Life is busy, I get it. The last thing you need is one more thing on your to do list.
Mastering your finances seems really time consuming and complicated. I tried to simplify it as much as I could for you but it ended up being 12 steps to a kick a$$ life. And those 12 steps didn’t include some really important things that help us move through the steps more quickly like figuring out your why and tracking your net worth. And it didn’t include things like making a will and getting life insurance which are critical if anyone depends on your income or in-home work.
If I had to pick one thing to have everyone do (after getting life insurance*) it would be to calculate your net worth. Your net worth is like a business’s balance sheet. What you own minus what you owe. Calculating my net worth kept my eye on the prize and was my secret weapon to achieving early retirement. Once you start tracking it, your mind automatically thinks differently about earning and spending decisions–you want your net worth to go up each month.
Net Worth = What I Own – What I Owe
What I Own–add up:
- Bank balances-include checking, savings, cd’s etc. take the balance from your register so it includes any amounts that aren’t reflected in your bank’s balance yet.
- Retirement accounts – the amount of your balance that is vested (this is the amount you would have if you left your job today).
- Homes-check Zillow.com to get an idea what it is worth. Include 90% of what you think your home would sell for because it can cost about 10% to sell a home.
- Cars, boats and toys-check Edmunds.com for car values, estimate the others.
- Other-some people include the value of electronics, jewelry and other personal items in their net worth. I do not include these because I want my net worth to go down if I buy something–this discourages spending. It is also pretty complicated to figure out how much you could sell these things for.
What I Owe–add up:
- Credit card balances
- Any personal loans for furniture, cars, boats, toys etc.
- Student loans
- Anything else you owe
Take what you own and subtract what you owe and you have your net worth.
Whew! Congratulations on calculating your net worth! I promise it gets easier. You can simplify the calculation by excluding some things you own–I don’t include car and boat values in mine because we don’t owe anything on them. And there’s no need to adjust home and car values each time you do it–update them every three months or once a year.
I budget and calculate my net worth monthly. My annual budget shows what my net worth should be at the end of the year if I keep my earnings and spending on track and if my investments give me a reasonable rate of return. I keep an eye on what caused my net worth to vary from my budget by calculating the variances. Here are my February, 2017 variances:
At the end of February, my year to date (YTD) net worth was $41,296 better than I budgeted! Income is super easy to budget when you have none 🙂 My expenses are under budget by $2,200 and the stock market is killing it so my investments are way better than budget.
When I started calculating my net worth, it changed how I thought about purchases. I had a new filter–was this purchase worth the impact on my net worth? If it wasn’t worth it, I’d rather see my net worth grow because that net worth gave me stability, choice and, ultimately, FREEDOM!
If you don’t think you have the talent for this–it’s just addition and subtraction.
If you don’t think you have the time for this–think about how much time you spend keeping up with Facebook, Pinterest, Twitter or the Kardashians. Could some of that time be better spent looking after your future?
* If anyone depends on your income or your work in the home, you must, must, must have life insurance–seriously, stop reading this and get it now. Term insurance is cheapest and works fine–NerdWallet.com can help you. Stuff happens–protect your family.