After you estimate how many years you have left to live, the next thing you want to do is figure out where you are now. I've read some very disturbing statistics on ZeroHedge about the finances of the average American. I have this gut feeling that the average Joe doesn't know his current net worth.
For example, most Americans probably use only one bank. With online banking, the average Joe can easily pull up the amount of money in his checking account. As long as this number is positive and is enough to last until the next payday, everything is fine and there is no need to fret. This is the mentality of the average Joe.
The same guy most likely has a balance on a credit card, maybe some student loans, and a car loan. Without too much trouble, he can look up all these figures. With about 15 to 30 minutes of effort, the average Joe can put together a simple Net Worth Statement. You simply list out all the stuff you own and all the stuff that you owe. Subtract your total liabilities from your total assets and you get your net worth. I'm very confident that the average guy doesn't know his current net worth because in the time it takes to figure it out, he could have played a few online matches of Call of Duty.
When you put your net worth statement together, make sure to list only the stuff that you own and owe today. You don't want to to include monthly expenses like rent or future sources of income. The reason for this is that expenses and income can change in the future.
On a net worth statement, start out by listing your assets. Include the amount of your checking, saving, retirement, and brokerage accounts. I like to total up the liquid assets. Further down, you can include bigger items that you own such as vehicles and real estate. Include precious metals and other tangible property that you could sell. Add all of these items together to get your total assets.
The second half of the net worth statement is the liabilities. Here, you want to include your credit card debt, car loan, mortgage, student loan debt, and any other amount of money you owe. Total this amount up and you will have your total liabilities.
Subtract your total liabilities from your total assets and you will have your net worth. If you have a positive net worth, that is good. If you have a negative net worth, that is not so good. A negative net worth means you don't have enough money today to pay off the people you owe.
If anyone comes up with a negative net worth, I would encourage them to start working to getting a positive one. The reason for this is that the future is full of uncertainty.
With your net worth statement, you don't want to include your monthly expenses or sources of income. Your monthly expenses can fluctuate in the future. The amount off your insurance bills can easily change with your actions and decisions. Rent can be variable depending on how much housing you want. Your income is also subject to fluctuations. Raises and promotions will increase the amount of money you make. If you get terminated, then your source of income is gone.
A net worth statement is useful in the case of emergencies. If you lost your job tomorrow, would you be able to pay your debts or would you default on your loans and be forced to declare bankruptcy. You need to know what position you are in today for this reason.
After figuring out your net worth, the next step is to find out what your current living expenses are. You want to figure out this portion after your net worth because, if you have loans outstanding, you will most likely be required to make monthly payments which will increase your cost of living.
I'll talk about that next time.
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