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.
How long could you live off your emergency fund? Photo: William Murphy