Step Two: Determine Your Net Worth

Determining Your Net Worth

Your net worth is a very important indicator of your financial health, your net worth indicates your ability to accomplish major financial tasks such as retiring buying a home and withstanding the unexpected, such as loss of a job or a family member with health problems. Of course, if you’re on this site, chances you are just like the two of us were when we started this site — in debt. And you’re looking to clear debt.

So you’re probably asking, “Why should I bother with my net worth when I’m obviously not doing well?” Read on to find out.

Your net worth has absolutely nothing to do with your worth as a person. You do not have to compare your net worth with your neighbors or your friends. Your net worth is not about keeping up with the Joneses. Basically, net worth is your assets minus your liabilities and assets is real money or an investment that you can convert to cash financial assets normally include money you have in the bank stocks, bonds retirement accounts, 401(k)s and any real estate or businesses that you own.

Generally, you ask clued your home. When figuring out your net worth and less you plan to someday live off the money from the sale of your home or taking out a reverse mortgage. If you plan on using the equity in your home someday then we will add the portion of equity that you plan on using to your net worth assets include your expected Social Security pension payments if you’re fortunate enough to have a pension plan. I like to calculate assets in dollars per month rather than a lump sum.

Basic items such as your clothing your car and your card collection do not count as a financial asset. But we won’t count these, unless you plan on selling them some day and using the cash to live off of. To determine your net worth we must subtract your liabilities from your assets; liabilities are loans and debts outstanding such as auto loans and credit card debts. When figuring your liabilities include money you’ve borrowed from companies’ families and friends unless you have no intention of paying it back and include your mortgage also be sure to include debt owned on other real estate or properties, because you counted the value of investment real estate as an asset.

Your net worth is very important to you and your situation and your future goals. What seems like a lot of money to one person with a simple lifestyle may seem like nothing to someone else with exceedingly high expectations and a desire for exceedingly rich and lavish lifestyle. Later on, we will discuss more numbers to determine your financial strategy such as goals for retirement will also discuss saving for other important goals in the meantime, if you’re net worth is negative or less than 50% of your annual income. Then you’re not alone, in fact you’re with most Americans. However, if you’re in your 20s and just beginning your career a low net worth is much less concerning.

Erasing Debt

Getting rid of your debt, the highest interest rate debt first is the single most important thing. You can do to directly and immediately affect your financial situation. Once you’ve done this you need to build a safety reserve equal to anywhere from 3 to 6 months of living expenses. You should also take the time to learn more about getting out of debt reducing spending and developing ways to save and invest in your future that our tax wise.

Many of you may not know or care, but since you have a Social Security number. A credit report and a credit score lenders examine your credit report before granting you credit lines and loans. It is important to understand what is on your credit report and what it means your credit report contains personal information such as your name and address records of all your credit accounts, inquiry’s from potential creditors and a detailed history of payment history, including late payments. Bankruptcy filings, and any negative information associated with your financial situation. Your credit score is a three digit score based on your credit report. Lenders use this score as an indicator of your likelihood of default thing on your payments. Your credit score has an impact on whether or not a lender is willing to extend you credit and more importantly at what interest rate.

FICO is the leading credit score in the industry FICO scores range anywhere from a low of 300 to a high of 850 the higher the score the better and the less likely you are to default on your loan or become delinquent in your payments. This score identifies your ability to repay a debt. The average FICO score is around 700 you will qualify for great lending rates. If your score is 625 or higher credit scores lower than this are generally not considered good and lenders deem these scores risky prospects for loans, and you will find yourself paying higher and higher interest rates as the lending institution accepts more risk. The lower the credit score, the higher the chances of delinquency are to the lender.

Your credit score is extremely important to your financial future. You may obtain a free credit report from the various credit reporting agencies such as Equifax. Experience and Trans Union all of the dreaded reporting agencies have a website where you can enter some personal information and obtain a free credit report. They all may differ slightly in information, but all are ride at the same conclusion whether or not you are fit, financially. When you receive your report the first step is to identify any possible mistakes if there are mistakes. You will need to submit a request to the credit reporting agency to have the erroneous.

As odd as it may seem you will find that your credit reports do not contain your credit score, the reason for this is simple, these companies want to charge you for your credit score. Each of the individual credit reporting agencies will charge roughly $7-$10 to give you your credit score each and every time. So if you would also like to know your credit score. Keep that in mind when ordering your credit reports and requests that your score be included with your reports. Just remember there’s a fee.

Once you have all three of your credit reports, and you’re certain they are all accurate. Errors are corrected and accounts removed that do not belong to you many of you may be surprised to find. There is quite often erroneous information on your credit report that could be affecting your interest rates on your credit cards, Cars and even your home. Also take special notice to any accounts that show late payments and make sure to get these removed if they do not belong to you.

If your credit report includes information or data on late or missed payments is more than seven years old. You may write to the reporting agency and ask that the information be removed. The same goes for a bankruptcy that is 10 years or older. One of the most important things you can do to avoid late payments on your credit report. Obviously is to pay your bills on time. Many banks and service providers offer automatic bill payment. They are quite easy to use, and will keep you from paying higher interest rates down the road.

The longer you have had an open loan on your credit report, the better closing old accounts and opening new ones generally harms your credit score. However, if you can refinance your mortgage, and save a good amount of money, then don’t worry about the age of your loan. After all, the goal here is overall financial health. The same principle applies to credit card debt, auto loans and an any other loans that may be carrying unnecessarily high interest rates. Also keep in mind. You do not want to keep high balances on your credit card debt. This lowers your overall credit score actively try to pay down your revolving debt, mainly on your credit cards.

Often, your credit doors make mistakes as well. You will need to call or write them to get the errors corrected and follow-up with a letter. Whenever you speak with an actual credit agency or lender, be diligent and make notes. If they say they can fix and erroneous entry, be sure to get their name and direct telephone number follow-up with them if they do not follow through. Continue on up the ladder until you find someone that can often. You may not see eye to eye on a problem and the creditor may be unwilling to work with you. If this is the case, know that the credit reporting agencies are required by law to give you a 100 word explanation of your credit file.

I’m sure many of you have heard about the credit repair companies on the radio in newspapers and magazines. You see their ads everywhere. Most of these companies charge ridiculous amounts of money and do very little overall to help your credit report any erroneous entries that are on your credit report. You can easily fix. There is no need to pay hundreds even thousands of dollars to have someone else do it for you.

Why do we borrow money? Many of us do not have large sums of money sitting in the bank just waiting for our four years of college education to come due. So, we borrow money, which enables us to get the education we otherwise could not afford. We also borrow money for automobiles. Even some of the more economical cars can cost in excess of $25,000. This is where we begin to get in trouble.

We finance our hundred thousand dollars of college education and of course, after all that hard work. You deserve to drive a nice new car don’t you? Certainly, auto dealers won’t disagree then you spend $2500 on a vacation that you deserve after a year’s hard work. I’m not saying you shouldn’t take a vacation and enjoy yourself. Take as many as you can afford to, but if you have to take the vacation in the form of an outstanding balance on your credit card for the next 18 months. Then you can’t afford it.

You will take many vacations in your lifetime. If you have the discipline to save the cash before hand, if you get into the bad habit of borrowing your way through vacations, cars and clothing and paying the interest on all these debts. You’ll spend your future income paying back interest, leaving you with a lot less money. For more important choices in your future

Banks and other lenders charge relatively high interest rates for consumer debt. That is one of the reasons you are less able to save money when in incurring, such debt. Not only does he borrow money through credit cards, auto loans and other types of consumer loans carry a high interest rate. It is not tax deductible. I’m not saying you should never borrow money, and that all debt is bad such as loans used to buy small businesses and real estate generally these loans can be had for lower interest rates than consumer debt and is normally tax-deductible. If managed properly, these investments may also increase in value over time than borrowing for educational expenses, begins to make sense.

Calculating how much debt you have a relative to your income is a useful way to size up your overall debt. Let’s ignore for now good debt. The loans you may owe on your home business, education and so on will cover later. For now, let’s focus on bad debt, the higher interest debt used to buy items that deep appreciate over time in value to calculate your bad debt. Divide your bad debt by your annual income. Obviously the best amount of bad debt is zero when your bad debt begins to pass 25% of your annual income. This can spell disaster. Such high levels of consumer debt on credit cards and auto loans can get out of control.

How much debt is acceptable? That depends on your income, for starters, if you borrow money only for investments. This is considered good debt for purchasing things that retain or increase in value over time, such as a business real estate or your education. However I would advise against borrowing money for bad debt spending on things that decrease in value over time and essentially become worthless such as cars, clothing and vacations.

Like your mother used to say too much of anything is no good for you, including good things. Can you attain too much. Good debt, of course when you incur debt for investment purposes such as to buy real estate or small businesses. Even your own education, you hope to see a positive return on your investment. However not all investments workout businesses fail and educational programs don’t help as they were intended. We all know people who have borrowed far more than they can afford to repay. Sometimes this works out. Sometimes it doesn’t. People can balance these dizzying payments sometimes for years but eventually it all comes crumbling down.

Here are two important things to think about and discuss with your loved ones. Can you sleep well at night, function well during the day. Do you worry about how you’re going to pay next month’s bills are your loved ones able to save what you would like to work toward your future goals. If you’re debt is too high. You may be able to use some basic debt read action strategies to get you back on course without doing anything too drastic.

How much money were you able to put away towards your retirement or future financial goals in the last year. How much of you added to your stash or your investments. Many people have no idea the rate at which they are saving money. The answer may sober or pleasantly surprise you the amount you actually saved in the past year is equal to the change in your net worth over the past year. In other words, you’re net worth today, minus your net worth from a year ago. You also need to take into consideration if you’re a homeowner. The extra payments you made to pay off your principal on your mortgage faster. However, don’t include personal property and consumer goods such as your computer clothing or your car. These things clearly lose value over time.

If all this calculating is getting on your nerves, or you’re hung up. It doesn’t need to be this complicated. Just save a small portion of your monthly income, save it in a retirement account save it in a savings account if you must just save it. How much you save in a typical month. At least take the time to find this out. It doesn’t matter if you can’t access the money, what does matter is that you’re saving it.