We all want to improve our money-management habits, but sometimes the path on how to achieve this goal is a little unclear. If you are looking to take your financial health to the next level, you can follow these seven steps to gain control of spending and money.
Related: 6 simple ways to reduce a mortgage payment
Tips for Evaluating Your Personal Finances
1. Determine Your Net Worth
A net worth gives an overarching view of someone’s personal finances. Sitting down and taking time to calculate their net worth each year can help consumers adjust their financial plans as needed. A net worth takes into account everything someone owns and everything that they owe.
To calculate net worth, take out a pen and paper (or computer document) and make a list with two sides. On one side, list the assets you own. On the other side, list liabilities or debts, which is what you owe. Then subtract your liabilities from your assets.
Assets can include money in savings, checking, investing or retirement accounts; real estate like one’s home; cars; stakes in businesses; or valuable personal goods like jewelry or art.
Liabilities can include student loans, automobile debt, mortgages or credit card balances.
If you find that your assets are greater than your liabilities, that means you have a “positive” net worth. On the flip side, if you owe more than you own, you have a “negative” net worth. You shouldn’t feel bad if you have a negative net worth. You just need to adjust your financial plans in a way that will help work toward paying off debt and then working to build up more assets.
2. Plan a Budget
One way to improve financial health is by following a budget that takes financial goals into account. A budget is a plan that someone can follow that will help determine how much money they spend each month.
Proper budgeting can lead to saving money each month to invest or put toward a large financial goal, like a down payment. A budget should illustrate how much someone makes and how they spend their money. Budgets can come in handy to guide spending. While some expenses are fixed, like rent, others can be tempting to overspend on — like entertainment, eating out or daily lattes.
To create a budget, start by gathering all bills and pay stubs. Alternatively, there are now many mobile apps that can keep track of your spending and income. Such apps can analyze your financial trends and will be easily accessible in your pocket. Make sure to research the mobile app’s safety and security features since they’ll be holding your personal information.
Subtract any expenses from income to discover how much room is left in a budget. From there, it gets easier to determine what consistent expenses to cut and how much to spend on variable expenses (like clothing or travel). Don’t forget to budget for less visible expenses like saving for retirement, an emergency fund or paying down debt.
3. Evaluate Housing Costs
After creating a budget, housing costs are likely at the top since they tend to be one of our largest monthly expenses. Taking a hard look at how much your rent or mortgage payments are taking a bite out of your monthly budget can be helpful.
A general rule of thumb in personal finance is that you shouldn’t spend more than 30% of your income on housing costs. This allows you to afford other discretionary costs. If you are spending more than that on housing, you may want to consider finding a more affordable option so you can make room in your budget to pay down student loan debt or to work toward other financial goals.
4. Determine Your Debt-to-Income Ratio
Determining a debt-to-income ratio can give consumers a better idea of their financial health. A debt-to-income ratio takes monthly debt payments and divides them by gross monthly income.
Lenders often use a debt-to-income ratio to determine if a borrower will be able to make their monthly payments. If you are planning on buying a home or taking out an auto loan, you’ll want to keep your debt-to-income ratio on the lower side. Working debt payments into a budget is a good way to stay on track toward lowering this ratio.
5. Refine Your Investment Strategy
Investing can be intimidating, which is why it’s important to gain a clear understanding of how it can help you work toward financial goals in a comfortable way. Investing inherently carries some risk because there’s a chance of losing money rather than simply saving money in an FDIC-insured savings account.
However, those who stash cash away in savings accounts should remember that the value of their money is actually depreciating due to inflation, while the price of goods tends to rise over time.
Investments like securities and mutual funds aren’t federally insured and losing the principal amount invested is possible. It’s also possible to profit off investments, and diversifying investments can help mitigate risk. By spreading investments across multiple assets, if one investment loses money it can sting a bit less because a more successful investment may make up for that loss.
Diversification can’t guarantee success and if the market drops as a whole, all of a consumer’s investments can suffer as a result, but it can improve the chances of not losing a lot of money or all of it at once.
6. Determine Your Risk Tolerance
To determine which saving and investment products are a good fit, consumers need to understand what their risk tolerance is. For example, if someone is young and has 35 years of working left before they retire, they may feel more comfortable making a riskier investment, such as stocks, that can lead to bigger gains down the road.
Those who are 60 may feel differently and may want to go for a safer bet, such as in the bond market. Generally, if someone is pursuing a short-term goal, it’s better not to choose a risky investment as the chances of profiting during a short period are not guaranteed.
You can familiarize yourself with your investment options to help determine which you’ll be most comfortable with. There are plenty of investment products to choose from like:
- Stocks
- Mutual funds
- Corporate and municipal bonds
- Annuities
- Exchange-traded funds (ETFs)
- Money market funds
- U.S. Treasury securities
Before making any type of investment, it’s also important to understand what kinds of fees are associated with holding the investment or buying or selling as part of the investment strategy (like when investing in the stock market). Having a solid investing strategy can make it easier to save for retirement or college and to make hard-earned money grow.
7. Set Financial Goals
Once you have evaluated your personal finances, you’ll have the insight to set clear financial goals. After considering what you want to achieve (pay for a wedding, vanquish credit card debt, retire early, etc.), you can create a financial plan for reaching those goals by listing them in order of which are most important. You can then put together a timeline, like a monthly savings plan, that will help you meet those goals.
The Takeaway
From mortgages to tuition bills and from utility costs to taxes, modern life throws all sorts of financial obligations that you need to juggle. This has made evaluating personal finances a tricky task. You can, however, wrestle control over your financial future by tracking spending habits, changing them if necessary and making thoughtful, realistic budgets.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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What is net worth and why should you know yours?
Know thyself. This classic maxim from ancient Greece is as much true for knowing about your personality and quirks as it is for knowing about yourself financially. And one of the best ways to understand yourself financially, in a holistic sense, is to calculate your net worth.
Sure, you may hear the phrase “net worth” most frequently bandied about in reference to people like Bill Gates ($96 billion), Mark Zuckerberg ($62 billion) or Jay-Z (a measly $1 billion). Despite being a financial term you most often associate with people who are out of your tax bracket, it’s true that you have a net worth, too.
Whether that net worth is negative (which is fairly common among those earlier in their careers) or more than you imagined, the number is out there if you look for it.
So, how do you find out what that net worth is? What does your net worth even mean? Why do you even need to know this number at all?
Let’s investigate. Because no matter what your net worth is, you’re worth it.
Wikimedia Commons / Anthony Quintano
Your net worth is, much like something you learned in your 10th grade math class, a simple formula that just seems a lot more daunting than it really is.
The formula is as follows:
Assets – Liabilities = Net Worth
Simple, right? Just like E = MC². Or A² + B² = C². Or whatever the quadratic formula is (Does anyone remember it? Anyone?).
But just like these classics, the hardest part often comes not with knowing the formula but with knowing what figures to plug in. And once you know these figures, what will this leave you with?
Well, your net worth, which is another way of assessing what you own vs what you owe.
SARINYAPINNGAM / istockphoto
You’re more than the sum of your parts. You’re also funny, cool and smart. But your current financial health assessment can come from this above equation.
It’s important to remember that the so-called “money in the bank” is not the actual amount of your finances. There’s so much more that goes into it.
Confused? Let’s unpack.
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Assets basically boil down to what you own, namely your money and your things. There are a couple of different kinds of assets.
The obvious ones:
- Financial Assets: Money in your savings accounts, checking accounts or even cash hidden under the mattress or in the floorboards all count toward your assets. Money in your 401k account is also included in this bucket.
- Tangible Assets: Your stuff. Namely, anything you own that is of value and that you can physically touch and see. Your home, your car, the espresso machine for the coffee shop you own, the espresso machine in your own kitchen. Your grandmother’s jewelry. Your boat. Your original Picasso painting (dream big!). Even a designer dress could be considered part of your assets if it’s of considerable and saleable value.
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Calculating the value of your home can be a task in itself. It’s always important to research the value of the homes around you, the size of your home, any deferred maintenance on the home, property or things like appliances are, and additional benefits (parking spots, backyard space, room counts, etc.).
There are also a number of home value calculators online. The house price index calculator is approved by the Federal Housing Finance Agency.
Other options include a comparative market analysis, or a CMA. This is a consultation provided by a market professional, usually a real estate agent. Thus, it lands closer to an estimate but is still more reliable than an online estimate or your own best guess.
The real estate agent will usually perform a walk-through of the home to note any upgrades or deferred maintenance and take this into consideration for market value.
It is not unusual for people to call the real estate agent that helped them purchase the home to perform this market assessment. The most reliable way to find the value of your home is through a valuation by a licensed appraiser, can vary by home size and other factors.
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Then, we have the more conceptual assets:
- Liquid Assets: Items like stocks, bonds, mutual funds or ETFs that are easy to sell quickly and whose sale will not greatly affect their price. If you’ve ever heard the term “liquidate your assets,” this is what they were talking about.
- Fixed Assets: These are items that would take a longer time to convert to cash. These assets are often deposited for extended periods of time in exchange for high-interest accrual and thus cannot be cashed before their agreed-upon time frame is up. An example would be tangible items that can take a longer time to sell. This could potentially include your home, land or other property, a designer wedding dress, or high-value jewelry.
- Equity Assets: You know that girl from college who became so-called “Employee Number Eight” at Start-Up X? This is why she’s rich now. Equity assets include your shares in a company. Employee Number Eight got in early, and now her stocks are valued high.
Bet_Noire / istockphoto
Intangible assets, such as brand recognition for a company or any other intellectual property like patents, trademarks or even goodwill, do not factor into your net worth due to the complexity of measuring their value. We’re sure Coca-Cola would hardly sell as much without their brand name and logo. But how much? Who could know?
Now, to discover the first number of your equation, all you have to do is add up all those assets. You’re halfway done with your formula!
The Coca-Cola Company
AKA, your debts. This part is definitely less fun, but don’t be so hard on yourself! Almost 87% of American families (ages 36-44) have debt.
The following categories are what most often make up your liabilities:
- Loans: Auto loans, student loans, personal loans, business loans, etc.
- Credit card balances: This only counts as a liability if your balance is not paid off in a timely fashion at the end of the month.
- Mortgages: Mortgages function as a home loan although the loan comes from someone or some organization that holds a lien (a claim) on your property for the amount of the outstanding mortgage.
While liabilities are on the (literal) negative side of the net worth equation, it doesn’t have to say something bad about your finances. For example, student loans or home loans may be seen as necessary—and even respectable.
Credit card debts from spending outside your means on items that won’t add to your wealth (repeat: stay away from the mall) aren’t great. However, they are also easily fixable with the right plan and discipline.
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So, how do you stack up? You may not be George Clooney (estimated net worth: $500 million) or an Olsen twin (estimated net worth: $300 million), but these individuals are a far cry from the rest of our society.
According to a 2017 Federal Reserve report, the average net worth of households in the United States from 2013-2016 was $692,100.
Sound like a lot? Let’s take it back to math class. Remember that an average can be significantly weighted by an extremely high (or low) number at either end.
The average is weighted by, you guessed it, the extreme upper class. Not exactly the Joneses next door that you’ve been trying to keep up with.
Thus, sometimes the median number can be more telling than the average. In the case of net worth, this rings true. The median household in the United States has a net worth closer to $97,000. For Americans between the ages of 35 and 44, that number is even lower at $59,800 and even just $11,000 for those under 35.
Some experts have said that millennials have concerningly low net worths compared to their parents and other earlier generations, clocking in at 36% lower than the same demographic just over ten years ago in 1996, according to a recent study by Deloitte. However, according to this study, the millennial generation will experience the fastest growth rate of net wealth.
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Your net worth, whether on par with these median or average numbers or even in the negatives, is no reason to completely freak out.
Your net worth is, of course, never set in stone. Rather, it is a snapshot of where you currently stand financially. For younger earners (anyone under 40 these days), this simply means you have yet to earn or invest enough to balance out your liabilities and borrowing, which is totally fine. Those elders have been earning for decades, how could we keep up?
As we enter new life stages, economic eras, and settle our early life fluctuations in job, lifestyle, and location (which can be major debt creators), our finances will be redistributed both within our own accounts and throughout American families. All this not to mention the delights of compound interest!
It’s important to keep abreast of your net worth because, while this number may fluctuate depending on factors such as stock values, interest rates, and other tides of the financial world, it’s important to have an idea of overall trends so you can generally understand your financial health and have an idea of your true wealth.
Rather than focusing on the particular number, it’s a good idea to focus on your gains year over year rather than the number you get at the end of the equation.
True wealth can be an important factor in knowing when you might expect to retire (and you may want to start planning now).
Finally, knowing your net worth is a great barometer for knowing how you can make it grow. It can be a good tool to leverage your debts and then work to pay them off in order to increase that net worth surely and steadily. It can also help lead you to paths and investments that can work to create steady gains.
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This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
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