Taking stock: Your Statement of Affairs

To get the most from your money in the long-term, you need to know what you own, what you owe, how much you bring in every month from your earnings, savings and investments, how much goes out again, and thus whether you’re living beyond your means.

Completing this personal reckoning is step two of my rather dramatically entitled 10 eternally true steps to financial freedom.

If we don’t take stock, we’re liable to do silly things like:

• Saving into a bank account earning interest at 5% while simultaneously accruing interest on a storecard debt at 26%.
• Working overtime, then buying takeaway food and late night drinks as a reward and so, post-tax, negating the overtime we’ve earned.
• Devoting evenings and weekends to our investments, to the detriment of the job or second income stream that’s actually bringing in the loot.
• Spending hours looking for the cheapest books or CDs online, while paying thousands extra a year on an expensive mortgage that’s moved onto the lender’s standard variable rate.
• Talking celebrity gossip at parties, when we could be enthusing to a cute stranger about how we’ve reduced our grocery bill down to £30 a week.

Okay, maybe that last one is an acquired taste.

How to take stock of your finances

Ready to run the numbers on You PLC? Don’t be daunted. You’ll only need your bank statements, salary slips, investment accounts, credit card details, shopping lists, travel pass, pension plan, kitchen sink…

The truth is this is going to need some sweat, but your reward will be a real grasp of where your money is and where it’s going. Armed with this information, you’ll be able to target your savings, spending and investing to maximise your future wealth.

What’s more, if you do it once as a spreadsheet, you can just update the figures as you go through the rest of your life.

Alternatively, here’s an online Statement of Affairs calculator that saves you rolling your own. It’s not as flexible or useful in the long-term as a spreadsheet, but it’s a start.

Option One: Using the Statement of Affairs Tool

The Motley Fool website has an amazing Dealing with Debt discussion forum; its posters have helped hundreds (or thousands, counting ‘lurkers’) to navigate even the grimmest financial black holes.

The first thing the board asks newcomers to do is to post their Statement of Affairs (SOA), as set out using this tool. It’s a good shortcut for our needs here, whether you’re in debt or not.

Fill it in, click ‘Format for Printing’ at the bottom, then copy and paste the result into your favourite word processor and save.

A few tips on filling out your SOA using the tool:

1. You might decide to put secured loans (those made against your home) into ‘expenditure’ rather than debt, since they’re monthly payments you MUST make to keep your property. (You’ll still want to record the debt itself further down.)
2. Fill in what you really do spend, rather than what you hope to spend in months to come. The idea is first to see where you are, not where you’ll be going.
3. Be honest! Cheat now and you’ll let yourself off the hook!
4. If you’ve got no idea what you spend on anything, monitor every single purchase in a spending diary for a month.

Option Two: Creating your own Statement of Affairs spreadsheet

The SOA tool linked to above is a great starting point, particularly if you’re short of time. Better though is to create your own personal spreadsheet, which covers all the essential categories.

Here’s what the spreadsheet will detail:

1. Your total income from all sources
2. Your essential / fixed monthly outgoings
3. Discretionary / luxury spending
4. Your total debts
5. Debt payments
6. Your assets
7. Your regular savings and investment plans

Once you’ve got it all recorded, you can update figures as your earnings, debts and spending patterns change, and fantasize model how much more money you’d have if you paid off your credit cards, or swapped your Sky TV subscription for a free library pass.

Below I’ve listed everything I think you need to consider. I’ve included a few extra ones compared to the tool above – most obviously I split out a ‘discretionary outgoings’ category, since few of us only spend on the essentials (the SOA tool is designed for those tackling severe debt, where buying luxuries is quite rightly ruled out immediately!)

I also split out debt repayments and savings plans, so you can see exactly where you’re starting from.

Every category should be recorded as two columns, where for each row the first column names the income source / expense / asset / reckless-financial-folly, and the second records in pounds (or dollars) how much it comes to each month, or what it’s worth if it’s an asset or a debt.

Let’s now go through each in turn.

1. Your total AFTER TAX monthly income.

Record and add up all your after tax income streams, as below. (You can include your partners too, if you share all financial matters, but remember you’ll need to include all their spending, assets and debts).

• Monthly salary
• Partner’s monthly salary
• Overtime or freelance earnings
• State benefits and tax credits etc
• Pension income (congratulations!)
• Investment income from shares
• Income from buy-to-let properties
• Any other regular monthly income (e.g. a trust fund or regular earnings from a hobby)

List them all in one column with the amount spent in the second, then sum the second column to get your TOTAL MONTHLY INCOME.

2. Essential / fixed monthly outgoings

Include all the items below in your spreadsheet (estimate where applicable using recent shopping bills and so on). You may decide to record secured debt payments as essential payments here – if so, remember in the debt reckoning to come later to record the total debt but not the monthly payment, or you’ll double count it:

• Mortgage or rent
• Service charges / ground rent
• Secured loans (optional – if not here, record in debts below)
• Council tax
• Electricity
• Gas
• Water rates
• Heating oil or wood fuel
• Buildings insurance
• Contents insurance
• Petrol
• Road tax
• Car insurance
• Car MOT
• Car parking
• Public transport / travel cards / season tickets
• Taxis
• Essential clothing (underpants and socks, not shoes to die for!)
• Groceries (food)
• Groceries (toiletries and cleaning products)
• Laundry / dry cleaning
• Services (such as weekly house cleaner)
• Standard fixed telephone line
• TV Licence
• Internet access (I’d argue it’s essential – it’ll save you money)
• Medical expenses (remember contact lenses and glasses)
• Dental expenses
• Pet food and vet bills
• Childcare and/or nursery bills
• Birthdays and Christmas budgets
• Hairdresser
• Any other regular monthly outgoings

List them all in one column with the amount spent in the second column, then sum the second column to get your TOTAL MONTHLY ESSENTIAL OUTGOINGS.

3. Discretionary / luxury spending

Include monthly figures for all the following in your spreadsheet (estimate by adding up recent shopping bills and so on where required – try to be honest with yourself):

• All non-essential clothing and fashion purchases
• Mobile phone (you might put this in ‘essentials’)
• Satellite / cable TV
• Meals out
• Pub visits
• Other alcohol consumption
• Takeaways
• Cigarettes (please stop today)
• Gambling (including the National Lottery)
• Books
• Magazines and newspapers
• Video/DVD rental
• Tickets (theatre, cinema, sports etc)
• Club memberships (remember any kids’ clubs)
• Sports and/or gym membership
• Gardening
• Discretionary travel
• Discretionary beautification (i.e. more than a haircut!)
• Non-essential toiletries (can you spell Chanel?)
• Home decoration (estimate annual furniture spend, then divide by 12)
• Holidays (estimate annual spend, then divide by 12)
• White goods (again, guess the annual spend and divide by 12)
• Electronic gadgets and gizmos (again, calculate a monthly amount)
• Toys (again, calculate a monthly amount)
• Holidays (you know the drill)
• Car upgrades / repairs (never buy a new car!)
• Other (Keep a horse? Own a boat? Include every extra as its own entry)

List them all in one column with the amount spent in a second column, then add up the second column to get your TOTAL AVERAGE DISCRETIONARY SPENDING.

4. Total debts (TOTAL OWED rather than a monthly expense)

Remember – mortgage repayments go into category 1 above (as essential spending, rather than individual debts). Here we tot up all your other debts. (Good luck!)

• Loans secured on your property (if not recorded in essentials)
• First credit card
• Second credit card
• Third credit card
• Any other credit cards (if you’ve got this many, you may need to get the scissors out)
• Car loan
• Student loan
• Store card debt (detail each card as its own entry)
• Overdraft
• Other bank or personal loans
• Money owed to family
• Money owed to friends
• Outstanding (unpaid) bills
• All other loans (remember that 0% interest deal that’s pending on your washing machine?)

Detail every single debt as its own entry, with the amount you owe in the column next to it. Then add up column two to get your TOTAL DEBT.

(Horrible? If so you’re now allowed just one stiff drink or, better, a quick cold shower. Soon enough we’ll set about killing your debt).

5. Debt repayments (the minimum you MUST pay each month)

Create TWO new columns next to your total debts category listed above. Next to every debt, enter two numbers – in the first column the minimum amount you’ve agreed to repay each month to service that debt, and in the second column the interest rate you’re paying.

Add up the monthly payments column to get your TOTAL MONTHLY DEBT REPAYMENT.

Important reminder: For mortgages, we recorded your monthly payments in category 1 – essential outgoings. You might find it useful to record your outstanding mortgage here though, just so you don’t forget it (!). Record the interest rate, but enter a zero next to the monthly debt repayment (since it’s already being counted above as an outgoing).

6. Assets (stuff you own, and could sell if you had to. Your kids don’t count.)

Here’s stuff you bought that isn’t ‘here today, gone tomorrow’. Everything from the equity in your home to the resale value of your iPod.

Be realistic. You don’t want to record the price of replacing your possessions, that’s not what this is about. You want the price you could get for them if you flogged them off, if you had to, so that you get an idea of what you’re currently worth in cash terms.

Typical assets:

• Loose notes and change
• Cash in current account
• Cash in long-term savings
• Premium bonds
• Other cash equivalents (see my guide to savings for a reminder)
• Gold coins or other esoteric forms of money
• ISAs or PEPs
• Non-ISA share portfolio
• Non-ISA bond portfolio
• Any other investments (e.g. realisable stake in private companies)
• Equity in your own home (equity is the estimated sale value, minus outstanding mortgage)
• Equity in second/holiday home
• Equity in any Buy-To-Let or other investment properties
• Endowment policies (early surrender value)
• Life insurance policy
• Car/s
• Boats/planes (hey, I cater for everyone on Monevator!)
• Antiques (decent furniture – sadly, secondhand IKEA stuff goes for peanuts)
• Art and other antiques
• Collections of any sort that realistically has value (e.g. your prized model trainset)
• Jewelery and watches
• Electronic equipment
• Pedigree pets
• Other assets (motorbikes, bicycles, caravans)
• (Note, selling your spouse is illegal in most countries, and what would you get really?)

(Try eBay for realistic valuations if you’re stuck)

Detail every asset you own as its own entry, with the amount you genuinely believe it to be worth in the column next to it. Then add up column two to get your TOTAL ASSETS.

I know I’m labouring this point, but be careful with Assets not to fool yourself. If you spent £500 on an 18th Century antique dining table, it’s very likely worth at least that today. But the things we all find it too easy to overspend on – gadgets, handbags, DVDs, bags of swag from Topshop and Next – very likely have negligible value, especially if you consider the hours it takes to sell them.

7. Savings plans and pension contributions

If you already have any regular monthly savings plans in place, you’ll want to record this in your Statement of Affairs.

Even if you simply squirrel away money for savings or shares on an as-and-when basis, a realistic estimate of how much you tend to save on average each month will be very useful in assessing your overall situation.

As usual, only include what you reckon you already save on average each month, not what you plan to save or aspire to.

I’d suggest you record these savings against the asset they’re producing, in the same way as debts above. For instance, record any regular monthly ISA savings against your ISA total, pension contributions (the post-tax income you’ve forgone, and NOT including any employer’s contribution) as a payment against your pension asset, and so forth.

If you add up all these, you’ll get your TOTAL MONTHLY SAVINGS.

After you’ve done all that…

Depending on which method you followed – the quick SOA tool approach or building your own spreadsheet – you can now get some very interesting numbers.

If you used the SOA tool, you’ll find it has automatically calculated your total monthly income, your monthly outgoings, your monthly surplus (or not-so-surplus, if you’re in financial straits), your total debt and your total assets.

You may still want to do some quick maths, however:

• Add up your Min Payments as recorded under Monthly Debts, and make a note of the number. This is your TOTAL MONTHLY DEBT REPAYMENTS.

The downside to the SOA tool is it only records essential spending, which limits what it can tell you about your overall outgoings.

If you’ve created your own SOA spreadsheet as above, you’ve already got your monthly figures for your monthly income (after tax – i.e. take home pay), essential spending, discretionary spending, total debt and debt repayments, and total assets and savings plans.

• Now create a new entry, called ‘MONTHLY SURPLUS’. In the cell next to it calculate: TOTAL MONTHLY INCOME minus ESSENTIAL OUTGOINGS minus DEBT REPAYMENTS . This is how much money you have free to spend or save each month.
• Create another new entry, ‘SPARE CASH’. In the cell next to it, work out MONTHLY SURPLUS minus MONTHLY SAVINGS. The result is how much money you have free to spend or save, assuming your investment and pension plans remain unchanged.

Enough adding up already: What does it mean?

If you’ve diligently set out your Statement of Affairs for the first time, you’ve almost certainly just had your eyes opened as to where your money goes. (See? I told you it would be worth it.)

Here’s a few specific financial health checks you can run with your data (I’m inspired here by Alvin Hall’s book What Not to Spend).

• If your MONTHLY SURPLUS is negative, you clearly have an issue you must deal with – your debts and/or ‘essential’ spending are in excess of your income.
• Look at your MONTHLY DEBT REPAYMENT. Hall suggests if you’re spending more than 20 per cent of your income repaying non-mortgage debt, you’re heading for the rocks. (Aim for 0%).
• Hall believes your mortgage shouldn’t be more than 30 per cent of your TOTAL MONTHLY INCOME. I agree, although it’s hard if you’re a new buyer in an overblown property market.
• Hall believes your MONTHLY DISCRETIONARY SPENDING should probably be less than your ESSENTIAL MONTHLY OUTGOINGS. If you’re already saving a lot and you have no debt, I say live a little, but I take his point.
• Hall points out your TOTAL ASSETS should exceed your TOTAL DEBTS. For most people, the price of their home and their mortgage will be the major factor here and it can obscure some sins – so try not to treat your home as an indulgent sugar daddy.
• If your SOA suggests you’ve got loads of spare money but every month your bank account goes into the red, you’ve probably not been sufficiently honest with yourself about your discretionary spending. Get out your bills / bank statements / receipts and redo your figures. Remember, regular ‘irregular’ expenses add up. (In my late-20s I was going to 3-4 weddings a year. It was costing me at least £500+ a year, or £50 a month on my SOA – and that’s assuming I could wriggle out of the often far-flung stag weekends).
• Be wary of securing non-mortgage loans against your property. Do you really want to risk losing your home for a two-week holiday? I list mortgage repayments as an essential outgoing (rather than a debt repayment) because for most people, your home is your number one asset.
• Pensions are an unusual asset, in that you can’t really get at them to write off other debts. For this reason, I don’t include them in my preferred SOA, and neither does the SOA tool I link to. Alvin Hall, however, includes them. It’s certainly true that a good pension fund (especially a final salary one) is worth its weight in gold – I just don’t think it’s helpful here. But certainly keep it in mind.
• I hate debt, and would urge you to get your debt repayments down to £0 a month by paying it all off. Understand that debt isn’t something ‘everyone has’. (I’ve not owed a penny for over a decade, aside from temporary credit card bills which I pay off completely each month without accruing interest). The exception here is affordable mortgage debt, which is traditionally considered ‘good’, since over the long-term the value of your house will probably outpace the debt. Student loans and overdrafts are also pretty cheap, so don’t sweat if you’re still paying them off.
• I’d suggest your TOTAL MONTHLY SAVINGS should be at least 10% of your income. More is better, anything is a start. Pay off your debts first, then, when you’re free, immediately divert those payments into your savings. This way riches lie!

Note: I’m not a professional financial advisor let alone a debt councillor, so if the findings above have shocked or dismayed you, please do go and seek professional advice. I’ve included some not-for-profit resources at the bottom of the article. Check these out – don’t just go with a debt management company that pops up in Google, as it could cost you dear.

Most readers (I hope) won’t be shocked after doing their SOA, just mildly dispirited. This is completely normal, particularly if you’ve been honest about your spending. (If not, do it again 🙂 ).

The aim now is to turn your SOA into a thing of beauty. You’ll want to pay off your debts, increase your savings, drive down your fixed expenses and cut back your discretionary spending in order to build up your assets.

Stay tuned for more on this in coming weeks (subscribe now to Monevator’s RSS feed to ensure you’re in the loop).

UK-based resources to contact if your SOA has worried you:

• Consumer Credit Counselling Service – free debt advice from the UK’s top money charity.
• National Debtline – the link will take you to the phone number. Another non-profit.
• Citizen’s Advice Bureau – there’ll be one local to you, with real live people you can speak to.
• The Motley Fool‘s Dealing with Debt board – great people who love to help. Show them your SOA and the tips will flood in.
• The UK Government has a debt and arrears advice webpage.
• Outside of the UK? Look for non-profit or charitable organisations; only go to financial debt management companies after taking independent advice.