When it comes to money, what we don’t know can hurt us.
I’ve seen this truth play out time and again when people tell me they want to get serious about their finances.
They want to invest.
They want to make plans for the future.
“Great,” I’ll say, “so what can you tell me about your current finances?”
The most common response?
A blank stare.
I’m not surprised
I know from personal experience.
Sometimes we just don’t want to know.
As soon as we start listing our current assets and liabilities, we come face to face with both our good and bad financial decisions.
Maybe we’ve done a great job of saving money every month, but we’ve also had a credit card balance for over a year.
We need to know both the good and the bad, otherwise, we can’t plan for the future.
Getting a handle on our current reality starts with something simple: a personal balance sheet.
To start, grab a piece of blank paper
Draw a line down the middle.
Write “Assets” on the left, “Liabilities” on the right.
Then, make a list.
Assets are anything we own free and clear.
Liabilities are any debts we owe.
On the asset side, list things like savings accounts, superannuation, and the value of a home.
On the liabilities side, list things like credit card debt, a mortgage balance, and any other loans.
For this process to work, we need exact numbers, especially for our liabilities.
Be prepared to call credit card companies and banks if needed to get this information.
Again, not knowing these numbers can hurt us
One woman who came to me for help admitted that she’d taken out a student loan for $6,000, but she’d ignored it for decades.
When she finally called, the total owed had snowballed to $34,000.
We worked out a plan to deal with the debt, but ignoring this liability came at a big cost.
Of course, the personal balance sheet may also reveal we’re better off than we think.
That’s a good thing.
We may have saved more and have less debt that we assumed.
Once we have all the numbers, add them up.
Then, subtract all the liabilities from the assets.
This number equals our net worth and our current reality.
This process seems simple enough.
However, if we keep avoiding or skipping this step, we’ll continue to have a difficult time figuring out where we want to go, let alone how to get there.
This column originally appeared in the New York Times.