Posted on September 28, 2018
It is normal to be fascinated with the idea of having sufficient wealth to handle basic expenses, without having to work. Well, that’s the noble version, some of us just want to ditch that pesky boss or avoid difficult customers. These days, fintech startups, asset management firms, and business owners are quick to offer their products as an instrument that gets you closer to living life on your terms.
As a novice investor, your first instinct is to plough through the internet searching for the best deals. Hit by an overwhelming amount of information, your head probably hurts and perhaps you feel the next step is to contact a professional. Someone who can walk you through the pros and cons of investing in exchange-traded funds, stocks, treasury bills, bonds, money market accounts and other financial instruments.
While this appears to be a meticulous approach, don’t forget that if you can’t assess where you are, then you probably can’t get to your destination. In the past, teachers have evaluated your academic prowess through examinations. Health professionals also advise you get regular medical checkups to help detect health problems early, ensuring treatments turn out to be more effective.
So, if an assessment can help you live a long healthier life, shouldn’t the sentiment be applied to our finances?
Think of it this way, you should understand your financial standing before deciding to buy into any investment opportunity (given the MMM disaster, it’s worth noting that I’m not even referring to get rich quick schemes). Creating a snapshot of your finances can provide insightful information on how close you are to financial freedom.
This sounds great, but how can it be done?
One of the most important steps you can take to evaluate your “financial health” is to calculate your net worth.
Sounds familiar, what does it entail?
To calculate your net worth, simply subtract your liabilities from your assets. Although it is not a herculean task, there is the need to avoid making unrealistic assumptions. Just in case you don’t get the point, consider this example — in no universe, not even Mars (if people lived there), is the value of that old car the same as a new luxury car.
The first step is to list out your assets (these are things of value you own) — real estate, vehicles, stocks, jewelry, savings accounts, and so on. Estimate and add up the total value — the number represents your total assets.
Next, list your liabilities — bank loans, mortgages, car loans, and so on. Add them up to get a glimpse of your total liabilities. Finally, subtract your liabilities from your assets to have a picture of your net worth.
In some cases, the result might not be glamorous — anyone who binge-watches or reads net worth estimates published by Forbes will understand. However, the results can provide an effective blueprint to making successful financial decisions.
Got it! But how often should I assess my net worth and what can be done to increase it?
Tracking your net worth at least once a year, provides data needed to help you make important financial decisions. On the other hand, increasing your net worth will require you to constantly trim expenses, pay off your debt and increase your savings.
Of course, life happens; you probably have school, work, kids, and other time-consuming obligations to worry about. Keeping that in mind, consider using digital applications that help you take control of your money.
These applications provide a convenient and secure platform to view all your accounts with different banks on one screen, monitor your expenses, and multiply your savings.
What’s the big idea behind tracking your expenses every year?
Our society is obsessed with riches, but financial freedom is a whole different ball game. Sometimes, we place emphasis on assets alone, forgetting that even if your income increases, your net worth could still decline or remain the same. If you don’t review your expenses, taxes, and loans, you are likely to continue chasing your tail.
Financial freedom entails that you maintain a rigorous and persistent review of your finances. It can’t be achieved overnight by nose diving into what you perceive to be “juicy” investments.
Disclaimer: Kindly note that this article is for general information purposes only. It is not intended as a legal, financial or investment advice and should not be construed as such. Before making any investment commitments, ensure you seek advice from a qualified financial or investment adviser.