Net Worth

Now that you've gone through the process of organizing your cash flow (see previous post), you can begin to get a handle on your Net Worth. For those of you who weren't paying attention in the required Accounting 101 class, don't let those words intimidate you.

Net Worth is simply the difference between what you own (your Assets) and what you owe (your Liabilities). For a simple example, let's assume you have a 2001 Jeep Wrangler, and you have a loan of $5,000 on it. By going to Edmunds.com or kbb.com, you can determine what the current value of your car is. Spending about 2 minutes on kbb.com, I've determined that the consumer-to-consumer value of the Jeep is $11,655. The difference between the value of what I own and what I owe is $6,655 ($11,655 - $5,000 = $6,655). If that was the only asset and the only liability I had, my Net Worth would be $6,655.

So, tally up the value of the things you own (Assets) and the things that you owe (Liabilities) and figure out the difference. When compiling your Asset information, I wouldn't include clothing, furniture, and other household kinds of things, since you're not likely to use them as "investment" Assets, and value is pretty difficult to determine. You should, however, include as an Asset any loans that you have made to others (but only if there is a reasonable expectation that you'll someday be paid back). I wouldn't include the $20 that you lent to your roommate back in college, for example.

MS-Money or Quicken can be quite useful in this step as well, because they have the facility to classify and store this information in a very useful way. But, as stated before, if all you have is a spreadsheet (or even some notebook paper), you can still accomplish this last bit of organization.

Now, look at your number that you've come up with. Is it positive? That is, are your Assets more than your Liabilities? If so - take a second and do a little dance. It's called the "Positive Net Worth" dance. Enjoy it, you've earned it.

If the number is negative, you can also dance, just don't spend any money to do it! Actually, the situation you're in is not unusual at all - especially for younger folks - mostly due to high credit card debt and home ownership (mortgage) debt. It's certainly not hopeless, but maybe this Net Worth exercise has opened your eyes a little? We'll talk about how to reverse the situation in a later post.

For now, be happy that you are taking the steps necessary to finally get a handle on your financial situation. Next time, we'll begin discussing what all of this ORGANIZATION does for us.

'til then - jb

Continuing...

In the first message we touched on the benefit of ORGANIZATION in your financial life. So, how do you achieve it?

There are a million ways to approach this question, and the point that you need to understand is "how" is no where near as important as "when". Of course the answer to "when" is NOW.

Some examples of "how" include: MS-Excel spreadsheet, MS-Money, and Quicken. If your financial life isn't terribly complicated, an Excel spreadsheet may suit your needs perfectly. However, as you and your financial life continue to evolve, it will eventually become necessary to use something a little more sophisticated, such as Money or Quicken. I've used them both, and don't really have any qualms against either. AS I indicated before, "how" isn't as important as "when".

Whatever method you choose, once you've set up the system you should enter historic information as far back as 12 months (if you have it). This requires digging out the old bank, investment, and credit card statements and entering the information. This is also where the more sophisticated tools are very useful. In today's connected world, many times you can simply download the transaction history from your bank, investment, or credit card company, and import it directly into your Money or Quicken file. You'll still need to go through and organize things, but much of the data entry is done for you.

If you don't have the time, the facility or the patience to enter this historic information, don't give up. Tracking your information from today forward is valuable as well. Think about it... in a year, you'll have 12 months' worth of history plugged in to your system!

As you generate this history (or review the old history), you'll see patterns emerge, with regard to your spending habits. Perhaps you spend MUCH more on golfing related activities than you realized. Or maybe your home decorating expenses were greater than your mortgage payments over the last year. Each of these kinds of patterns help you to understand the "where" associated with your money. Once you know where your money is going, you can begin to control it to put your money where you really want it to go.

Keeping track of your financial information doesn't have to be an enormous chore. The initial set-up can probably be completed for most folks in a couple of evenings. After that, if you use your money tracking system alongside your checkbook, making entries in the various accounts as you go, keeping this organization intact should be effortless, costing you less than fifteen minutes a month.

Next time, we'll start talking about Net Worth, which is a by-product of this organization process.

Until then, take care -- Jim

What is it?

Okay, so in the first message I said I'd begin to cover just what financial planning is...

I'm thinking, though, that any reader might be more interested in knowing what the benefits of financial planning are, rather than what ingredients go into the cake.

One of the most important benefits of financial planning is ORGANIZATION. Statistics tell us that fewer than 25% of Americans know their financial net worth. In addition, (prepare to be astounded) the average individual's credit card debt is over $8,000. Think about that for a moment...

This figure includes all of those people who pay off their cards each month. How does this happen?? Folks don't have a handle on the big picture of their personal financial world. If they did, they wouldn't likely allow themselves to get this far into debt, as they would understand the impact that credit card debt has on everything else in their financial lives.

ORGANIZATION - is the foundation of financial planning. By organizing your finances and gaining an understanding of money flows (inflow is your paycheck, outflow is your electric bill), you have made the first step toward reaching your financial goals in life.

That's all for now... more to come.