Money 101 – Lesson 3: Assessment

(This is the 4th article in the Money 101 Managing Your Money Series. We advise that you start from the the first article in the Series. Please click here to go to the Money 101 Managing Your Money introduction)

Having figured out where you would like to be and want to go, you now need to take a look at where you are. Some schools of thought advocate that you should start with assessing your current situation before setting goals. The problem with that is, for most people, their goals setting tends to get limited to merely correcting the problems with the current situation, rather than trying to get to where they would really like to be.

In the last session you made a list of all of your needs and desires. You attached some figures to your goals, and worked out some guidelines in regards to time. You looked at some of the recommended goals and factored them into your plan. The problem for that suddenly becomes evident is that the items on your list require a rather sizable amount of money. Your question: "Where in the world am I going to get that kind of money??? I have not saved a dime in the last two years and I have a KES20, 000 credit card balance. There is no way I am going to be able to get to any of my goals in this lifetime!!"

This question - "Where in the world am I going to get that kind of money???" - is one of the central questions for anyone who wants to gain control of their finances. It is the one question that can trigger the transformation from random money management to controlled money management. The reason you made a list of all of your desires, prices and timelines is very simple; as Abraham Lincoln put it “A goal properly set is halfway reached”

The first step down the path of control involves a discovery process. You earn plenty of money, but it all probably all disappears, and the last week of every month has you scratching your head wondering what the bank did with your cash. You need to figure out what happens to all your money on a monthly basis.

There are many ways that you can do this, but probably the easiest is to put a piece of paper in your wallet or check book and try, for a period of one month, to track every cent that you spend during that period of time. The reason that you want to do this is because you will probably be amazed at how you spend money right now. You MUST go through this step if you are to gain control of your finances and get the things that you really want.

Exercise 2: Creating your Income Statement

This exercise is designed to help you understand how and where you spend the money that you make. Print out or copy the form below and fill it in.  It is a guideline of the common classifications of income and expenditure. If you have expenses that are not classified in the table below, add them in the spaces provided in the ‘Others’ category, or you may adjust it to match your 'peculiar' income and expenditure.

To complete your categorization, you really have to think a little bit more deeply than this. A one-month expense listing is likely to either over-estimate or under-estimate your actual monthly expenses because some expenses do not occur every month. For example, car insurance payments every 12 months, renter's insurance each year, gift occasions such as mother's day, father's day, Mother's birthday, father's birthday, sister's birthday, Christmas. And so on. Try to determine all of "hidden" expenses like this, make a list, and divide by 12. Some of the most common “hidden” periodic expenses include:

  • Health insurance
  • Property insurance
  • Automobile insurance
  • Car maintenance

So give it a try: track all of your expenses for one month. Put a piece of paper in your wallet or your cheque book and write down every cent that flows through your fingers in a given month, whether it goes out in the form of cash, charges on your credit card, cheques, or automatic bank withdrawals. Quicken or Microsoft Excel are good tools to help with this process if you like to use tools like that, or just do it on a sheet of paper. Accumulate the list and take a look at it at the end of each week and then at the end of 30 days.

If you take the time to do this exercise, and really record all of your expenses over 30 days, and consider your longer-term expenses as well, and come up with a total expense number and compare it with your income, then what you have just completed is a true cash flow analysis. You know how cash flows in and out of your household. It may be that you found this analysis depressing. You may find that monthly expenses may be just a bit higher than income, leading to a slowly growing credit card bill. You may also have a big problem every twelve months when the car insurance bill comes due. Or maybe not. Maybe you are a bit more prudent and actually have a little money left over at the end of each month. Either way, it is important to know your true position.

The other half of understanding your household finances is to create what is called a balance sheet (also known as a net worth statement). A balance sheet shows where you stand in terms of your assets and liabilities i.e. what you own, versus what you owe.

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