When you begin saving, you need a starting point. While the sooner you start putting away money, the better, the best time to start is at year end. It's at this point that all your financial statements are prepared, giving you a look into what your spending habits and your financial position has been over the prior year.
Before you start evaluating your financial health, you want to start by organizing all your account information and centralizing it at a central location. That data needs to be accessible for budgeting and security reasons, so wherever you store it must be password protected.
You want to create two critical statements, which will be outlined below:
1. Statement of Income
- This is divided in two major categories: Income and expenses. Once completed, it will show you where your money went. Income includes anything that is generating a positive cash flow: a paycheck, dividends, interest, child support, alimony, etc. The expense side should include any payments and discretionary spending. Divide your expenses into two subcategories: variable and fixed. The first includes non-recurring payments or those expenses that fluctuate with usage. Fixed expenses include those recurring outlays, such as your cable bill or rent. Unless you're ordering extra amnesties, then these items are paid at the same time for the same amount every month. Diving your expenses in this manner allows you to see clearly where it is you can start cutting your spending and gives you a starting point for budgeting.
2. Statement of Financial Position
- This statement is known as a snapshot. It provides an overview of your net worth at a moment in time. You accomplish this by adding your assets - those items you owe and are either generating an income for you now or will in the future, particularly when they are sold. This includes your home, cars, any real estate or of monetary value. You deduct these items from your next category, liabilities. Those are what you are paying off, such as your rent, mortgage, car payments. The final sum is what you are financially worth at the point you are finished listing all relevant items. The beauty in this statement is that it will usually uncover additional stuff of monetary value the average person overlooks in a Statement of Income.
Both statements can be prepared alone, but it is a good idea to involve a financial advisor. Contrary to the conventional wisdom, one does not cost that much and some are happy to offer a complimentary service. If that's not an option, consider contacting a consumer credit agency for advice or speak to your banker. Taking these steps will start you on that important first step on your saving adventure.