Here’s a sorta-poem I wrote:
Change in Approach
I used to track my savings and investments monthly. If you also do, you’re a step towards financial maturity. Let’s advance a few more steps here.
Then I figured this does not give me the complete picture since there are times when my savings dwindle, either due to unforeseen or excessive expenses (which is bad), or when I make major purchases on real assets (which is ok). Say home renovation or purchase of insurance or debt repayment. Less cash and savings on hand do not necessarily mean a worse financial standing.
So I decided to track my personal net worth instead.
Simply put, net worth is how much will be left to you once all you’re your assets have been sold off and all your liabilities have been settled. It’s like when you file for bankruptcy and get liquidated (hopefully not). This is also what our top businessmen and government officials disclose. So at least we know where we stand compared to them. Asa. Asa talaga.
Nothing too serious and complicated really, anyway it’s your personal net worth for your personal use and self-awareness-self-confidence. My approach is conservative as well as I don’t want to pad and sandbag my net worth statement, since I don’t want to feel richer than I really am. Grin. XD
You don’t need to be an accountant to grasp this. Simply put, Assets (A) are how much you own. Liabilities (L) are how much you owe. And Net Worth (NW) also known as Equity (E) is how much of what you own came from your own money. In formula lingo, A = L + E (NW). Everything you own must have come from your own money or from borrowing. Where else right?
Sharing my personal template below. Note, numbers presented here are fictional, aspirational even and for illustrations purposes only. Personally, I prefer not to be scientific about it so I don’t include the money in my wallet and I don’t need to account for everything up to the last Php. Rounding down to nearest hundreds works for me. Just the major items.
Let’s break it down. Pick a certain cutoff, say end of Sep2013. Then list down your vast riches as of that date.
What You Own
Assets will include liquid cash (balance of savings and current account and emergency funds, I prefer to exclude my payroll account since I don’t keep my savings there), long-term deposits (maturity value of time deposits, SDA’s etc), investments (selling value of stocks, UITF, etc). Receivables are any significant portion that you own and will receive in a year’s time, like loan repayment from a friend, or refund etc. I personally prefer not to include future income, bonuses and retirement fund here since I don’t own them yet. Value of your businesses as well, if you have. For mine, I included affiliate marketing and online income as part of my businesses too, which is true.
I also included real assets such as property (recent appraised value of the house and market value of my car). These real assets should be depreciated monthly, like for a brand new car expected life is 5 years while for homes, I used 6% annual depreciation which I computed from the appraisal report when I took a home loan.
I also included my life insurance sum assured in the picture (assuming you’re already covered). Why? Well because it makes me feel rich even if I’ll only realize the value (or rather my beneficiaries) when I’m gone. Seriously. And besides, I own it and I am charging my liabilities side with insurance payables (limited term 10-years to save). Since I need it to be balanced, an entry in liabilities side should have a corresponding entry in assets and/or equities side. So I chose both. Up to you really. As for the fund value of these unit-linked insurance policies, they go to my assets too. As for my auto and home insurance, I no longer count these as assets since they protect the values of my car and home, which are the real assets that I accounted for. I just include them in my liabilities side to be more conservative.
What You Owe
All your loans (includes OB of home loan, personal loan and auto loan), credit card outstanding balances. I also included how much premium payments I still need to make for my 10-year insurance policies, and the annual auto and mortgage insurances. Other monthly bills that I have to pay. You may also put here your monthly household expenses, or at least your budget for it. I don’t put mine since my mom takes care of the budgeting. And besides, I want this to be a snapshot of my net worth, and not a cash flow statement of our household haha!
My Net Worth
Total assets less total liabilities. Hopefully you arrive at a positive number. I monitor at least two figures: Net worth which includes insurance sum assured (A) and life insurance payables (L); and net net worth which excludes life insurance sum assured (A) and life insurance payables (L). The latter is what I track more closely and set my annual targets for.
That Nice Feeling
It really feels nice when I update my file (monthly), I get to see my assets increase (in spite of depreciation charges) and my loan payables reduced. Even if there’s no significant increase in cash held, at least I know that my hard-earned money was put into real assets, debt-reduction, which also increase my net worth. Or in times when I was not able to save at all due to necessary and overwhelming debt payments, it gives me the feeling that my net worth still improved.
More than the mathematical side of it, for me this experience and discipline of tracking provides a healthy psychological boost towards money and personal wealth management. Helps in strategizing and decision-making on how to spend as well.
Time to do yours!