Most of us will surely have new year resolutions or goals. And some would probably have something to the tune of:
Or become a millionaire by my 30th birthday, something like that. Nothing wrong with this goal. But what I realized, and asked my self more than 2 years ago, is that, how does one measure becoming a millionaire financially.
Or the most basic question really is, how do I know if I’m making progress towards my financial goals? Especially now that it’s a new year, a new start for all of us.
I’m reiterating in this post that Juan should create a personal statement of assets, liabilities and net worth (SALN). I wrote about this more than two years ago, the basics of creating Juan’s SALN and I shall be stressing it now once again, to encourage Pinoy’s to start the year right.
Surely, it’s easy to tell that Juan is a millionaire if s/he has at least PHP1M in his/her bank deposits. But how many of us have that? If I don’t have PHP1M, does that mean I’m not a millionaire?
How about my other assets? Or what if I indeed have PHP1M in my bank account but I also have a loan of PHP1.5M — am I still a millionaire? How many of us ask these questions to ourselves?
Creating a SALN is basically listing down what you own, what you owe, and the difference is your net equity, or in the language of taipans and the world’s richest, your net worth. Again, it does not have to be as accurate as auditors and BIR would have it since it shall be for your personal use. You just need an Excel file and the discipline to manage and track your finances — which is for your own good anyway.
And believe me, it gives you more peace of mind than tracking your savings (or loans) separately. It also becomes addicting to the point that you become extra aware and judicious before you spend your money.
Also mentioned before that one of the fastest way to become a millionaire is to get a life insurance. But of course we all want to be a millionaire while we are still alive. So allow me to list down how I defined the entries to my personal SALN. You may tailor-fit yours as necessary.
1. Liquid Cash
How much is in your savings and checking accounts. May also include your emergency funds.
2. Long-term Cash
How much you have on high yield time deposits, T-bills, bonds and other equivalents. I also prefer to include here savings in AFPSLAI / PSSLAI, if any, since it has higher yields and I prefer to keep them long-term.
Market value of stocks you have, preferably net of selling charges.
4. UITF / Mutual Funds
Market value of your various managed funds may it be equity, balanced, bond, etc.
5. Insurance Fund Value
I prefer to keep this separate from UITF and mutual funds since it has a different effect to my current net worth (CNW) (discussed below).
6. Life Insurance Sum Assured
How much will your beneficiaries get when you die? As mentioned above, this will make you a millionaire easily. Hence I track my net worth via 3 different definitions (discussed below).
7. Various Businesses
Market value of your various businesses. It may be the net worth of your businesses or an estimate of its “value”.
The market value of the house and lot (and/or condominium) you own (mortgaged or otherwise). You may also depreciate / appreciate its value over time. You may also include here the value of major appliances / properties inside the house if they have good resell value (antique, paintings etc, but personally I don’t do this).
9. Vehicles Value
The market value of the vehicle/s that you own. This one is usually depreciated over time (e.g. 10 years).
10. Land Value
In case you have other properties, the market value of these. If market value is hard to determine, purchase value might also be a conservative estimate.
Note that I don’t usually include appliances / gadgets etc. Personally I don’t want to have the mindset that buying these items increases my net worth. Yes these are all important and useful, but in my books, they count as necessary expenses and not assets.
1. Credit Card Balances
This one is important because usually, when we swipe to shop, we tend to forget how much we already owe. Tracking this also encourages Juan to pay the whole balances and not just the minimum amount due.
2. Short Term Loans
Balance of other unsecured loans you may have, especially those with less than or equal to 12 months loan tenor.
3. Long Term Loans
Balances of other loans with loan tenor longer than 12 months. SSS loan, Pag-Ibig Loan and other bank loans may go here.
4. Insurance Payables
Since we are counting insurance fund value and sum assured as assets, insurance payable must be rightfully treated as liabilities since if we don’t pay this obligation (e.g. 10 years), then our policy might lapse and we will not have above-mentioned assets.
5. Mortgage Loan
Did you take out a mortgage loan to get a house and/or condominium? Then these shall be counted as liabilities for us to enjoy the above listed assets.
6. Auto Loan
Similarly, if you took out an auto loan to get that dream car of yours you call asset, then this liability should be accounted for. The trick here is to ensure that the repayment of the auto loan balance is faster than the depreciating asset / car value.
Caveat, below definitions of various net worth are developed by Investment Juan01 and such definitions work well with us. Again, tweak it as applicable to your finances.
1. Total Equity / Net Worth (NW)
Total Assets less Total Liabilities
2. Living Net Worth (LNW)
(Total Assets less Life Insurance Sum Assured) less
(Total Liabilities less Insurance Payables)
3. Current Net Worth (CNW)
(Sum of Assets 1 to 4, plus Withdrawable Portion of Asset 5) less
(Sum of Liabilities 1 to 2)
It’s easy to be a millionaire in terms of NW and LNW. I’d like to push every Juan to strive being a millionaire in terms of CNW. Personally, growing CNW substantially every year is always the goal.
What do you need to maintain this SALN file in Excel? Attitude, point-of-view and discipline, the same ingredients you need to have a richer financial standing.
Update this file as often as needed (I try to do it daily), and your lots of steps closer to becoming a millionaire.
With every use your of credit card, or with every loan repayment, you’ll have a better sense of how it’s affecting your financial standing.
You’ll be more careful in taking out new loans, especially long term ones without collateral since it may not impact your CNW but in reality, you are still in debt.
You shall be forced to be creative in improving your CNW whether via more deposits, stocks, UITF, or growing your businesses.
And it will be your constant encouragement since even if your net take home pay is not that big, if majority went to increasing your CNW and not to expenses, then you’re on the right track.
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This 2016, may all Pinoys have a richer life.