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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 [1].

Completing this personal reckoning is step two of my rather dramatically entitled 10 eternally true steps to financial freedom [2].

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

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 [3] 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 [4]; 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 [3]. 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).

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:

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):

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!)

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:

(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:

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.

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 [6]).

Note: I’m not a professional financial advisor [8] 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 [9] to ensure you’re in the loop).

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