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Money and personal money management seems to incite a lot of fear and confusion in people.
But it really doesn’t have to.
You see there’s a little known secret regarding money management that I’m going to let you in on.
Managing your money is crazy easy once you have been taught how.
Yep, probably not as life changing as you were hoping for but it’s true. Managing your money is ridiculously easy assuming you have been educated about it.
And I think that lack of education is where the fear, confusion and general negativity comes from. Because if no one has ever taught you then how would you know what to do.
For example, my Mum brought a really bad mobile phone and locked herself into a crappy contract for 2 years. This upset her because she can’t use her phone properly and she just doesn’t understand which phones are good and what she needs in a contract. She got upset and confused, and then really frustrated with herself because of this.
But she has never learnt about mobile phones. Never. She sees me happily tapping away and assumes she should be able to do the same. Like it’s some inbuilt ability. No of course it’s not. The reason I can use mobiles so well (and many people of my generation) is because I spent my school breaks and lunchtime sitting in the play ground looking at someone’s new phone, fiddling around and inevitably learning all about it. Without realizing I received quite a thorough education in mobile phones.
My Mum never had that education so how would she naturally know how to use it. She wouldn’t! Luckily I’ve now explained this to her, given her a crash course and we are going to get her mobile phone situation sorted.
But I told you that story so you would understand that if no one has ever taught you something well enough then you shouldn’t feel bad that you have no idea how to do something!
In fact just think about that for a sec. If you have never received adequate money management education then how on earth can you be expected to know how manage your money. You just can’t.
So stop beating yourself up about it and let me break it down for you. One step at a time.
Plus if at any point your still feeling totally overwhelmed by it all please email me at [email protected] with any questions you may have. I’m actually looking for clients who would like me to help them get their personal finances sorted. This would be a totally free service in exchange for being a case study on a blog post, anonymously of course if you would prefer. It would also be a service completely tailored to how you work and learn, so if you have struggled with courses or techniques marketed to the masses and need something a little more personalized then I really can help!
Anyway lets begin with your money management education. Starting with calculating your net worth.
Firstly, what is net worth?
Your net worth is the amount of money you personally or as a household are valued at. So it’s your total assets minus your total liabilities.
Assets are things you own that are positive money wise.
- Collectables (like expensive watches)
Basically assets are things that if you had to liquidate them (a fancy work for sell) then they would give you cash, hence why cash is the ultimate asset. (Ever heard of the saying, ‘cash is king’ that’s why…)
Liabilities however are the things that cost you money.
- Student loan debts
- Credit card debts
- Car loan
To be honest all debts are liabilities. If you owe money it’s a liability.
Why would we want to calculate our net worth first, wouldn’t figuring out a budget be a better idea?
No, you need a starting point and calculating your net worth gives you a very good starting point.
If you jumped in and made a budget right now a few issues would come up.
Firstly you may have more debt than you realize and that would need dealing with. If you don’t factor that into the budget then you will have some problems.
Also how do you know how much money you wish to save, or really what direction you want to go in with your money if you don’t know your current position.
No net worth should always be your starting point.
Now onto the good stuff.
How do you calculate your net worth?
Add up all your assets. Then add up your liabilities. Then minus your liabilities from your assets and that’s your net worth.
As a formula that would look like:
Assets – Liabilities = Net Worth
(Pretty easy. But don’t panic if your still confused, it can be difficult to understand a new concept. We will go through a few examples and then I have a detailed action plan so you can work out your net worth.)
I always find I learn things much quicker when given examples because even if I don’t necessarily understand how someone’s explaining it I can usually work it out from their examples.
Jane lives alone in rented accommodation. She has just graduated with $30,000 in student loan debt. However she has $2,000 in savings with her bank. She also has a credit card with $1,500 owed on it.
So Jane’s assets are:
Savings – $2,000
Total Assets = $2,000
Jane’s liabilities are:
Credit card debt – $1,500
Student loan debt – $30,000
Total Liabilities – $31,500
Therefore Jane’s net worth would look like this:
Assets of $2,000 – Liabilities of $31,500 = A Net Worth of -$29,500
We can see Jane currently has a minus net worth. This would be reasonable to expect as she has just graduated.
Now Jane has calculated her net worth she realizes that she needs to start paying debt off as a priority. Rather than saving up for that super fancy car she likes.
John and Malcolm have just brought their first house together. They are in their late 20’s so have been working a while. The house was sold to them for $240,000. They used a deposit of $40,000 and got a mortgage for the remaining $200,000. John has a car on finance, the car is currently worth $10,000 but he still has $8,000 left to pay. Malcolm owns his car outright and it’s worth $6,000. John has retirement savings of $30,000 while Malcolm has retirement savings of $45,000. Malcolm also has $15,000 in a savings account with his bank.
Because John and Malcolm have a house together they combine their finances and so we will work out their net worth as a household. Some couples keep their finances separate in which case you would just work each person out in the same way we worked out example 1, Jane’s net worth.
John and Malcolm’s assets are:
House – $240,000
John’s Car – $10,000
Malcolm’s Car – $6,000
John’s retirement savings – $30,000
Malcolm’s retirement savings – $45,000
Malcolm’s savings – $15,000
Total Assets = $346,000
John and Malcolm’s liabilities are:
Mortgage – $200,000
John’s car loan – $8,000
Total Liabilities – $208,000
Therefore John and Malcolm’s net worth would look like this:
Assets of $346,000 – Liabilities of $208,000 = A Net Worth of $138,000
So John and Malcolm currently have a positive household net worth of $138,000. Upon understanding their net worth they may decide they want to destroy their car loan and then start saving for early retirement. Or they may decide to work hard at paying off both the car loan and the mortgage so they can go traveling and rent out their paid-off house for income.
See how in both examples by calculating their net worth they could see where their money priorities lie much more easily.
What should I include when calculating my net worth?
Asset wise if the total value will not change significantly for a year, or will not be spent in a year (in the case of cash) then include it in the calculation.
So if you save up money for Christmas each year, don’t include those savings in your net worth because it’s going to be spent within the same year.
For liabilities, the value change within a year does not apply. Basically whatever your liability is on the given day that you work out your net worth use that number. Make sure to include any money owed even if you plan on paying it all off the following month or something. It still needs to be included.
A note on cars: Cars can be tricky when calculating your net worth. Basically because a car’s overall value can change dramatically in a short space of time and upkeep costs can virtually cancel out the car’s value. Therefore some people do not include cars as an asset at all. But even if you decide not to include the car as an asset you must still include a car loan as a liability. Because you will have to pay back that money regardless of the cars value.
How to calculate your net worth ACTION STEPS:
Grab some paper, a pen and a calculator or bring up a blank excel spreadsheet.
Write down all your assets and their value.
If your unsure of something’s value its always better to underestimate than over estimate.
What you can always do is hop onto a website that sells whatever your trying to guess the value of and see what an item, with the same age and condition as your own retails at. So if you have a car, go onto a used car sales website (the bigger the better) input your cars make, model, mileage, age, condition etc and see what other cars similar are selling for. You can do this with virtually anything including houses, but house wise, because the value can be so high, its probably best to get a valuation done by a proper agent.
Add up all your assets to find your total assets.
Write down all your liabilities and their value.
You may need to go through paper work, or call up and find out exactly what you owe to everyone.
If you have been getting into debt but have kept your head in the sand about exactly how much, now is the time to call up and see the exact numbers. It might be a bit scary but it’s far better to find out now than 6 months down the line when the debt could be even larger.
I will be writing a post about what to do if you’re behind with your bills in a few weeks. But if your in a desperate situation right now please feel free to email me for advice and I promise to help you as much as I can to get your head round your finances.
Add up all your liabilities to find your total liabilities.
Minus your liabilities from your assets giving you your net worth.
*Please see the two examples further up the page if confused, or comment below or send me an email at [email protected]
Well done you should now have calculated your net worth! Don’t worry about the numbers your looking at now because remember this is just your starting point. We will have those finances in ship shape in no time!
Once again if you are feeling overwhelmed or totally confused by it all please email me at [email protected] with any questions you may have.
I’m actually looking for clients who would like me to help them get their personal finances sorted. This would be a totally free service in exchange for being a case study on a blog post, anonymously of course if you would prefer. It would also be a service completely tailored to how you work and learn, so if you have struggled with courses or techniques marketed to the masses and need something a little more personalized then I really can help!
So that’s it for your first lesson in money management. Please comment below or share the post if it has helped you out, because that would really help me out!