The First Step in Personal Finance

Many people avoid doing this at all costs. I’m not surprised since it wasn’t until my late 20’s when I did what I’m about to share with you. All it takes is a little know-how and the willingness to face the music!

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Whenever society talks about wealthy people, like the Jeff Bezos and Bill Gates of the world, we talk about how much money they are worth. “This man is worth 100 gazillion dollars!” the news anchor screams through the television, salivating from the mouth. That number is referred to as net worth. Net worth is the sum of all your assets and liabilities valued at current market price. It doesn’t mean the person has 100 gazillion dollars in their checking account. In fact, if they were that bad with money, they wouldn’t be worth that much in the first place. Since wealthy folks keep most of their assets not in cash, when the price of those assets go down, you can bet their net worth does as well. Read here to see an example of how Jeff Bezos net worth can fluctuate in the billions without him even spending a dollar.

The Magic Number

Now here is what’s really crazy about net worth. Most of us mere mortals know the roundabout net worth of famous, wealthy people we’ve never met before (like when Kylie Jenner hitting $1B was trending on Twitter), but we don’t even know our own magic number! Isn’t that wild? Money has so much impact on life, and yet I bet you can ask your friends if they know their net worth within about 1,000 bucks and you would get mostly blank stares. Answers that include “Oh I’m broke, so probably zero” aren’t sufficient. Net worth is a number, so if your friend says zero, it’s probably much lower than zero because it’s negative! Do you know your net worth? Check out how you stack up against the rest of America in the table below.

AgeMedianAverage
< 35$11,100$76,200
35-44$59,800$288,700
45-54$124,200$727,500
55-64$187,300$1,167,400
65-74$224,100$1,066,000
75 +$264,800$1,067,000

The finance gurus out there would disagree with me when I say that the first step in personal finance is to calculate your net worth. But it’s the truth. This is where my journey started and if I hadn’t done it, I might have continued down the path to financial ruin. Are budgets important? Well, obviously. I think that is where most people try to start. Budgeting is a quick follow up to this step, but I still think you have to know exactly what assets and liabilities you have out there before you can accurately decide on a budget. Especially in our generation where everything is automated. Have you ever had a credit card on autopay for the minimum payment, and forgotten about it for years? I’ve done it and it’s brutal. Recognizing that you have these issues is going to impact how you decide to make your budget, so isn’t it more important to make sure you have all your information correct first?

What’s great about the modern world is you don’t need to calculate your net worth by hand, although it’s totally feasible. There are plenty of tools out there, both free and paid, that can do it for you. I tried a few out before settling on Personal Capital, which is free by the way, and I’ve been using it ever since. I plan on writing a detailed guide on all the features it has and how it can help you be more responsible with your money, but for now you can just Google search them. Net worth isn’t a stat exclusive to the super wealthy. It is critical to one’s financial education to understand how this number gets calculated and how your daily decisions make this number go up or down.

The Truth Hurts

When talking about money with friends, my favorite angle to dive into is the psychology behind why people do the things they do, or don’t do. Knowing your net worth is not some monumental task, and yet people refuse to do it. Why? I really do believe it has to do with emotional and psychological factors involved in the process of discovering your magic number. I get it. Confronting an uncomfortable truth is never easy. However, your number doesn’t change or go away just because you don’t acknowledge it. Haven’t you heard the adage, “if you don’t measure it, you can’t improve it”? That applies here. Besides, just because you don’t know what your net worth is, doesn’t mean the bankers and credit agencies are in the dark too! They can pull your credit report to find out your liabilities, and generally will ask you to list your assets whenever applying for a substantial loan. 

If you haven’t read the about me page of my blog, you should check it out. If you already have, you’ll know that part of my story is how I had terrible spending habits and was financially irresponsible. It’s fitting that this is my first post about money, since this is exactly what I did to turn my financial life around. In my late twenties, there were some things going on that made me pause and take a deeper look at my finances. My wife and I were both settled in our careers with nice paying jobs. We could afford to buy pretty much what we wanted, when we wanted. Clothes, vacations, furniture, eating out, etc. We still had some credit cards, and loans, but the minimum payments weren’t enough to slow us down from buying the stuff we really wanted! By all accounts, I thought we were doing well.

I don’t remember how I came to find out about Personal Capital, I just remember downloading it on my phone because I wanted to see how good we were doing. After plugging in all of our bank accounts, loans, credits cards, retirement accounts, and a mortgage, the result came back and shocked me to my core. Our number was big, and very, very NEGATIVE!!! How could this be? At this point in my life, I felt like we had plenty of money and were living comfortably. The reality was we were in debt over $175K. It was a lesson learned, maybe a bit late, that great income does not equal great wealth. I was determined to change my number.

There’s no get rich quick scheme involved in how I approach money. Building anything of value takes time and discipline. Your wealth is no different. But you can’t get there unless you are willing to take the first step and confront your situation. I did. It wasn’t particularly rewarding, either. I imagine for most people it won’t be. Looking back on it, I wish I had done it sooner, but I am glad that I did it at all. It took us a few years to straighten things out, but I’m glad we did before things got out of control.

Have you started tracking your net worth? If so, when did you start? Share your story!

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