Creating a personal financial plan is a crucial first step to becoming financially responsible. It’s never too late to create a financial plan and you don’t need to spend money to assess and plan your financial future. With a few simple steps you can assess and take control of your finances. I recommend starting with a basic Excel spreadsheet which will allow you to edit and experiment with different scenarios.

What is your Net Worth?

Make a list of your assets and then your liabilities. Your net worth will be your total assets minus your total liabilities. While there is not right and wrong net worth number, you can use this number to track your financial status from year to year. Everyone’s net worth will vary based on their own situation and what live events they have experienced so far. Obviously the goal is to have more assets than liabilities, but it can take years to reach this point.

• Some assets to consider: home(s), vehicles, checking, savings, investments, retirement and cash. You might also consider other valuable items such as coins, jewelry and other collectibles.

• Some liabilities to consider: balance on any loans (mortgage, car, student loans, etc.), credit cards and any other significant debt.

Calculate Your Monthly Debt to Income Ratio

If you’ve ever tried to obtain an auto or mortgage loan the bank most likely calculated your debt to income ratio. If you just finished your net worth, you can transfer your list of liabilities for this calculation as well.

Some monthly debt considerations: mortgage payment (and corresponding expenses such as taxes, insurance, PMI, etc.), minimum credit card payment, student loans, car payment, child support and other monthly debt.

Next you will calculate your monthly income. Start with your monthly income including bonuses and add any additional income you receive throughout the month.

Now that you have your monthly debt and income, you will simply take your total monthly debt number and divide it by your monthly income (Ratio = Monthly Debt / Monthly Income).

So now you have your Debt to Income Ratio, great huh? As you can imagine you want this number to be as low as possible. The more expenses you have, the higher your number will be. This ratio is good to track as you set goals to pay off your debt. This will give you a benchmark to track and see if and how your ratio improves over time.

So how does the bank use the debt to income ratio? Well if you were trying to get a mortgage they typically like to see your ratio at 28% or less without factoring in housing expenses and 36% or less when factoring in housing expenses. What if you are above these percentages? This would typically mean you have credit card debt or a car loan that is inflating your ratio. It’s probably going to be to your advantage to pay down some of your debt, so you fall into the qualified lending ratios. If you have high ratios, you might be able to get a loan yet, but the rate probably won’t be as favorable. These ratios are some general guidelines, but of course other factors determine how qualified you are as a borrower.

Now that you have a grasp on your net worth and debt ratio, you can create a monthly budget.