Image by Nattanan Kanchanaprat from Pixabay
Once you have decided to take control of your personal finances and you have determined who will be your financial buddy, coach or mentor, the next step is to take inventory and determine where you are at with respect to your overall portfolio. Portfolio typically refers to the investments which may be small at the beginning.
We are looking to create a baseline. As we improve our personal financial position we can set goals and determine how well we are doing. We need to have this baseline and ability to manager because as Peter Drucker has stated “say you can’t manage what you don’t measure”. Data provides us with the capability to determine where improvements need to be made and how well we are meeting our goals.
One metric that provides a good baseline is net worth. Net worth is simply the total of all our assets minus all our liabilities (or debts). Assets would be those things that have a value. They can be equated to some type of cash either directly or after being sold. Liabilities are those things we owe. Things we make payments on. These would include items like credit cards, medical bills, mortgages, and car payments.
Here is a simple example:
Note that the house is always a little tricky when making this type of calculation. I recommend making the calculation several different ways.
- Add in the appreciation and the debt as I have show above. The market price of your house won’t be exact, but you can base it on market comparables in you neighborhood. Or you can use a slightly less exact measure by pulling a figure from Zillow or Redfin.
- Provide your net work in two forms. One net worth including the net worth and one without it.
I chose to disclose net worth as option number 2. In my mind it provided a more accurate overall snapshot of where I was at. There is nothing wrong with option 1. Just keep in mind that it isn’t exact but this is true of many things in life.
I like to track my net worth on a weekly basis, and I do it by hand. Later we will look at ways of automating this. I would recommend that you review on a weekly basis but if that is too frequent then looking at it on a monthly basis will work as well. The key is to monitor it so that if you see something that does not pass the sniff test of being accurate, then you can start digging deeper into the data. Then act on what needs to be remedied from there.
Don’t feel bad if the numbers aren’t impressive or they may even be negative. It’s OK. We will work together to make improvements from here on out.
Now that we have established a baseline. We can take a look at budgeting so that we can further improve out net worth. Tracking will come up again in budgeting but we will be tracking how well we are doing against the weekly budget.