Your financial life is broken down into three parts, the past, present, and future. As you can probably imagine, the past is any debt you've incurred, the present is your lifestyle, and the future is what you're saving for the near future and retirement. What most people struggle with is the percentage of funds going to each time frame. Is the majority of your income going to debt pay down? Is your current lifestyle hogging your income? If either of these are inflated, your future suffers. It always loses to your past and present obligations.
You need real numbers to determine how your income is divided. For this exercise you'll need to grab your bank statement, your pay stub, and three highlighters. First, highlight all the transactions that fund your past. Car payments, credit card payments, medical bills, etc. (skip your mortgage for now, we'll come back to it). Next, highlight all the payments that fund your current lifestyle such as rent, utilities, food, entertainment, etc. Lastly, use your pay stub and bank statement to determine what you are allocating to your future via your retirement fund contributions, investments, and savings account transfers.
Your mortgage is a little tricky. It's debt, though it's also used for your present lifestyle. Further, many people consider real estate an investment in your future. If you are currently "underwater" on your mortgage, count it toward your past. If you don't plan on paying off your home before retirement, count it toward your present. If you plan on paying it off before retirement, count it toward your future.
After completing this exercise you'll have real numbers to see what your income is funding. If a large percentage of your income is going to your past, you'll have to cut present spending to get yourself out of the hole. If a large percentage of your income is going to your present, you'll have to cut present spending to fund the future. Your goal is for your money to only have two jobs: fund the present and fund the future. Getting out of your past is your top priority.
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