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As part of my blogging goals for 2012-2013, one of the ongoing projects I've been working on since Thanksgiving has been writing a book called, 31 Days to a Financial Revolution - Automate Your Finances To Achieve Financial Success. As the name suggests, the book details a series of 31 approachable steps over a one month period that people can take to optimize their finances. Along each step of the way, 2-minute?automation?action items are implemented to increase the?likelihood?of the financial planning steps continue to be followed going forward.
At first, my goal was to just write a short 20-30 page eBook on one specific topic. However, when I started looking at all of the material I had already covered on my site (now at 804 posts total), I realized it was complete enough to tie together in to the form of a book.
From there, the question then became what would be the first step/day to get the financial revolution started! In thinking for a while about the first step that I would take to get my finances set up, the answer became abundantly clear. In fact, it was so clear and obvious, that I realized I had never even thought to actually write a post about it on my site, despite the extreme importance of the step.
The purpose of this post will be to correct this annoying little discrepancy and cover the first step that I think should be taken in personal finance - listing out all of your financial accounts and calculating your net worth!
Step 1 in Personal Finance ? ?List Out All of Your Financial Accounts and Calculate Your Net Worth
As I?ve dealt with people?s finances over the past three years of personal finance blogging, I?ve noticed one thing ? when people are not doing too well financially, they are afraid and/or ashamed to face the music and gain a concrete vision of their financial position.
Of course, this fear only causes them to get further behind on their finances. Why is is this? Simple ? because in order to start getting your financial house in order to achieve financial freedom, the first essential step is to get a clear picture of where you are currently (i.e. where your financial mistakes or successes in the past have lead you to right now).?
Not convinced yet? Let?s take an example of a fictional man named Mark. Mark is trying to decide how to use some excess money he is realizing each month from a recent pay raise. He racked up a large amount ($50,000) in credit card debt during his 20?s, and since he?s ashamed of it, doesn?t track the balances or current interest rate he is paying. Because of this, he decides to invest the money in the Facebook stock IPO in hopes of aggressively growing his money. However, what he doesn?t know is that the interest rate on his credit cards is 20%, and because of this, he has no business investing in an IPO since he can get a guaranteed 20% return by simply paying off his credit card bill.
In other words, in order to make continually informed decisions about your personal finances, you have to keep up with what your current position is!
So, how do you obtain this clear financial picture? Easy ? it?s called a personal financial statement. Wait a second, aren?t financial statements complex? Not really, but just to make things easier, let?s call this a personal net worth calculation.
How do You Calculate Your Personal Net Worth?
In short, your personal net worth is equal to your solvent assets (investments, cash accounts, etc) minus your liabilities (debts). So, in order to perform this calculation, you have to keep a running list of all of your accounts and their corresponding balances.
Depending on personal preference, this listing of financial accounts can be done manually in an Excel (or equivalent) spreadsheet or automatically through free or commercially available personal finance software.
- Personally, I prefer to handle this process manually using a Google Docs spreadsheet. Google Doc spreadsheets are super easy to use, handle just like a regular Excel spreadsheet, and are automatically stored/backed-up online, enabling my information to be protected from computer crashes and also accessible from any computer in the world with an Internet connection.
- If you?re interested in automating this process with personal finance software, there are now many great options available. Some of the ones I?ve tried and like are Mint (free), Manilla (free), SaveUp (free), Personal Capital (free), and Quicken Home ($). The only reason I don?t use this type of software is because some of the banks I have my money stored in are not listed in the directories of this software.
Regardless of whether you decide to handle this tracking manually on a spreadsheet or automatically with one of the personal finance software alternatives listed above, the overall process flow is the same:
Step 1 ? List out all of your accounts (and corresponding balances) containing your ?marketable? financial assets. Shown below are some examples of the types of accounts that should be included in your list:
????????? Checking accounts
????????? Savings accounts
????????? Brokerage accounts
????????? Investment accounts
????????? Stocks, bonds, mutual funds
????????? Person-2-Person loans (where you are the lender)
????????? Microloans (where you are the lender)
????????? Anywhere else you have placed or invested your money
Got all of them listed out? Good. Now, add up all of the balances.
Step 2 ? List out all of your accounts (and corresponding balances) containing your loans/liabilities (debts).? Shown below are some examples of the types of accounts that should be included in your list:
- ? ? ? ? ?Credit cards
- ? ? ? ? ?Personal loans
- ? ? ? ? ?Boat loans
- ? ? ? ? Car loans
- ? ? ? ??Furniture loans
- ? ? ? ??Student loans
- ? ? ?Or anywhere else that you owe money
After getting all of these listed, add up all of the balances and subtract the total from your asset total to calculate your net worth.
Ok, so you calculated your net worth! Now what? Well, your net worth statement/listing of financial accounts will be continuously used as the starting place to make informed financial decisions.?However, it?s important to know that this calculation IS NOT a one-time action item. For this system to work, you must keep this listing current EVERY MONTH.
Now, if you?re like me, you easily forget things like this because your life is pretty hectic with many different commitments. Because of this, you need to complete the following 2-Minute Automation Action Item to maintain visibility.
2-Minute Automation Action Item ? Place automatic monthly reminder on Gmail or Outlook calendar to update your net worth listing as your account balances change.
Share your experiences by commenting below!
***Photo courtesy of?http://www.flickr.com/photos/59937401@N07/5856725357/sizes/l/in/photostream/
Source: http://www.mypersonalfinancejourney.com/2013/01/step-one-personal-finance-calculate-net-worth.html
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