While I think few would argue that paying off debts is a good thing, there is a better way to accurately see the big picture of your finances. It is called your NET WORTH.
And no it is not just a number that rich people talk about at cocktail parties. It is what financially saavy people use to track their progress.
The simple definition of it is:
Assets(stuff you own) - Liabilities(debts) = Net Worth
It is simple to calculate and I will get to that shortly, but first…
Why Net Worth rather than just debt?
Your Net Worth is more encouraging
The primary reason for using your Net Worth as a gauge of your financial progress rather than the amount of debt you have is because it is more encouraging. When you look at your amount of debt to track progress you are only seeing the fruit of paying down those debts. On the other hand, your Net Worth increases for every good financial decision you make.
For example, you can increase your Net Worth with the following actions:
- Paying off credit cards or car loans
- Paying more towards your mortgage
- Buying property
- Funding a Roth IRA
- Getting your employer’s match on your 401(k)
- Building an emergency fund
- Buying index funds, mutual funds, or dividend paying stocks
- Or even just not spending as much money
There are many more things you can do to increase your Net Worth, but these are some of the bigger and more common ones.
Your Net Worth changes how you think about buying decisions
The second reason I prefer to use my Net Worth to track my progress is because I have found it helps change how I think about my buying decisions.
One of the most valuable financial lessons I have learned can be summed up in two words: buy assets. What I mean by that is you should spend more of your money on things that will keep cash in your pocket. So they should at the very least:
- maintain their value
- but better yet increase in value
- and the best would be increase in value and provide you income as well.
On the other hand you should avoid buying things that are going to take cash from your pocket. Coincidentally, these are most of the things most of us spend our money on. When you buy clothes, food, electronics, decorations, cars, entertainment, you are (generally) using cash to for something that is going down in value and therefore decreasing your Net Worth. Examples of this would be:
- Spending $200 on new clothes
- A $50 steak dinner
- Getting the new iPhone
- Going to the Yankees game
- A brand new BMW
Think about how much you could sell each of these for 2 years from now. Each one of them is a depreciating asset, so 2 years later they would not be worth what you paid for it, if anything at all. But if you had spent it on…
- Buying property
- Funding a Roth IRA
- Getting your employer’s match on your 401(k)
- Building an emergency fund
- Buying index funds, mutual funds, or dividend paying stocks
You would have a much better chance that it would be worth at least what you paid, and it would more than likely be worth more than you paid for it.
Obviously there is more to life than Net Worth, and you can never avoid spending money on depreciating assets, but you can avoid spending ALL of your money on depreciating assets. This is the key to why many people never get ahead financially. They spend all of their money on stuff that goes down in value. Once you start buying things that increase in value, you begin building a snowball that just grows larger and larger, faster and faster.
I don’t want to get the cart ahead of the horse, so lets get back to our Net Worth. The reason I mentioned this is because I want you to be thinking about the end result of each buying decision. None of the things listed above are necessarily wrong, but they should be thought about and decided upon rather than just reacting to what you “feel like doing”. Your Net Worth will reflect each buying decision that you make - good or bad.
How to calculate your Net Worth
This shouldn’t take more than a hour if you have never done it before. When you update it in the future it will take even less time than that. I have created a template from my own balance sheet that you can use if you would like. You can download it here.
1. Get a spreadsheet
First off, you can do this on paper if you really want to, but I suggest Excel, Google docs, Open Office, or really any kind of spreadsheet will do.
2. Total your assets
List every asset you can think of. Anything that you could realistically sell. For the purposes of sanity and simplicity I don’t bother with items under about $500. Yea, I am sure I could find someone on Ebay to buy my socks, but I am just looking for a general picture. So I just lump together all these smaller items as one line called “Misc items” and take a conservative guess of what they could be sold for.
So your house, cars, retirement accounts, stocks, savings accounts, checking accounts, emergency fund, jewelry, and anything else similar would fall in this category.
To get real estate values you can use Zillow to get a decent estimate of what your home may be worth. For automobiles you can check out Kelley Blue Book to see what they could be sold for. For all your checking, savings, investment accounts you can either check the balances online, or just use your last statement.
Once you have them all listed with the estimated selling/liquidation value you can total them up.
3. Total your liabilities
A few lines below the Assets total, we are going to now list every debt you have. Mortgages, credit cards, student loans, they all apply. Do the same as above checking balances on each one and then total your debts to get your liability total.
4. Subtract them
Now you can subtract your liability total from your asset total and viola! You have your Net Worth. Date it and save it.
Now what?
When I first calculated my Net Worth, it was -$13,843.84. Which was eye-opening to me. I knew I had a bunch of debt, but didn’t realize how below par I was. Regardless of what you number is, just look at it as the starting point. It is from this point that it will become larger.
After we had been working at it for one year it was up to $746! We were so excited to have a positive Net Worth! Even if it was only $746. As we kept on working on it, it has just continued to grow.
I normally update mine about two times a year. But if you are working really hard at it and need to see the encouragement of it increasing, do it more! As in just about anything, you are either moving forward, or you are going backwards. If you are increasing your assets by making good buying decisions or minimizing debts your net worth will be growing.
Next we will start looking at ways to make your Net Worth rise!
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7 Things about money I learned over the 3 years that we have been married
1. Money issues need to be talked about
Many people try to avoid subjects (or really anything) they don’t like or are afraid of. You have to face the giants. If your finances are a mess, you have to face up to the truth. How can you expect to move a mountain that you refuse to admit exists?
2. Decide what you want to accomplish - together.
In order to succeed financially as a team, you have to have unity. You may not agree about everything, but find those areas that you are in agreement and shoot toward those goals. They will be a lot easier to attain if you are both putting focused energy towards them rather than pulling against each other for your own thing.
3. Realize that you balance each other out
This might not be the case for everyone, but for my wife and I, this was clearly one of the reasons God brought us together. We both bring different financial mindsets to the table and it keeps us in proper balance. If one is a spender and the other is a saver, I got news for you: it is probably by design. If my wife were just like me, we would be living an unbalanced life, probably saving too much for the future and focusing not enough on today. We both bring balance to each other’s life financially. In our case, we both had to make sacrifices to meet in the middle, but because of it we are living more in line with God’s best for us.
4. Support your spouse (yes, even if they have problems)
It is so critically important to cut each other some slack and allow your spouse an opportunity to grow. None of us are perfect and we all have areas to grow in. Part of the growing process involves making mistakes, so if your spouse isn’t being as financially disciplined as you are - cut him/her some slack. If you are constantly nagging your spouse about money (or anything for that matter) it doesn’t give them much incentive to change and it keeps them from being open with you about their failures. Being able to encourage each other when either one of you fails is very important.
5. A budget is necessary
Living on a budget is different for a single person than it is for a married couple. Let me say, I think everyone should use some sort of a budget, but especially married couples. The reason being is that a single person who doesn’t budget ultimately knows the responsibility for the bills, debt, consequences, etc. will fall on them. When a couple lives without a budget they both can be secretly thinking, “well I will let my spouse take care of it,” and things can fall through the cracks. Having a budget creates an unbiased system to hold both parties accountable for their actions.
6. Individual spending money is necessary
It is way too much of a hassle to have to discuss EVERY purchase you make. Each person needs a specific (and small) amount that they can spend however they choose - but just like allowance, no more when it is gone. It has worked well for us to make this cash solely for individual purchases - going out to eat, clothes, buying food for potluck at work, etc - misc things. You can look at how we manage our money, but basically 95% goes to our joint accounts to pay our bills, pay debt, common saving goals, etc. The remaining 5% gets divided between us for our individual interests.
7. Eliminate sources of strife
This was eye-opening to me. When we first got married, we paid for gas for our own car out of our individual spending money. It just seemed logical to me and seemed like it would work fine. We only had a limited amount of spending money for each of us and it would be enough to cover the gas for the week and other miscellaneous things we needed like I mentioned above.
The problem arose when in a very subtle way - we both seemed to be keeping a mental list of how often we drove places together in each other’s car. And of course, we both often thought that we were driving our car more than the other person. We really were not selfish in other areas of our marriage, but that one small thing was causing unnecessary strife. Now we pay for all of the gas out of a joint account - problem solved.
Have you learned any lessons about money and marriage that you could offer?
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Money Market accounts only allow six withdrawals per month
It doesn’t happen too often to me, but since I use my ING sub-accounts for budgeting I occasionally make more than six withdrawals per month. When this happens they send me a kind, but firm email informing me that if I make that mistake again they may be forced to close my account.
What you will get in your inbox from ING if you are bad…
Based on recent activity in your Orange Savings Account™, we want to remind you that you cannot make more than six withdrawals from your account each month. This is a federal regulation that all banks are required to follow for savings accounts like this one, so if this type of activity occurs more than three times in any 12-month period, we will have to close your account.
Since this is not the first time that you have made too many monthly withdrawals, we will be required to close your account if you do this again - and we don’t want that to happen!
So here’s what you can do to prevent your account from being closed:
Take a look at your statements or go to ingdirect.com and review your account activity. Keep track of how many times you transfer money out of your Orange Savings Account, including transfers to other ING DIRECT Accounts, and make sure you’re not making more than six withdrawals each month. Make one or two larger transactions rather than moving money numerous times. This will reduce the number of withdrawals you make each month.
Having worked closely with Money Market accounts earlier in my career I am very familiar with these restrictions. As the email mentions, the six withdrawal per month limit is a government restriction on the accounts, the bank itself can get in trouble for allowing customers to make more than six. Some banks will be more strict about enforcing this policy than others. But, if it comes down to it most banks will eventually close your account if you continue to abuse it.
I was frustrated about not being able to withdrawal my money once I reached this limit, and then the simple solution dawned on me…
The ING Hack to get around the six withdrawals
My wife and I budget for gifts and some months (i.e. December) we may be transferring a lot from the Gifts fund to our checking account. Once we reach five withdrawals for the Gifts account and we know we will need to do more that month, we simply transfer the remaining balance of that account to an unused (or a new) account. Then we just rename the new account “Gifts”. Viola, now we have another six withdrawals that we can make that month.
Renaming and opening new accounts (once you have opened the first one) takes about 20 seconds. So, really it is a very quick and easy process. I wouldn’t want to have to do it often, but it is better than getting your hand slapped or having your account closed.
A phone call to ING
I was also curious about what exactly they meant when they say they will, “close your account.” Did this mean just the individual savings account or did it mean the ING user account as a whole?
So, I called them and they confirmed that after exceeding the limit three times within 12 months, they will close the individual savings account. They did also mention that if a user does it multiple times for multiple accounts, they may consider removing that user’s profile from the system.
Just FYI.
Does anyone have any other ING helpful tricks or tips?
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What is the best way to start a budget?
The first thing that anyone who wants to make a budget must do is to compare their income versus their expenses. The good thing is that it is quite easy to do.
To get started you can download this free Excel budgeting spreadsheet which will help you calculate how much you spend each month and compare it to your current income.
It’s too bad most of us never learned this in school and had to figure it out on our own - so here is the lesson that we should have learned in 5th grade:
Expenses > Income = Bad Expenses < Income = Good
And honestly, as simple as it sounds, that is the key to wealth. Anyone, and I mean anyone, who IS wealthy (I emphasize IS because I am not talking about people who appear to be wealthy, but who are actually in debt up to their eyeballs) spends LESS money than they earn. AKA - their expenses are less than their income.
The great news about this is that anyone can do this - no matter what their income level. If you can do it on a small income, then you can do it on a large income. If you can’t do it on a small income, then you won’t be able to do it on a large one either. Trust me!
If you don’t believe me, just ask all of the lottery winners who went bankrupt within years of winning millions of dollars.
Back to making our budget…
Regardless of how your expenses and income compare right now - get excited, because you can easily change it!! If it is bad you can make it so much better!! If it is good, you can still make it even better!! I will show you how later, but for now…
Let’s make a budget!
Did you calculate what your monthly expenses and income were? Were your expenses less than your income? If so, you are a rare breed who is in great shape, so just sit tight for a minute.
For everyone else, whose expenses exceeded your income - you are not alone. You actually have a lot of company. The problem is that it isn’t good company! Most of our debt-ridden society is in the same boat, but you are one of the bold ones who is jumping out of the debt boat!!
So, if your income is $1000 and your expenses are $1200, that means you spend an extra $200 each month that YOU DON’T HAVE!! What your job is now is to find out what you can get rid of or quit buying each month to save that $200. If you have no idea where to start you can check out these money saving tips or browse other money saving ideas.
I know, I know - this is the part that hurts. Just like pruning a bush - cutting back hurts, but ultimately you are going to yield so MUCH more fruit because of it!!
The goal here is to get your expenses and income to AT LEAST be equal. Once that is accomplished we can work on eliminating wasteful spending or cut other costs to bring the expenses below the income.
Now that you have calculated what your monthly income and expenses are we can start designing our budget. We will first discuss the less effective, but easier method for budgeting…
The world’s easiest budget
There are 2 simple rules to do a simple budget:
- You can’t spend more than you earn - carrying a balance on a credit card is not allowed.
- Money must go to the budget categories as soon you get paid.
The way it works:
Rather than having 10-20 different categories of items to be budgeted for you only focus on the 1-3 most important ones and let the rest of the chips fall where they will.
So, to do this you take your paycheck of say $1000 and right off the top you put the money to your main priorities. For many people this is tithing to their church, retirement savings, college savings for children, etc…
A sample of this would be:
$1000 (paycheck)
-$100 (tithe)
-$100 (retirement savings)
= $800 (for the rest of the bills and everything else)
It is absolutely critical that the money gets taken out FIRST for these few budgeted items. If not, I can almost guarantee that the full amount will not make it as intended.
I highly recommend making this process automatic by using direct deposit or some other form of automatic withdrawal. There is just something about human nature that has a hard time staying consistent with things like this.
Why do you think the U.S. government takes our taxes directly out of our paycheck, rather than coming to collect the full sum at the end of the year? It is the same principle - use it to your advantage.
Easy budget, but not very efficient
I think this budget is perfect for people who don’t want to budget. It is simple, doesn’t take up much time, and will help you reach some savings goals. That said, it is still inefficient and leaves the door wide open for inefficient and foolish spending.
I think it should be considered the “lazy man’s budget” - and you are not LAZY, you are willing to work to get your finances in order!! I know this because you are still reading. So, since you are NOT lazy and are hungry for more of a challenge, let’s look at how the pros budget.
The money saving budgeting method
Yes, this method takes a little bit more time and energy, but it also will provide you will long-term financial benefits if followed.
To do this we are just going to expand on the lazy man’s budget mentioned above. Rather than having just 1-3 categories of items budgeted for, we are going to create as many as we need to put a limit on our spending in all areas.
You can use the mentioned budget spreadsheet as a guide for tracking your progress. Try to account for every possible expense that you could run into. You will never be able to budget for every possible scenario, but the goal is to minimize surprise expenses. Inevitably, there will still be surprises from time to time - so I suggest creating a category for these surprises (or you can just use your emergency fund).
How to stick with your budget
The almost sure-fire way to make a budget that fails is to NOT budget for any fun stuff. I wrote about how budgeting should be fun and it is a necessary ingredient for success. You need to budget for clothing, entertainment, going out to dinner, or whatever else it is you love to do! The key is to do it in moderation and to set limits and abide by them.
The amazing thing is that by budgeting for fun stuff, it actually liberates you to spend money on these items. When you have money budgeted each month to buy clothes, the money is now sitting there waiting to be used for that assigned purpose. Suddenly you can go clothes shopping without feeling guilty!!
This is how budgeting truly becomes fun. When you have money sitting in the bank waiting to be spent. Or, even better: if you start budgeting for vacation and after a little while you have hundreds of dollars begging to be spent on a vacation!! You go on your trip and come back home and don’t owe any money to a credit card company - now that is how a budget becomes fun and what helps you stick with it!!
Other budget options
There are many ways to make a budget work. The key is to finding a system that works for you and sticking with it. This article has gone over a basic method of budgeting, but I also suggest you check out the envelope budgeting method, or the method that I use to budget with ING.
As far as paying for budget software I think it depends on the user. It is not a necessity by any means, but most software programs will make your life easier and save you time. It just depends on personal preference really.
That said, my favorite budgeting software tool that I have found is called Mvelopes Personal. They are basically like a virtual envelope system for budgeting. They have a very simple and intuitive method for budgeting that is one of the best out there. If you want more information you can Take a tour of Mvelopes Personal.
Another budgeting tool I found is called YNAB and you can find out more about it at YouNeedABudget.com. It is a very basic tool that will help keep your budget organized. I don’t like it as much as Mvelopes, but I think it is a little bit cheaper.
I would love to hear what has worked for you and what hasn’t. Let me know in the comments below…
Technorati Tags: make a budget, budgeting
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Budgeting with envelopes
The envelope system is very basic, but generally a very successful way to budget. It is a bit primitive in our technologically advanced society. But most Americans are in debt up to their eyeballs, largely due to the fact that technology has made it very easy to go in debt. So, if primitive works, why not do it?
- I would suggest paying all of your BILLS (Mortgage, Electric, Phone, etc.) from your checking account, and then I would use the envelope system for the remaining money.
- Make your list of items that you need to [tag]budget[/tag] for (groceries, gas, entertainment, clothing, etc.). For this system, I would suggest making the categories as specific as possible.
- Now that you have a list, estimate a monthly or bi-monthly dollar amount that you will need next to each item. If you don’t have good records of your spending, this may take a couple months to get this right.
- Buy a box of envelopes, get out a big, stinky Sharpie marker and write a name on each envelope (groceries, gas, entertainment, etc.).
- Go grab the cash from the ATM and fill up each envelope with the allocated amount. The key to this system is that when the envelope is empty, you are FINISHED spending for that period. It forces you to plan ahead based on how much money is allocated.
I think it is a good idea to create a MISCELLANEOUS envelope, I promise that you will find something to use it on that you had not planned and if you don’t, then let it keep getting bigger until you do. Because you will use it eventually.You will have to make adjustments the first few months, but just start somewhere and keep tweaking it until it is just right.
If the envelope system of budgeting isn’t your thing you may want to check out YNAB personal budget
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Here are four quick tips to sticking with a budget…
- Write it down | There is so much power in this!!! You have got to get it down on paper. You need to TELL your money where it will go. You control your money, don’t let it control you. If you are not sure who is in charge, then it probably isn’t you. Write the vision and make it plain on tablets, that he may run who reads it. habakkuk 2.2
- Eliminate temptations | Recovering alcoholics should not hang out in bars. The temptation is too strong. It is just foolish. The same applies to someone who is trying to break the habit of overspending. You shouldn’t hang out at the mall, Home Depot, or wherever you get tempted. But put on the Lord Jesus Christ, and make no provision for the flesh in regard to its lusts. Romans 13.14
- Think long-term | It will not happen overnight, but it WILL happen if you do not quit. Get motivated by your thoughts of how peaceful it will be to have your financial life organized. Allow yourself to dream and imagine how good it will be. When circumstances make you feel like it is too difficult or that it will never get any better, remember: All this assembly may know that the LORD does not deliver by sword or by spear; for the battle is the LORD’S… 1 Samuel 17.47
- Reward yourself | This was a must for me. Without incentives or rewards I have a hard time succeeding. Rewards help to keep us motivated! So, set little goals for yourself and celebrate those milestones. They are a big deal, do not underestimate them! Considering the reproach of Christ greater riches than the treasures of Egypt; for he was looking to the reward. Hebrews 11.26
check out more scriptures on budgeting.
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This could be a complex lesson, but I am going to boil it down as far as it can be boiled. We as humans often KNOW how we SHOULD behave, but we sometimes DO something different. This is especially the case when we have to pay the price now, but will not receive the reward until later (i.e. saving for retirement, exercising, giving).
But put on the Lord Jesus Christ, and make no provision for the flesh in regard to its lusts. Rom13.14
Why do you think the government takes the taxes out of your paycheck rather than having you pay it yourself? I would like to think that they do it to make it more convenient for us as citizens, but the truth is they figured out that they have a much better chance getting our tax dollars if they take it before we can touch it.
One of the secrets to success in life is to find someone who did what you want to do and learn what they did to get that result. Well, tax withholding is the trick the government used to make sure they got paid. So, lets use the same tactic on ourselves.
Direct Deposit can be your best ally to help you make this happen. Many empoyers allow multiple direct deposit accounts. You can have $50 per paycheck get directly deposited in your Roth IRA, and have the remainder go to your checking account.
Amazingly, most people who used every dollar from each paycheck will find that they don’t even notice that they received $50 less. This was the trick that finally got me saving for retirement, years after I KNEW what I should have been doing, but was still not DOING it.
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