When it comes to getting a full picture of your finances, sometimes the hardest part is knowing where to start. You have paper statements, legal disclosures, an overflowing email inbox with regular e-bills and e-statements, and still more who-knows-what from online accounts if you could only find the login info. The whole thing can feel hopelessly overwhelming.
But here’s hope: You don’t have to go through an elaborate process to get started and make progress. Here’s part one of a quick punch list of 10 things you can do to get your finances in good order—I’ll follow up with the remaining five projects in a month.
1. Tabulate Your Net Worth
Think of this as taking a financial inventory. Find statements for all of your bank accounts, brokerage accounts, retirement accounts, and employer stock plan accounts (employee stock purchase plan, restricted stock units, stock options, etc.). List them on a piece of paper or in Excel, with a description of the account (for example, Employer 401(k)) in the first column and the value in the second column (for example, $97,250).
Next, find the value of your home on Zillow.com or Bank of America Real Estate Center. Add your home and its value to your net worth list. Do the same for any other property you own, such as a second home or rental property.
Add in the value of any business you own. An appraisal is the best way to determine the value of your business. Online calculators are available for a quick (and typically inaccurate) estimate.
Together, your accounts, properties, and anything of value are your assets. Add up the total value of your assets.
When you’re finished, find statements for all of your liabilities, including credit cards, car loans, student loans, home loans, home equity loans, and other real estate or business loans. Create a separate list for these liabilities below your list of assets. Add up the value of your liabilities.
The last step is to subtract the value of your liabilities from your assets and add that figure below both lists. This is your net worth: the total of all of your assets minus the total of all of your liabilities.
You’ve just created a complete inventory of everything you own and owe, and now you know your net worth! Is it larger than you expected? That’s often the case the first time you do this and see everything in one place. Here’s a sample net worth document so you can see what you’re trying to create, along with a template for you to create your own net worth tabulation.
Once you have your net worth statement, you can start to manage it. For example, you can close unused bank accounts, consolidate old 401(k) accounts into a single rollover IRA account, or make additional payments to high-interest credit card debt to pay it off quicker.
2. Build a Cash Reserve
For a cushion against a short-term financial pinch, build a cash reserve. A cash reserve helps you meet unexpected financial strains such as a job transition, large medical expenses, or an unexpected major car repair. If you’re working, your cash reserve should be equal to a minimum of three to six months of living expenses. If you’re retired, you might want to keep as much as one to two years’ worth to avoid being forced to access your investments during a stock market downturn.
Cash reserves should be kept in an insured bank or credit union checking or savings account. Be sure to keep less than the $250,000 maximum insured amount in any one bank or credit union. Certificates of deposit (CDs) generally are not a good place to keep your cash reserves because there is a 10 percent penalty on early withdrawals, which you may need to do in a financial emergency. You can also keep cash reserves in a money market mutual fund in a brokerage account. While money market mutual funds are not insured, they typically hold only the safest short-term debt and are nearly as safe as insured bank and credit union deposits—plus, they have no early withdrawal penalties.
An alternative to keeping cash reserves is to maintain a home equity line of credit (HELOC). Many lenders offer HELOC products that allow you to borrow against the equity in your home up to a certain dollar limit. If you open a line of credit and don’t use it—meaning you don’t borrow any of the available amount—your pre-established line of credit can serve as a source of funds in a financial emergency. However, the lender can freeze borrowing or reduce your borrowing limit at any time. Several lenders capped HELOCs during the Great Recession of 2008, preventing borrowers from accessing funds when they needed them most. Building your cash reserve in a bank or credit union is the safest approach.
3. File Old Tax Returns
If you’ve gotten behind on filing tax returns, catching up should be a priority. Otherwise, you won’t know how much money you may owe the U.S. Treasury and state government.
You might not owe any taxes if your only income is from an employer and taxes are withheld from your pay. However, you could owe if you had too little tax withheld from your pay or haven’t made estimated tax payments on other income. If that’s the case, you are incurring interest and penalties for not filing.
Assuming you are working with a tax preparer, your job is to collect your documents and get them to your tax preparer as soon as possible. Start with your W-2 and brokerage account statements, both of which show income. Then locate tax reporting statements for your largest deductible expenses, such as home mortgage interest, property tax, medical, student loan interest, and charitable donations.
Don’t let perfection be the enemy of good enough. The clock is ticking, and interest and penalties are accumulating. Waiting until you find a few more statements and receipts may cost you more in penalties and interest than the deduction you might have received. Let your tax preparer guide you in deciding whether it’s worth your time and effort to gather additional information about your deductions.
If you’re unable to locate your W-2, your tax preparer may be able to access some of your information from the reports your employer filed with the IRS. And if you don’t have enough cash on hand to pay back taxes owed, your tax preparer may be able to help you work out a payment plan with the IRS or state.
Past-due tax returns can cause enormous and unnecessary anxiety. Get moving on this project to ease your mind and increase your financial well-being.
4. Check Your Life Insurance Policy
If you have dependents, you probably have life insurance to replace your income and provide financial support for them in the event of your death. If you don’t have life insurance, and you have family who rely on your income, you should seriously consider buying some. It’s a good idea to periodically review your life insurance policy or policies to make sure that the dollar amount of coverage is still adequate for you and that the policy has not expired or is about to expire. Life insurance is often most critically needed when you’re younger and just starting a family, before you’ve had a chance to build net worth.
5. Get Umbrella Liability Insurance
Umbrella liability insurance is a separate policy in addition to the liability insurance you have as part of your auto and homeowner’s policies. It provides extra coverage to pay for defense against lawsuits and judgments if you are sued for damaging other people’s property or injuring someone else in an accident. Umbrella liability insurance is one of the great values in insurance, costing only a few hundred dollars a year for $1 million or more of coverage. Such policies protect you from catastrophic financial loss for a small annual amount.
Get started on one of these strategies today to take the first step toward getting your finances in good order. Next month, I’ll share five more mini-projects, rounding out this list of 10.