Take Control. Start Here. Do One Thing.

Do you want to take control of your finances, but just don’t know where to begin? Here’s something that you can do today, which will both boost your confidence and empower you to move forward on other personal finance projects.

The first step is to make a list of everything you own (your Assets) and everything you owe (your Debts or Liabilities).  Subtract the Liabilities from the Assets, and you have what we call your Net Worth.  The most basic form of this list, what I call the “Index Card” approach, can simply include the name of the asset’s owner, (account, property, artwork, etc.), where the account is held or located, and its current value.  It’s simply an inventory of everything, and helps ensure that nothing gets lost or overlooked. 

It is very common for many (and I mean many!) families to have one designated house “Treasurer”, who pays all the bills and manages all of the accounts.  If that person gets sick or passes away, the result is a tragedy that is also messy and costly.  This basic exercise can help to prevent that scenario.

For example, a couple’s basic list might look something like this:

  • Joe – Checking @ Citi =  $3,500
  • Mary – Savings @ ING Direct =  $5,000
  • Joe – IRA @ Fidelity = $42,000
  • Mary – IRA @ Vanguard = $75,000
  • Joe & Mary – NYC Condo = $675,000
  • Mary – Inherited Painting = $25,000
  • Joe – Student Loans = ($35,000)
  • Joe & Mary – Mortgage on Condo = ($500,000)

The timing for this project is perfect. It’s early in the year, so you’re undoubtedly receiving year-end 2012 statements in the mail. Tax season is fast approaching, so you’ll need to get organized by April 15th anyway.  For the first draft on the index card, you can use year-end 2012 values.

Once you’ve captured everything, you can also include notes about a particular item, like the interest rate on your mortgage, etc.  But don’t stop there, because it’s important to track even more information than simply the owner and values of your accounts. Try using the Excel spreadsheet I’ve uploaded, which you can customize to reflect your own circumstances.  DOWNLOAD HERE  You can insert every account, property, debt, and life insurance policy that you own, and add beneficiary information for those retirement accounts, annuities, and insurance policies. Beneficiaries are people who will receive your assets (or life insurance proceeds) if you die. It is critically important to verify that the beneficiary designations are up current and accurate, because the person named on the Designation form will get the money. What this means is that if you forgot to update your accounts when you got married, then your ex-girlfriend or boyfriend will get your money – not your spouse.

This sample spreadsheet helps you track your progress over time with a chart, which you can delete if you find it distracting.  I’ve included Account Owner, Type of Account, the Vendor (where the account resides), Account Number, Value, Primary and Secondary Beneficiaries, and Notes.

Why do you need it?  Let me count the ways. 

1) You’ll always know where you stand financially. As your life changes and gets (undoubtedly) more complicated, you’ll simply need to make minor changes to your spreadsheet.

2) Should you decide to work with a financial advisor, estate-planning attorney, buy a co-op apartment, or apply for a mortgage, you’ll need it.

Financial Advisor:  It’s one of the first things I do with clients because it reveals so much useful information: how many months of living expenses do they have in the bank?  Are there any 401(k) plans from previous employers that can be combined into an IRA?  Are there assets owned by one person that should be jointly held.  Is that valuable piece of inherited art sufficiently insured?

Estate Planning Attorney: They need to know whether you’ll be faced with federal or state estate taxes, and whether you need to take steps to reduce or eliminate that tax obligation.

Mortgage Lenders: If you haven’t applied for a mortgage recently, you’ll be surprised at how thorough and cautious they’ve become since the housing market crashed. In this post-financial crisis world, it’s quite simple: banks are lending you a substantial amount of money, and they want to be paid back.  For my New York City friends, if you’re buying a co-op, the Board will want to know the details of your finances as well.

3) This balance sheet will guide you through your next project – getting organized by filing all of your important documents.  You’ll start with the first line item, and work you way down the list.  Each category or type of account should get its own hanging Pendaflex file holder in your filing cabinet.  For example, Savings & Checking Accounts, Retirement Accounts, Real Estate, Insurance Policies, Student Loans, Credit Cards, etc.  To save valuable filing cabinet space, separate each account using paper clips or binder clips.  Avoid using manila file folders.  They take up a lot of space, and your filing cabinet will turn into an overwhelming, overstuffed mess.

I’ll post separately about how long to keep financial documents.  For now, getting what you have into the right location of your filing cabinet is a great first step.

How often should you update it?

You don’t need to update the account values any more than once per year, or if you to add or delete an account, or have taken on some new debt.  Of course you are welcome to update this document as often as you like.  The sample I’ve provided has one column per year, but you can easily track quarterly or monthly numbers.

Anything else?

This spreadsheet merely tells you what you have and what you owe at any given time.  It is not a financial plan, and won’t tell you what’s missing, nor will it necessarily help you understand or analyze the individual line items.  It won’t jump up and down and say, “Hey! You have two kids. You need life and disability insurance!” or “Here’s how we should structure your estate plan.” A financial planner, estate-planning attorney, or insurance agent would likely do that. I only jump up and down if there’s a critically important point to deliver.  Air horns and megaphones are reserved for emergency situations.

Now that you have a solid, basic list of your financial world, you know where you stand, and can now focus on where you want to go.  Keep a copy of this document in a safe place (where both of you can find it), and make sure that those who need a copy (like the Executor of your Estate, your Financial Planner, Estate Planning Attorney) also have a copy.

Try it out!

Give it a try, and let me know how it works out for you. You can reach me on Twitter @DDOadvisory or Facebook.com/DDOadvisory.  Good luck and be well!

Daniel D’Ordine, CFP® is the owner of DDO Advisory Services, LLC, a full service financial planning and investment advisory firm in New York City and Rhinebeck, NY.
Follow me @DDOadvisory.

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