good debt, bad debt, and you-just-have-to-pay-it-to-live
debt. This last type of debt would include electric bills, gas bills,
and telephone bills. More often, they're referred to as expenses,
although they are "owed" debts.
The single, largest component of good debt would be
your mortgage loan because your mortgage is for your house, which
is an asset. You must report your mortgage loan on your liabilities
worksheet.
Americans have long been battling a war to reduce
bad debt. Bad debt makes up the bulk of the liabilities worksheet.
It is what siphons most consumer's paychecks. Bad debt is what you
still owe on your car, your credit cards, your unsecured personal
loans, and even your student loans. Obviously, the name of the game
is to have as few "bad-debt" liabilities as possible and to increase
your wealth substantially.
Bad debt works against you -- Americans are too happy
living moment to moment to realize this. They relish in the ability
to "buy now and pay later." Credit cards, the biggest enticers,
have lured many consumers into vulnerability. Boy are they seductive
-- costly, too!
As an example, suppose you buy a leather couch for
$1,500 and put it on your MasterCard. You can't pay the entire bill
this month, but that's no problem! You only have to make a minimum
payment to remain in the issuer's good graces. However, as other
debts start adding up, you only meet the minimum payment for the
next year or so, or at least until you get out of the hole with
your other bills. Then, one year later, a friend drops her cigarette
on the couch. Now it's torched, and you need a new couch. You get
rid of the couch, but you're still paying for it on your credit
card. "But surely I've more than paid it off by now," you think.
Well, think again.
How long does it take to pay off such a debt? If you
only meet the minimum monthly payments, and your credit card has
an average annual percentage rate of, let's say, 19.8 percent interest,
it will take you more than 22 years to pay off that $1,500 couch.
This is a classic example of how bad debt can work against you.
The more debt you are burdened with, the longer it will take to
dig yourself out of a hole. Therefore, your first priority should
be to eliminate nonproductive debt.
-- Updated: Dec. 20, 2002
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