This is step 2 of my 10 recommendations, for a financial
tune up. This one is easier than sitting down and setting up a budge but is
still very important.
Before I start on this step, I wanted to mention that
the new Excel 2013 has tons of different budget templates. I recommend
people to take a look at the family budgets, they are easy to use. There are
also templates to budget for a wedding, a renovation and much more. I love it!!
Figuring out your Net Worth is pretty easy. You take all
your assets and minus all your debts. It is how much money you would
have, if you sold all your assets and paid off all your debts. If you Google
Net Worth calculator, you can find many calculators online.
Assets = Cash in hand, funds in bank accounts, Retirement
savings, Vehicle, real-estate, stocks, bonds, life insurance (if it has any
cash value), personal items (jewelry, artwork, furniture, collectables etc.).
Liabilities = mortgage, credit lines, installment loans (for
vehicle or other purchase), credit cards, student loans, home equity loans,
back taxes etc.
Even though you most likely will never sell all your assets
and pay off your debts, knowing your net worth will hel0p you make better
decisions on how to accomplish your financial goals. It will also help you be
prepared, when you go into the bank and ask to borrow money, as Net Worth is
one of the many things they will review with you.
Be prepared that this number may be low or even negative,
especially when you’re young. A large mortgage, student loans or steep credit
card/credit line debt could send you into negative territory. A negative net worth
isn’t always bad. For example if you just finished school and started your
first job, most likely you will be negative. This is expected and doesn’t
reflect on bad finances.
USUALLY your Net Worth will be low when you are young, as
MOST young people will have a lot of debt and little assets. We acquire student
loans, car loans, mortgages and much more in our younger years. The goal is to
track your Net Worth and for it to increase overtime. As you pay down your
debts your Net Worth will increase and as they are fully paid off, it will free
up cash flow to put towards other purchase of other assets or invest.
Tips
to increase your Net Worth:
Pay off your debt quicker. Avoid debt if/when you can
-
Change your debt payments from
monthly to bi-weekly, if possible. Bi-weekly payments allow for more money to
go to principal and will have the debt paid off faster, with less interest.
-
Increase your debt payments. Same as
above, it will help your debt to be paid off faster, with less interest. Even
if you can afford to increase them by just a small amount, do it, it will add
up and have them paid off faster.
-
If you have a debt with a large
payment, then look at possibly selling an asset, you are not using. This will
free up cash flow to go to other expenditures.
-
AVOID using a credit card, unless
you can pay it off in the short term. Credit card interest is usually high and
the minimum payments are so low that you are usually paying mostly interest and
fees. Many people use a credit card as an emergency reserve account, ahhhhh,
don’t do that. Please try to avoid this and instead pay a certain amount each
month to a savings/emergency reserve account and use that money when an emergency
arises. Not to say, I haven’t had to do this before, I have, but have learnt
from it!
Increase
your income/cash
flow
-
Get a second job for the short or
long term (depending on your situation) to help you pay off some debts and/or
save
-
Get the kids to help out. If you
have teenage working kids, have them help out towards phone, internet bills and
possibly rent (depending on your situation). I have had clients in my office
that wanted to buy EVERYTHING for their child, their education, vehicle, etc.
This would be great, but this particular client I am thinking of came in to
borrow the money every time and was getting largely into debt. This was not
helping her situation
-
Take on a roommate or live in
student. Use the extra income to pay down some debts and/or save
Decrease
unnecessary expenditures
-
Look at your monthly budget and see
if there are expenses you can cut back on and use those savings to pay down
some debts and/or save. I touched on
this in my last blog
Make good decisions.
Wait till you’re ready and do research, before making big purchases
-
Be careful when buying cars. They
can be a money pit. Buying a car with a large monthly payment is going to take
away from your money being saved. If you buy new that car, it will most likely depreciate
to next to nothing in 7 years. I am not saying don’t buy a car, if you really
need one, just be careful. The monthly expense of the car payment, insurance,
gas, maintenance can really add up. Try to buy a vehicle that is going to last
a long time and that will fit into your monthly budget, while still allowing
you to put money towards savings.
-
Don’t buy a house until you are
really ready! Look at renting vs. buying and make sure you know that with that
mortgage payment will also come property taxes, utility payments, maintenance
and much more.
-
If you are going to buy a house try
and save as much as you can to put towards the down payment. Many people put 5%
down just because that is the lowest they can do, but with that will come extra
mortgage insurance fees and if you need to sell in the short term, your
mortgage may end up being more than the property price.
-
When shopping around for a mortgage
make sure to find out all the features/benefits of the mortgage you are
choosing. Many people go with the lowest rate, but I also recommend look at the
pre-payment options and other features. Going for a mortgage with a SLIGHTLY lower rate won’t do
you any good if there comes a time you want to make extra payments and can’t.
Increasing your mortgage payments by $100/month and/or making a lump sum
payment every year and/or choosing bi-weekly payments vs. monthly can save you
way more than an interest rate that is marginally lower.
Start
Early
-
Get on track EARLY. Learn about
money, set up a budget and track your Net Worth from a young age. Focusing on
debt repayment and starting to save at an early age can really pay off HUGE!!!
I recommend for people to look at some calculators online i.e. take a look and
see if you were to save $100/month form age 20 to 65 vs. from age 25-65 and see
how much a difference it makes. You can Google and find all sorts of different
calculators to help you with this
-
Take a course on investing. I had to
do this before becoming banker obviously, but I truly feel that everyone can
benefit from taking financial courses.
Invest
-
Invest in your future. Put money
towards your short term and long term savings each month. I.E your savings
account, Tax free account, RRSP etc.
-
Put a monthly amount of money
towards your child’s education as soon as they are born. If you hope to pay for
some/all of your child’s education, then start early. Tuition and other fees
can be expensive and will most likely continue to increase. If you can do this,
it will help you/them in the long run to not have to borrow as much later.
-
Look at investing in income
producing assets. I.E dividend paying stocks. Talk to an investment
professional about this one.
All the best in your ventures towards tracking and
increasing your Net Worth!!
