Know the Facts, Estimates Won’t Do

Once you make a mental commitment to take charge of your money the next step toward getting in control of your money is to take stock of your current condition. This is usually quite easy but can be a little more complex, depending on the types of assets and obligations involved.

It is amazing how many people avoid knowing about their own finances at all. Many people never even open their bank statements. I really don’t understand that one!

But anyone who wants to be successful with their money needs to know where they are as much as where they are going. Otherwise, how can they map a way to get where they want to be.

Learn How to Count

First start balancing your check book if you don’t do it already! Next make a current list of your income. For most this may be no more than a monthly salary but for others, especially the self-employed or seasonal workers, this may involve totalling a year’s income and dividing by twelve to get an average.

Then learn how to develop a net worth statement. Make a list of your assets. Many people try to list too much. If you are just getting into serious work on your money program try to keep it simple. Don’t worry about stamp collections, tools, or jewelery unless they are real investments (which isn’t likely). Just try to list all the monetary assets.

Include all checking and savings accounts, retirement accounts like 401k’s and IRAs, and stocks or bonds. Add anything else that can be easily converted into cash. You will want to include the value of your home (if you own it), any other real estate, and perhaps your automobiles (certainly do so if you have loans against them), but probably not any other personal property.

Make a similar list of obligations. This list includes your mortgage if you have one, car loans, personal loans, educational loans, and credit card accounts, etc. Don’t leave anything out.

Now comes the interesting part. Add up each list, then subtract your liabilities from your assets. Hopefully this will be a positive number. Unfortunately, often it is not. Whatever it is, this number is an important number for you to know. It is your Net Worth.

The Value of a Net Worth Statement

What is a good number? It is not particularly relevant and it is never a good idea to think too much about how we compare to others, but I know many would like to know. The most recent figure I have is for 2004 when the median net worth in America was $93,100.

The important thing is to see how we want to use this information. It is a measurement of our success in reaching our financial goals. Individual parts of our financial life may go up and down. But it is the total picture that measures our overall success.

What we want to do is keep all the records we need readily available and take time once each month to calculate our net worth. It will only take a few minutes at most once we have established the practice. By doing this we will have an accurate record showing whether we are getting ahead or behind with our money. Computing your net worth once is interesting, but having this figure for several months gives us important information to guide all our financial planning.

Putting this Information to Use

With this information at hand we can compare each month's total to the month before to see our ongoing progress. Equally important, we will be able to see immediately the basis for any change.

If total savings and investments are up well and good. If the total goes down we can see if it is due to a drop in money assets or if it is due to a fluctuation in housing or stock values. If it is the latter, we may not be concerned at all. It may represent an opportunity to increase investments while prices are low. If it is the former, however, we will want to check out the reason and make whatever adjustments are necessary to avoid overspending.

There are many other values to calculating your net worth regularly. The important thing now is to get started. Make yours up today if you haven't already and then move on to the next steps toward getting in total control of your money.