While watching a snippet of the Dr. Phil Show the other day, I heard a monologue that related intimately to personal finance.
“You cannot change what you do not acknowledge,” snipped Dr. Phil, who was desperately trying to counsel a broken family on coming together.
Later I learned this was one of Phil’s “life laws,” or principles he goes back to often and actually lists on his website. In case you were wondering, life law No. 1 is “You either get it or you don’t,” and No. 2 is “You create your own experience.” And “People do what works” is No. 3. I think most of us agree with those statements, right?
But No. 4 — “You cannot change what you do not acknowledge” — still caught me. When my husband and I were in debt many years ago, we were blissfully unaware of how perilous our situation really was. We had good jobs, yes, but we were spending all the money we made and always one layoff or illness away from losing it all.
Because we didn’t acknowledge the problem, we didn’t dare try to change it. Years later, it took a huge lightbulb moment for us to realize we could be doing a whole lot better. But until we had that “a-ha moment,” it was easy to skate through life without a care in the world.
Why is that?
“Get real with yourself about life and everybody in it,” writes Dr. Phil as a strategy for life law No. 4. “Be truthful about what isn’t working in your life. Stop making excuses and start making results.”
I can’t really say I’m a fan of the show, but geez, isn’t he spot on?
Whether you want to get your money straight, pay off debt, or simply reach your financial potential, it all starts with acknowledging that something isn’t quite right and, more importantly, being real about it.
Seven Things You Need to Know About Your Money
But being real isn’t about beating yourself up — at least I don’t think so. We’ve all made financial mistakes we aren’t proud of, but picking ourselves apart won’t heal them. We need to acknowledge our problems, yes, but only for the purpose of coming up with an actual solution.
That’s why it’s important to know your money inside and out — and not just the rewarding details, but your deep, dark secrets as well.
To get ahead in life — to take control — you have to get real and see things for how they really are. If you’re looking for a place to start, figure out these seven things about yourself and get real — once and for all.
No. 1: Your Net Worth
If you want a fairly clear picture of your financial health, take some time to figure out your net worth. This is normally calculated by taking your assets and subtracting your liabilities, but the process increases in complexity if you’ve got more than a few outputs and inputs.
The easiest way to figure out your net worth is to sign up for a free account with Personal Capital. Their net worth tracker will tell you exactly what you’re “worth” without asking for a dime in return.
However, you can accomplish the same thing with a pen and paper. Create a category for your assets (including your savings, retirement accounts, house, car, etc.) and another for your liabilities (debts such as your mortgage, car loan, credit card balances, or student loans), then compare the figures. Your net worth is whatever’s left after you subtract your liabilities from your assets.
While knowing your net worth may not seem like a big deal, it can be a game-changer, says J. Money of Budgets Are Sexy.
“We all like to think we know where our money is and how well we’re doing (or not), but seeing it in plain black and white tells a much more accurate picture,” he says. “The numbers never lie, and to be able to go back throughout the months and watch your progress is incredibly motivating.”
Whether you input your information in Personal Capital or calculate your net worth by adding and subtracting the figures on your own, knowing your net worth can be a powerful motivator.
- Related: The Most Important Number
“Whether you’re paying off debt or investing for the future, your net worth will reflect the moves and is one of the best ways to spend five minutes of your time each month,” says J. Money.
No. 2: Where Your Money Is Going
We’ve written about the importance of tracking your money before, and can’t underscore this lesson enough. If you don’t have any idea how much you’re spending on groceries or entertainment each month and constantly running short, you need to find out those crucial details right away. The longer you wait, the more it will cost you.
“Everyone should know where their money is going,” says TSD contributor and fee-only financial planner Matt Becker from Mom and Dad Money. “That is, how much money is coming in, how is it being spent, and how it is being saved. That information provides a baseline for where you are now and allows you to start making purposeful decisions about how you want to improve things going forward.”
In this post, we detail the step-by-step of tracking your spending, and exactly why this is so important. If you need help getting started, that’s a good place to begin.
No. 3: How Long Your Emergency Fund Could Last
Think you have enough cash in the bank to weather any financial storm? You might have plenty, or you might have a lot less than you think. Either way, it pays to know how much money you really have — and how long it might last if your family loses an income stream or someone becomes deathly ill.
“Everyone should know that their income is not guaranteed,” says financial expert Deacon Hayes from Well Kept Wallet. Many people spend money as if their income will last forever, he says, but that is seldom the case.
“As a financial coach, I have seen people lose their jobs, take a pay cut, or even one spouse decided to quit their job to stay at home with the kids,” says Deacon.
Knowing how long your emergency fund would last in unexpected circumstances or if the worst-case scenario played out is an essential part of protecting your family from the “what ifs” of life.
To find out, figure out your monthly expenses and compare them against the money you have saved in your emergency fund. If you’re having trouble figuring it out, our detailed post on How to Create a Bare-Bones Budget can help you figure out the bottom-dollar figure you need each month to get by.
No. 4: Your After-Tax Income
Debt blogger Melanie Lockert from Dear Debt believes everyone should have a decent grasp on their after-tax income if they truly want to get ahead. We all know how much our salary is, right? But do most of us know exactly how much money we’re bringing home?
If you’re not using a monthly budget or tracking your spending the answer is probably “no.” And unfortunately, not knowing how much you actually take home can be a huge mistake, says Melanie.
“Many of us can think we make a lot of money, but after taxes, we’re not bringing home that much. Budgeting, saving, and investing all rely on your after-tax income and what you can contribute. If you know what you’re really making at the end of the day, you can control where your money goes and have a better understanding of what it can do for you.”
No. 5: Your Financial Goals
Money is “a tool you use to build a life you want to live, not something you use just to buy more stuff,” says Jim Wang of Wallet Hacks. “You should draw a picture of what you want your life to be in five, 10, 20 years and then use money to craft that life. All too often, we only think of the things we want to own, like cars or a particular house, rather than what we want our lives to be.”
For most people, this idea involves figuring out when you might be able to retire or reach financial independence. Like Jim says, we should all look at our money from the perspective of how it can help us get where we want to go.
Whether your goal is paying down debt once and for all, retiring early at 55, or paying off your house, it helps to write those goals down. Only then can you create a realistic plan to make all your dreams come true.
No. 6: Your Credit Score
Your credit score isn’t just a measure of your financial health; this three-digit number can be used to decide how much interest you’ll pay if you take out a loan for a home or car — and if you qualify for that loan at all.
For the most part, a good or above average credit score (720+) is enough to qualify for the best loans and rates, but anything lower might lead you to struggle to find a good deal or qualify at all.
- Related: What Is a Good Credit Score?
First things first: To figure out where you are in terms of credit, you need to figure out what your credit score is. The easiest way for most people to do this is to sign up for a free Credit Karma account. By inputting your personal information, you’ll gain access to a wide range of details listed on your report — plus estimated credit scores from both TransUnion and Equifax.
If you want to dig a little deeper, you can also request a copy of your credit report from the three credit reporting agencies — Equifax, Experian, and TransUnion – once per year at AnnualCreditReport.com. This will give you a sense of your credit history and show you any delinquencies or dings to your credit, but it doesn’t provide you with an actual credit score.
Finally, some credit card issuers, such as Discover, will include your free credit score with each monthly statement as a cardholder perk.
No. 7: How Much Money You Owe
If you want to dig your way out of debt, it’s crucial that you know exactly how much money you owe. After all, you can’t really create a plan of attack unless you’re intimately acquainted with the actual balances on your loans, credit cards, and other debts.
We often focus too much on the monthly payment, but those monthly bills only tell part of the story. If you want to get out of debt, acknowledging how much debt you’re in is the first step you need to take.
To find out, break out all your monthly bills, including car payments, mortgage payments, student loans, credit card bills, and anything else you might have, and total the amounts owed.
What you find might surprise you — even scare you. But sometimes, that “shock value” is the most useful tool you have to turn your situation around.
“It’s important to know how much debt you owe, because it stands in the way of your financial freedom,” says Lance Cothern, author of Money Manifesto, who paid off $80,000 in student loan debt in three years. “Once you know how much debt you have, you can put together a real plan to start paying it down based on what makes sense for your family.”
- Related: 11 Ways to Get Out of Debt Faster
While none of these seven details is earth-shattering on its own, as a group they represent a total picture of where you are financially — and where you’re going. That’s why it’s important to face the music — to be real. If you spend your entire life with your head in the sand, you may look back one day and wish you had done things differently.
This sad truth begs the question, “Why not get real with your finances and take actionable steps to get ahead now instead?”
Unfortunately, it isn’t always that easy. I hate to circle back to Dr. Phil, but I’m afraid I must. After reading through his life laws and thinking them through, another one caught my eye.
“Life rewards action,” writes Dr. Phil. “Make careful decisions and then pull the trigger. Learn that the world couldn’t care less about thoughts without actions.”
Once again, I am drawn in by the simplicity and truthfulness of his advice. While thoughts and actions are the first step to getting out of debt and becoming wealthy, they really do mean nothing if you never follow through.
He goes on…
“Talk is cheap. It’s what you do that determines the script of your life. Translate your insights, understandings and awareness into purposeful, meaningful, constructive actions. They are of no value until then. Measure yourself and others based on results — not intentions or words. Use any pain you have to propel you out of the situation you are in and to get you where you want to be. The same pain that burdens you now could be turned to your advantage. It may be the very motivation you need to change your life.”
Dr. Phil is right. Wishful thinking might help you sleep at night, but it won’t pay off your debts, and it won’t help you become rich.
Knowing these seven things about your money is the first step, but taking action is the only thing that can change your life for the better. You cannot change what you do not acknowledge, and you cannot get ahead if you never really know where you are.
Do you know all of these details about your finances? Why or why not? What is the most important thing you ever learned about your finances?