Any journey worth undertaking has two known elements: the starting point and the intended finish line. At the journey’s end, it is essential to look back at the distance traveled, and this is possible only with a clearly defined beginning.
This is true for all journeys, including financial ones.
At Seed Tree Group, we spend a good deal of time talking about financial plans—how to develop one, how to adhere to one, how to experience success from one. All of these aspects involve knowing your financial starting point, also referred to as your overall net worth.
Now before we move forward, it is worth taking a breath and embracing reality. Your net worth, most likely, will not be one million dollars. At least not yet. More likely, especially if you are in your 20s, your net worth is in the negative.
This can be frustrating and scary and can cause many people to ignore the truth and continue to bury their heads in the sand while spending frivolously on car payments and over-priced lattes. But this does not have to be the case for you.
You are the trailblazer for your journey, and you must take stock of where you are in order to determine where you want to be.
At its most basic, your net worth is the sum of your liabilities subtracted from your assets.
Sounds easy, right? Think again. First, we have to clearly define what is meant by an asset. An asset is something you own that either maintains its value or appreciates in value. By that definition, your house is an asset. Your car is not. Your savings account is an asset. Your credit card bill is not.
When it comes to your college degree and other intangible assets, leave them off your calculations. When it comes to things like your stamp collection, your silver flatware, your wine collection, leave them off your calculation. When it comes to your nice suit or expensive dress, you guessed it, leave them off your calculation.
Now that we cleared that up, total your assets. Look at your checking account, your savings account, your retirement account(s), your Health Savings Account, your home’s value minus your mortgage, etc. Total everything on a spreadsheet in column A.
Next it’s your liabilities; this is where frustrations mount. Dig up the amount owed on your student loans, your car loan (not your monthly payment, we’re looking for the total amount still owed), your credit card balance, and so on. This goes in column B on the spreadsheet.
Take the total amount in column A and then subtract the amount in column B and you’ll end up with your current net worth.
Depressed? Don’t be—most people don’t even take this first step and, as they used to say in the old G.I. Joe cartoon, “knowing is half the battle.” You now know where you stand and you’re taking charge of your financial future.
Plug this number into a new spot on the spreadsheet and date it. You’re going to repeat this exercise on the same day, every month, and you’re going to re-do all the calculations. Each month, you’re going to record the total and date it.
Then, you’ll see something amazing—you’ll see that, month after month, that number begins to grow. It won’t happen all at once. But, slowly and surely, the number will climb. As you start to pay down your debts and lower your liabilities, you’ll be subtracting less and less from your assets. As you do this, your assets will grow in value, and you’ll have more in column A. As column A grows, and as column B shrinks, your net worth will move up and up and push you toward your financial goal.
And then you can kick back and enjoy that nice glass of wine (or lemonade), because once you have a solid financial plan, your money works harder than you do.
Seed Tree Group, LLC, offers financial literacy classes as well as seminars and workshops on financial wellness. For more information, CONTACT US.