“If you don't know where you are, then you don't know where you're going” -Terry Pratchett
To succeed in any journey, you need to know where you’re starting. That especially holds true for personal finance.
In Step 2, you’ll determine your current financial situation. In this step, you’ll need to roll up your sleeves and starting putting in the work to achieve financial freedom. I can promise it’s absolutely worth it.
Let’s get started!
Part A: How much money do you have?
Start by adding up all the money you have in your bank accounts and investment accounts. For now, don’t include any retirement accounts, automobile value, or house value in this total.
Note: In financial terminology, you’d call this your “liquid assets.” For simplicity, we’ll just refer to it as “assets.”
Example: Vijay has $100 in a Bank of America checking account, $300 in a Bank of America savings account, and $1,100 in a Fidelity investment account. Vijay’s assets are $100 + $300 + $1,100 = $1,500.
It’s possible adding up your assets will be an easy exercise. But for most of us, it will be difficult. You may have to remember old bank passwords or find financial statements. You may also feel apprehension in writing down these numbers, especially if you don’t feel good about where they are today. But it’s absolutely necessary as a first step to financial freedom.
Take action now: Before you move onto Part B of this article, actually go through this exercise. Then write down your asset total, either on pen/paper or digitally.
I want to emphasize that reading through these articles without taking action will be worthless. You’ll read through, get excited about improving your finances, then forget about it tomorrow. It’s just human nature. If you’re serious about build savings to improve your life, take action now to add up your assets.
Part A takeaway: Today, I have $_________ in assets (bank accounts + investment accounts).
Part B: How much money do you owe?
Next we’re going to determine your total debt. Add up the amount you owe today on credit card loans, auto loans, student loans, and other debt. For now, don’t include your home mortgage if you have one.
Example: Vijay has $500 outstanding on his Bank of America credit card. He also has $1,200 left on his auto loan. He doesn’t have student loans. Vijay’s total debt is $500 + $1,200 = $1,700.
For many, adding up debt will be difficult emotionally. Debt is an uncomfortable topic. It can sometimes seem impossible to overcome. But to pay off your debt and succeed financially, you’ll need to start by knowing where you are today.
Before you move on to the next section, take action now. Actually add up your loans and write down your total debt. You may need to find financial statements you haven’t looked at in ages. But it’s worth the effort.
If you don’t have enough time to look up your loans now, stop reading this article and schedule a time when you’ll come back and continue.
Part B takeaway: Today, I have $_________ in debt (excluding mortgage).
Part C: Determine your net worth
Now that you know your assets and debt, you only need simple math to calculate your net worth.
Net worth = Assets - Debt
Example: Vijay has $1,500 in assets and $1,700 in debt. Vijay’s net worth is -$200.
Yes, your net worth can be negative. In fact, according to a 2016 study from the Institute for Policy Studies, one in five American households have a negative net worth (more debt than assets). If that’s your situation, it’s perfectly ok. What matters is committing to improve your situation from here. This is only your starting point.
Part C takeaway: My net worth is $_________.
Note: Before we move on, I also want to discuss the term “net worth.” A person’s net worth is simply their assets minus debt. It has nothing to do with a person’s worth as a human being. There are wonderful people with high net worths and wonderful people with low (or negative) net worths. When we use “net worth” going forward, we simply use it to describe your financial position, not your quality as a person.
So, why does net worth matter? It’s simple. A high net worth can provide you with opportunities and flexibility in choosing how to live your life. You can take more risks, try new things, and design your lifestyle. A low or negative net worth can restrict you from following your dreams. You may have to stay in a job that’s not right for you, stress about paying bills and rent, and pass up on opportunities. Our goal on the Path to Financial Freedom is to increase your net worth, to help you live a happier and more meaningful life.
So how do you improve your net worth? To find out, move onto Step 3 in the Path to Financial Freedom!