Some people are naturally good at managing money; they always kind of have a calculator or spreadsheet in their head where they’ve fixed sums of money for everything they are planning to do. But not everyone is gifted; even the best of us break down when we see something which we’ve always wanted, the new iPhone? A new designer handbag? Or simply, eating out too much that eventually breaks the bank.
Life becomes a lot easier when you have handy financial skills. Most people are responsible with their money; they know that their spending habits impact their credit card score along with the credit card debt, which they end up carrying for months. If you’ve had a tough time with money matters and are tired from living paycheck to paycheck despite earning a handsome amount every month, then here are some personal money management tips.
Know that it Starts and Ends with Net worth
Calculating ones net worth is not complicated. You need a pen and paper or open a simple excel spreadsheet to get going at it right away.
Net worth in its simplest form is the difference between the value of your assets and liabilities.
List down the value of all assets you possess on left hand side and all liabilities on right hand side of a work sheet. Examples of assets are property, land, precious metal, stocks, mutual funds, bonds, cash etc which add money to your bank account by means of income or capital appreciation.
Examples of liabilities are debt, loans that you have taken against above assets or for personal consumption. This money is your liablitity because the money is going out of your bank account.
This exercise will take you time and it should else you have not been thinking about your money the right way. Do not bother to be very precise and accurate at this stage. All you need is the total value of your assets and total liabilities you have.
The difference between the total value of your assets and liablities will give your Net worth. This number can be negative, zero or positive. The important thing to achieve financial well being is to first know this number because that is your reality. Remember that all good processes stem from real data and not hypothesis as their basis.
Once you know your Net worth, make a goal of how much you want it to be for every year until age 80. Many of us won’t live that long, but this exercise will give you amazing glimse of the power of compounding which would likely trigger a mindset shift in your life.
By writing down the value of expected net worth for each year you will have a peep into your self projected financial future. This is your first cut exercise and you only have to live long enough to see how it turns out to be! Once you have done this exercise today, you are no longer your earlier self. You have new eyes which are more perceptive to opportunities.
Personal financial statements
Once you have written down your net worth number for every year for future years, you will automatically start thinking how can you get there? You now would probably need a simple system to account your expenses and income to know whether you are treading in the direction of your plan. This is exactly the point where you start getting real.
Have you heard of any profitable company that is not keeping record of its expenditure and income? Would you care to invest in such a company? Then what is the probability that you will improve your financial well being without keeping your books aka personal financial statements? Think about it.
Vijay L demonstrates how one can start from scratch on this good habit that makes budgeting a thing of the past. Yes, you heard it right! You would no longer find the need to make monthly budgets after maintaining your personal financial statements. This is because budgets are estimates but spendings are real. Once you have real data of past months and years, why would you need estimates?
Accumulating the right assets
This is a little tricky part because this is a subjective topic depending on your personality and interests. But there is a way to know your natural strengths and inclinations, which serve you the best opportunity to improvise and excel in your chosen dimension. Ultimately, the asset should generate returns (passive income) which beat inflation by few points. Accumulating the righ assets is a result of good money skills. And getting good money skills is a product of good record keeping of personal financial statements. Once you embark on this journey, the fog tends to clear with each step you take forward.
“Most people think that passive income is getting easy money for not having to work,” Vijay L says “That is simply not true”.
The effort required upfront is indeed high but gradually reduces with time and experience. Whereas the income is low at the beginning but significantly increases with time and experience. Call it a relationship between effort and reward with time as constant companion on your side!
If you want to get good with money and never slip again in its management, then do give You, Money and Family a read.