The third guiding principle of the Puzzle Box Paradigm is to know your current financial and wealth situation. This puzzle box border also shares a corner puzzle piece with the “Know Thy Personality” border where it’s critical that you understand your relationship with money. That relationship is a powerful determinant of your wealth building potential. So make sure what you do in this section aligns with that one.
The Puzzle Box Paradigm:
Wealth is the accumulation of money, assets, possessions, and other riches. Increasing your wealth should not be viewed as a bad or evil endeavor as long as it’s done with honesty and integrity.
Naturally, the level of wealth that you wish to achieve is a personal matter. It will be different for each individual based on their own rationale and reasoning.
But whatever wealth road you choose to travel, your journey must begin somewhere. To my logic, there’s no better starting point than to get an intimate picture of where your personal finances and wealth stand today. You can do this is three ways: (1) calculate your current net worth, (2) analyze your current spending habits, and (3) analyze your current investment/saving strategies. Let’s take a closer look at each of these.
There are free tools that will allow you to do this online. For example, the web site Mint.com is popular. You can link all your banking, credit card, and investment accounts to your Mint account and get all kinds of personal financial reports. It’s pretty cool and easy-to-use stuff, so check it out.
Now, I know there are a lot of people who are a bit apprehensive about putting their financial information online. So I’m going to tell you how to do it manually, with spreadsheets, and you can decide what works best for you. But the key is to “just do it!”
Calculate Your Net Worth
Your net worth provides a snapshot of your financial status. It is basically the difference between everything you own minus everything you owe. In accounting lingo it is your Assets (what you own) minus your Liabilities (what you owe). It’s very easy to calculate your net worth. You can do it in 20 minutes. Here’s what you need:
- To determine the total dollar amount for your Assets, first gather the statements for your investment accounts, retirement accounts, bank accounts, savings accounts, CD’s, bonds, and any other accounts that represent cash or nearly cash.
- Next, list your hard assets that carry a current market value of at least $500 each, such as cars, home, jewelry, artwork, coin and memorabilia collections, and other property. Don’t worry about listing your dishware, appliances, and other items that might only fetch pennies on the dollar if you sold them. Assign an estimated (but realistic) dollar value to each item on the list.
- To calculate the grand total of your Assets, add up all the dollar amounts for everything listed in Steps 1 and 2.
- To calculate your Liabilities, gather your credit card statements, mortgage and automobile loan statements, student loan statement, furniture financing, and any other statements of debt.
- Next, tally the outstanding balances that you still owe on the items listed in Step 4.
Net Worth Calculation
- Subtract the Liabilities total (Step 5) from the Assets total (Step 3). If the difference turns out to be a negative number, it means you have a negative net worth. That’s not good, but you now know where you stand. You should calculate your net worth every year for comparison purposes and to confirm that your wealth is steadily growing to your satisfaction.
Determine Your Spending Habits
By analyzing how and where you spend money, you’ll be able to identify areas where you can easily cut back and contribute more toward building wealth. If you’ve never done this type of exercise or it has been a while, you’ll probably come across some real eye-openers.
To start, gather your credit card statements, checkbook, bank statements, and other spending and debt statements. Also, get your pay stub, pension statement, and any other statements that reflect income you receive each month to live on. Use the information they contain to complete an Income/Expense spreadsheet like the one below. You can complete it for this year if you have at least six months of information to work with. If not, do it for the prior full year.
Create expense categories and sub-categories that best fit your lifestyle and be as detailed as you wish when listing items. If there are very small or one-time purchases that don’t warrant their own category or sub-category, just lump them into an “other” category/subcategory. Try and be as accurate as possible, but if you have to use estimates sometime, no problem. Here’s an example statement that you can use as a guide.
In the above example, this fictional person has monthly income of $3,944 and monthly expenses of $3,147. The difference of $797 is extra money that could be directed to savings and investment accounts.
After you complete your Income/Expense Statement, take a step back and look it over. See if anything jumps out at you right away. Is there an expense amount that seems unusually large? Can you identify areas where the amounts you’re paying out can be reduced? Are there any expenses that should be eliminated all together? If so, create a specific goal on how you want to deal with them.
Prepare a Savings & Investments Summary
To complete the picture of your finances, you should prepare a savings and investments summary that reflects where you stand today. So gather all your statements related to investment and retirement accounts, annuities, insurance, savings, bonds, etc. Create a summary statement like the following:
After completing the summary, look it over to make sure that you’re happy with your portfolio. Do you like the mix? Is there a type of investment that you’d like to add or delete? Are the amounts in the “Total Benefit Amount” column adequate?
Finally, take a close look at the last column labeled “Monthly Investment”. Determine if you’re putting away enough for the future. If not, jot down some initial goals of how much more you would like to save/invest over the next 1-3 years. You can fine tune them in the “Know Thy Goals” section.
Ideally, you should analyze your net worth, income/expenses, and investment strategies once per year. But do it as often as the goals you create in the next section dictate.
-Calculate your net worth
-Prepare an Income/Expense Statement, analyze expenses, and identify areas to reduce costs
-Prepare a Savings/Investment Statement, analyze it, and identify opportunities to increase contributions
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