1st and 15th Financial Corner Jan 15, 2011

If you’ve thought about what you want, and building wealth is part of that goal, then here we go.

FIND OUT WHERE YOU ARE

It is critical to track every incoming and outgoing dollar. Remember, this will take dedication. You have to get friendly with Excel or some other spreadsheet software… there’s no way around it unless you plan on using pen and paper to do this. I haven’t balanced a checkbook since the 1990s. Excel is that powerful.

Begin documenting your income and expenses. Put them into Excel and subtract the expenses from your income. This will show you your cash flow situation. Is it positive or negative?  I do this weekly.

To make it easier, I do not use cash unless absolutely necessary, and I use a rewards credit card that I completely pay off every month to avoid interest charges. I also use online bill paying with my bank. With these methods, I have a record of every expense without having to keep a pile of receipts.

That takes care of income and expenses; now let’s talk about net worth.

Simply put, net worth is the value of your assets minus your liabilities. It’s the amount of money you would have if you sold everything you own and paid off all your debts.

Let’s clear the air on those two terms before we proceed. Assets are things that have tangible value, like a car or a house. Liabilities are usually the result of loans. For example, if you sell your house, you will owe somebody some money, unless it is paid for. Your monthly power bill is not a liability, it’s an expense. You could choose to stop paying that any time, they’ll just stop providing you with that service… it’s not a liability.

So, liabilities are things like the balance of your mortgage, the balance of your auto loans, credit card balances, etc.

Why do I want a high net worth? I want to build a nest egg large enough that we do not have to depend on a job to provide an income stream. A lawyer making $800,000 per year is not wealthy, in my eyes, if she’s spending $799,000 every year. She’s either going to have to maintain that high income the rest of her life or start saving.

On the other hand, someone making $25,000 per year and only spending $5,000 per year is accumulating wealth. Granted, that person might not have a great quality of life. The key is to find a balance that makes you happy, but still allows you to build your net worth.  The Millionaire Next Door does a good job on this subject.

Go ahead and list all of your asset values in Excel and list all of your liabilities. Subtract your liabilities from your assets, and you have your net worth.  Is it positive or negative?


Previous editions
1st and 15th Financial Corner January 1, 2011

 

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