Day 1 – Assess Your Financial Health

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If you took just one positive action every single day to improve your finances, what could you accomplish?

Every day throughout March, I’m going to share a task or a thought that will help you succeed at money. I’m going to show you how to make more money. I’m going to teach you how to live happily with less expense. I’m going to teach you how to prepare for financial emergencies, how to grow your assets, how to pay your debt, how to talk to creditors and customer service people, and much, much more. This is a guide for a happier, healthier, wealthier life.

How long have you been struggling with money? Months? Years? Your whole life? It’s time to stop that. Over the next 31 days, you’re going to make real, visible financial progress.

Before you can start fixing your financial problems, though, you need to assess your financial health.

That part’s easy. So easy, in fact, you only need to know three things.

  • You need to know your income.
  • You need to know your expenses.
  • And you need to know which of those two is bigger.

Let’s get started.

How Much Money Do You Make?

The first thing you need to do: know and understand your income. You probably don’t even have to think about this one. You know how much money you make, especially if you’re salaried. (I told you it was easy.)

But maybe you don’t know how much you make. That’s more common than you might think, especially if you’re juggling multiple jobs that each vary your work hours from week to week. It’s also common among freelancers and entrepreneurs whose income comes on a per-project, commission, or other irregular basis. If you’re one of those people, try to work out an average. Figure out a number for your yearly income, even if it’s a rough one.

Got it? Good. Now, I want you to look at your income through a different lens. How much do you earn in one day? How much in one HOUR of work? How much will you earn over the next 10 years if your income doesn’t change?

What sort of purchasing power does that income give you? We’ll fuzz the math on taxes a bit for now, but assuming you work 40 hours a week, 52 weeks a year:

  • If you make $20,000 a year, you’ll put in 6 hours of work to afford a $50 dinner for two. For one hour, you can buy a month of Netflix, but not a $10 shirt from Target. If you invested one hour of work every day at 5% interest (compounded monthly), you’d have $32,347 in 10 years.
  • If you make $40,000 a year, you’ll work for about 27 hours to afford a $500 laptop. For one hour, you can afford a a 31-count box of diapers and maybe have enough left for a small McDonald’s coffee, but one hour won’t get you the $35 co-pay to see your doctor. Invested at 5% interest, one hour a day would become $34,926 in just 6 years.
  • If you make $80,000 a year, you’ll need to pull a 12-hour day to afford one semester of your daughter’s college textbooks. One hour is enough to pay the $35 co-pay to see your doctor, but it isn’t enough to afford a $50 dinner for two. Invest one hour a day at 5%, and in less than 9 years, it will grow to $100,000.

You can decide on your own if you’re satisfied with those numbers, but here’s why I’m pointing these details out: I want you to change the way you think about the money you earn. To truly understand how much money you earn, you need to know how that income fits into the wide world of things to spend that money on.

Now figure up your income for one month. Jot that number down on a piece of paper. We’ll use it in second.

How Much Does Your Life Cost?

Now we’re going to examine your expenses. This part is a little trickier than figuring up your income, especially if you don’t already track your spending. Let’s look at it one category at a time. Write each category on your piece of paper, and next to each one, write down the amount you spend on that category in one month. If you’re unsure about an amount, try to work out an average or give it a good guess.

  • Housing (rent or mortgage)
  • Utilities (electricity, natural gas, heating oil, propane, water, sewage, garbage)
  • Food (including restaurants, drinks, tips)
  • Transportation (gas, bus fare, tolls, parking fees)
  • Communication (cell phone, Internet access, etc.)
  • Healthcare (health insurance premiums, prescription medications, over-the-counter medicine or supplements)
  • Debt Payments (student loans, credit cards, auto loans, personal loans, late fees, etc.)
  • Entertainment (concert tickets, MMO subscription fees, Netflix, hobby supplies, etc.)
  • Household Goods (toilet paper, cleaning supplies, soap, shampoo, etc.)
  • Clothing (acquiring new clothes, dry cleaning, etc.)
  • Pets (pet food, litter or bedding, medication)
  • Education (tuition, competency courses, certification or licensing fees, textbooks, etc.)
  • Anything else you spend money on in a month

Tally everything up. These are your expenses. Write down your total. We’ll use THAT number in a second too.

Before we find out your financial health, look at your expenses and analyze them a bit. Are your healthcare costs low because you’re in great shape, or are they low because you’ve been neglecting healthcare and hoping you don’t get sick? Do you spend more on clothing every month than you do on food? If you have a long commute, how much of your income is getting eaten up by transportation? How satisfied are you with the amounts you spend in each category?

Remember how we talked about looking at our income through a different lens? Let’s do that here too. How many hours do you work each month to meet each of your expense categories? If you work 21 days this month, how many of those days go just to paying for your housing or your groceries?

Which categories are you dissatisfied with? Take note of them.

Which Number Is Bigger?

Okay, so you’re got a piece of paper with two numbers on it. One number represents your income, the other represents your expenses. Which number is bigger?

Income!

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Awesome! You’re living below your means. (Are you sure you need to be reading this series?)

There’s always something to improve on, though. Where is the extra going?

Could you pay more on any debts you owe? Are you putting funds towards investments that will grow your wealth in the future? Could you drop your expenses further to divert even more towards investments?

Your finances look pretty healthy, but don’t neglect them. Your first step is to widen the gap between your income and your expenses even more.

Expenses…

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Okay. We’ve got some stuff to work on, but don’t despair. This can be fixed.

If your expenses are bigger than your income, where are you finding the money to pay the shortfall? Are you chewing through savings, or going into debt? Have you been forced to ask friends or family for money?

Your finances look rough, but we’re going to polish them up over the next 31 days. Your first step is to kill your shortfall. Look through your expenses again. What categories can you reduce? Look at your income. Can you increase it with a side gig or by working more hours? Make some important decisions and start implementing them TODAY.

Tomorrow: Create An Emergency Fund

Here’s something to think about. If an emergency happened right now that cost $1000 to resolve, where would you get the money? Tomorrow, we’ll talk about emergency funds — what they are, why you need one, and how to find some extra cash to start one…even if you don’t think you can afford it.

So How Are You Doing?

I want you to tell me about your finances. You don’t have to get specific with the numbers (unless you want to). Are you satisfied with your income? Are you struggling to reduce one of your budget categories? What challenges have kept you from succeeding with money in the past? What do you want to achieve?

Tell me about it in the comments, or you can email me, if you’d rather keep it private. How are you doing?

Click here to read Day 2!
Posted in 31 Days To Your Financial Future
2 comments on “Day 1 – Assess Your Financial Health
  1. Dear Debt says:

    My income is more than my expenses, but everything goes to bills, because I am aggressively paying off my debt. I always think of my expenditures as hours worked. It really helps me keep things in perspective.

    • Adam Kamerer says:

      I think ideally you want to have an equilibrium between your income and your expenses. Everything you earn can be put to use; it’s just a matter of making sure the use you put it to is the smart one.

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