When you find yourself in debt, the first instinct is to jump right into paying it off. However, you should take a step back and thoroughly assess your current financial situation before taking any action. A wealth management plan should include an assessment of your current financial situation, so you can understand where you are making mistakes and why. In my Phases of Wealth Building post, I refer to this step as baselining. Getting help from a financial professional can help you with establishing metrics for measuring your progress. But before you call up an advisor, start actively monitoring your own spending habits and see where your finances could be improved.
Wealth Assessment Methods
Wealth assessment or baselining - is a process that helps individuals understand their current financial situation and make informed decisions about how to improve their fortunes. There are a few ways that you can use to assess your wealth. The most common ways are net worth or 'income and asset' ratios. Net worth is the most straightforward measure, but it can be difficult to calculate and is not always reliable. Income and asset ratios are more accurate, but they can also be more complex to calculate.
Where to Start Your Baseline
Getting started with your baseline can be as easy as opening a notebook and writing down all your income and your fixed expenses. The purpose of this is to access where your income is being directed once you get it. This is often the very first step that I recommend to my clients. It can be eye-opening; and for some, it can be emotional. There is something cathartic about knowing where you stand financially as opposed to having a vague notion and wondering what you have available to you.
With your income and expenses written down, you can start to ask yourself probing questions. Such as, are your expenses reasonable when compared with what you bring in? Are there unnecessary costs in each of your budgets? Perhaps dining out too often is getting expensive. Or maybe it's time to cut the cable. Are there expenses that you would consider frivolous? Is there a way to spend less on those items? Do you have any recurring monthly costs that could be eliminated?
How to Use the Baseline
Many people don't know where all their money is going and how much they're paying for services they're no longer using. Take a high-level look at your budget (and if needed, make some rough estimates) to see where your money is going before calling a financial advisor. Once a person's wealth has been assessed, they can use the information to make decisions about how to improve their financial situation. Try to use mindful spending principles to find ways to save money on expenses that are not directly benefitting your life.
After establishing the first cut, I encourage you to reach out for help in establishing measurable goals and metrics for creating a financial baseline. Have you done a wealth assessment of your current status? Did you find anything that surprised you? If so, share in the comments below.
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