Assess your finances

When you want to improve your financial situation, you may be tempted to immediately jump to several strategies. But before you can do anything, you need to assess your finances at the present time.

That means you need to know how much you have on your bank account, saving account, and eventual retirement account; you need to know the balance of your credit cards and other debts; and more importantly you need to know on average how much you earn and spend.

Only by having a clear idea on how your current situation really is, you can see what is the best path for your finances.

This is part of the first steps on how to improve your finances.

Use a software or service to assess your finances

To assess and keep track of your finances more easily, you need a proper tool. For example if you live in the United States, you can use services like Mint.com; or you can install software like GnuCash or KMyMoney.

All of those tools allow you to setup the financial accounts you have (checking account, saving account, etc.) and they allow you to record any income and expenses. Those tools come pre-configured with default accounts, like “Checking account” or “Saving account” for assets and “Groceries” or “Dining” for expenses; but I recommend to create additional sub-accounts to fit your needs (if you have multiple checking accounts, you can create different accounts under the default “Checking account”).

Once you have configured your bookkeeping software or service, you need to start recording all transaction you have; you record any income (wage, bonuses, etc.) and expenses (groceries, gas, insurances); it doesn’t matter how small, you have to record everything … even a $1.50 snack you purchased at a gas station or a $5 reimbursement you got from a friend. You need to register all transactions at least for 3 months to have a clear view of your spending habits.

Earlier I have suggested to create sub-accounts to fit your needs, but there is another advantage to this; you can segment the transactions by priority. For example: if you have a main job and an occasional side hustle, you should record them on separate sub-accounts under “Income”; for “Groceries” expenses you can create separate accounts for vital food (vegetables, bread, etc.) and junk-food. You should do this for all accounts where you have both essentials transactions and optional accounts.

The reason for such segmentation is simple; when we will discuss how to improve your budget, you will need to know what are your priorities and what you can optimize.