After setting your goals to Financial Independence, the next part of your journey is to determine your current starting point. With those two things together, i.e. where you want to get to and where you currently are, it’ll be a lot easier to plan out how to achieve your goals.
Part 2: Define your Starting Point
One common obstacle to achieving financial independence is consumer debt. Most people have some type of debt they have to deal with and pay off, such as student loans, credit card debt, car loan and / or a mortgage. The first step in determining your starting point is to list all of your debts with their current outstanding amounts (i.e. what you still owe) and then total those amounts to get an overall amount.
While debts represent the negative side of a financial picture, most people also have a positive side: their assets or possessions that are worth something. This can include anything from a house to a savings or investment account as well as antique or art of a certain value. Do the same as what you did with your debts: list anything you own along with its estimated value and total those amounts.
With these two numbers you can now calculate your net worth: a very useful indicator of how healthy your personal financial situation is. Simply take the total value of all your assets, then subtract the total amount of debts you have to find your current net worth. Note that this might be a negative number!
Lastly as part of determining your starting point, it’s a good idea to get a solid overview of your current expense patterns. Not only does this help to see where your money is going, it will also come in useful when you start setting goals later on in your journey for the various financial areas we’ll be looking at. Start logging your expenses on a daily basis to get a good idea of what you spend your money on.
Find some time today to look at the tasks above to complete to keep progressing on your path to Financial Independence!
Hello again and great to have you back for the second day of the 31 Days Challenge to Financial Excellence! Today we are going to calculate our net worth to see how healthy (or unhealthy) our current financial situation is.
Your net worth is a sum of all your possessions (also called assets) minus the total of all your debts. You can either have a positive net worth, which means that you have more possessions than debt, or you can have a negative net worth, indicating the exact opposite: you owe more than that you own.
Examples of assets include: real estate, any money in savings or checking accounts, investments and valuables such as antique (don’t bother including your electronics or small jewelry though as these are unlikely to add that much value). Continue reading “Day 2 / 31 – Calculate your Net Worth”→
Our next step of the 100 steps mission to financial independence is to set yourself a goal for what you would like your net worth to be in six months. This gives you an excellent target to work towards to during the mission. Although you’ll probably find that your net worth doesn’t change dramatically in this half a year, 6 months is a good time frame to start with as it is long enough to see substantial changes and the effects of goal setting, yet short enough not to forget about it or lose track.
You can set yourself a goal for your net worth by either stating a specific amount, or alternatively by setting a percentage by which to increase your income. If you set a specific amount as your target and keep that the same every six months, with time as your net worth increases and as it should become easier to achieve the same target, you might not be achieving as much as you could. Alternatively, if you set yourself a target of certain percentage increase it means that your net worth target increases more as your net worth itself increases.
In this 6th step, you are going to determine your overall financial starting point by calculating your net worth. I know the words “calculate” and “net worth” might be putting you off, but this step is a lot easier than it might sound, as we have already done all the preparation work in the last few steps by digging up financial statements and creating our assets and liabilities lists in step 4 and 5.
Your net worth basically indicates what would happen if you decided to sell all of your possessions and pay off all of your debts today: would you any have money left over or would you still be in debt? How much money would you have left over or how much money would you still owe? Your net worth is an easy sum of your total amount of assets minus your total amount of liabilities. Continue reading “Step 6: Calculate your Net Worth”→
Now we know exactly what our debts (or liabilities) are, in this step we are going to look at what our possessions (also known as assets) are. Assets add a positive value to our financial status: they are the things that we own and therefore add a positive value to our balance sheet.
Making an overview of all your assets, will not only allow you to know exactly how much you own at present, it also gives an insight into what you might be able to do in order to increase the number or value of your assets, thereby increasing your financial value.