If you find your net worth is not increasing annually, you may wish to consider seeking a professional financial planner to help develop a plan to get this going in the direction you want.
You can determine your net worth on a simple sheet of paper or you can use an online service like quicken or mint.com. If you have a computer, this can be done as a simple spreadsheet, or you can just use a few sheets of paper.
Let’s start with assets. List your current assets first. A current asset is any cash or other items that could be converted to cash quickly. This includes cash in the bank, savings, all of your stocks, bonds, mutual funds etc. held in your name and not subject to a tax if withdrawn. If you have a cash value life insurance policy, you can include the cash value (more on insurance later). You can also include any money owed to your by others. Now add these items up. This is now your current assets.
Now let’s look at items that are not easy to convert to cash, or your fixed assets. This included your home, cars, motorcycles, household furnishings, sports and hobby gear. All of these items can be converted to cash, but it will take some time to list them for sale, find a buyer and agree on a price. List these items as assets even if you owe money on them, we will come to debts in a minute.
The last section on your asset list includes all of your deferred assets. This is anything you expect to receive in the future, company savings or profit sharing plans, pensions, retirement plans are all deferred assets. List these and add them up.
Now to get the total of your assets just add all of your current, fixed and deferred assets. This is your total assets. Set this number aside for a second, so we can turn our attention to liabilities.
Liabilities are what you owe to someone else. This includes the mortgage on your house, personal loans, car loans and credit card debt. It might also include any student loans, lines of credit and even if you took out a loan from a retirement account or cash value life insurance policy (You should never do this BTW).
Now total your liabilities, and subtract this number from the total of your assets. There you have it, you just figured out your net worth.
How To Get Where You Want To Be
Today does not define who you are, where you are going or how you will get there. Despite tough times, you are still in charge of your life, your future and what you make of it. The financial world is full of examples of people who started with nothing and build their finances to the point they were free of debt and worry. If you have lost everything, you really have no choice but to start over. If you have been an investor in the stock market (even with just a retirement plan), and lost half you nest egg, now is not the time to hide in the sand and doing nothing. Remember an education is power and a financial education is financial power. It allows you to take charge of your money and make it work harder than you do.
Remember this adage: “Failure to plan is planning to fail.”
Create a financial plan by first knowing where you are now (setting your net worth), then comparing that to where you want to be in the future. Once you know your direction, the next step is creating the plan. It is just like planning a trip, first you figure out where you want to go, and then you plot your trip on a road map. Along the way to check off the mile markers to figure out if you are there yet.
Before we move on, remember this is a financial measure, not a personal measure. I have found too many times people get all caught up with measuring their worth with how much money you have. Money is just a medium of exchange; it helps you get you where you want to buy. Remember the Beatles hit record “Can’t Buy Me Love”? You can have a lot of happiness by having enough money to buy the things in life you need or even want, but you can’t buy love, that has to come from within you. Now let’s move on to the next step, personal budgets.
Make your Money Work For You
Do you find it difficult to stick to a budget? I know I do, there is always something on sale, or maybe just more month than money. I have always liked this proverb: ”The art is not in making money, but in keeping it.”
Right now you are in your prime spending years, you are working, married with kids to match, and everything is under control, right? Well not if you don’t have a budget that is aligned to your financial goals. The only way to make your money work harder than you do, is to bring it under control, rein in your spending on things you don’t need and create a plan to make your money work.
How Do You Spend Your Money
You may be very careful with your money or you may be carefree the choice is yours. But each choice has a result (perhaps planned, or perhaps unintended).
Once you have identified your net worth, the next step is to look at your income and expenses. It is important to establish where you money is coming from (source of funds) … and where it is going.
There are several things you can be fairly certain of as you plan for your future.
First, you have to deal with the effects of inflation. Inflation erodes your spending power. You can check this out at http://www.inflationdata.com. Over the last ten years, the highest rate of inflation has been 5%. Remember that rule of 72 from chapter one? It can also be used to determine how quickly inflation reduces your spending power. Just use the rate of inflation and divide it into 72 to determine how quickly your spending power is reduced.
Second, you need to know how important it is to distinguish between your wants and your needs. This is a time to consider increasing your income or budgeting out unnecessary spending that eats up your income. Some times it is necessary to defer a purchase, if you don’t need it. Keep you credit cards at home, so you can avoid that impulse to spend when you don’t have cash.
Third, with a budget you can put into place a very important adage ”Pay Yourself First” by setting aside 5 to 15% of your gross earnings every payday for savings and investing. Note I suggest looking at your gross earnings (the money you earn, before deductions), rather than net pay.
Fourth, we all know there are only two ways to improve your financial situation:
By increasing your income through saving more, working more, increasing the yield on your investments.
By decreasing your expenses with adjustments your standard of living, spending habits, cutting costs or minimizing your debts.
A budget is simply a plan for how you will disburse your income and earnings. Although virtually everyone operates on an unwritten monthly budget, effective financial planning requires setting down on paper all of your monthly income and expenses. Budget planners are available at a number of online financial planning sites. If you haven’t already look at sites like: Mint.com, qizzle.com, Yodlle Moneycenter or Rainydaybudgt. Take some time and set-up a budget; once you can control you spending, you will be better able to have money to invest for the future.
Budget Planning
This may be easy for you, or you may even hate the idea of accounting for where you money goes.
With the Internet and smart phones it is now easier than ever to track every dime you spend if you want to. The good news is you don’t need to if you have created a budget and at least know which of several buckets your money goes.
Start with stating your income from things like monthly earnings, profits from a business, rental income, interest, dividends, or pension income.
Next list all of your fixed monthly expenses, things like the mortgage, or rent, car payments, insurance, a budget for food, utilities, childcare and anything else you pay every month.
Now list your variable expenses, those items that might only occur a few times a year. This includes taxes, perhaps insurance if paid annually, contributions, and perhaps entertainment. Now set aside some money for those emergencies